ELITE ADVISOR BEST PRACTICES

The Bizarre Case of The People of the State of California v. Glenn Neasham - Part One

First in a series about cognitive impairment in older clients

By Dick Weber

Key Takeaways:

  • One is the new three when it comes to striking out—at least when you count how easy it is to be thrown in jail for not realizing your new client may not be mentally competent.
  • The Neasham case—a small case from a small town in California—is going to have HUGE implications for agents and advisors—everywhere.
  • There are ways to protect our clients and ourselves from overly aggressive laws and their regulators—it just won’t be easy.


Perhaps no legal case against an insurance agent has evoked so many of the concerns we have about standards of care and ethical selling/advising—with the implication of at least one state’s expectation that an advisor must accurately assess a client’s mental competence or face criminal prosecution.

Taken from his home in handcuffs almost three years after the sale of a deferred annuity—arrested and accused of three counts of criminal acts under California’s Financial Elder Abuse statute—agent Glenn Neasham was found guilty on a single count of felony theft in late 2011. The judge first sentenced Neasham to 300 days in jail, then reduced it to 60 days (the statute allows for up to four years), assessed a $5,000 fine and placed him on probation for three years. His license to sell insurance was revoked by the California Department of Insurance (CA DOI) a few months after the conviction on felony theft. Neasham’s jail sentence has been suspended pending Neasham’s appeal, and he and his family now subsist on the charity of family and church members with no real prospect of recovery of their former lifestyle—even if the appeal is successful. In the (approximate) words of Oliver Hardy (of Laurel and Hardy fame), “… another fine mess this has turned out to be!”

Background

Neasham was an established life and annuity agent in a small California town located several hours north of San Francisco. He favored deferred indexed annuities for his clients, believing that they represented a safe alternative to low-rate CDs, had certain income tax advantages and provided certain estate planning options. A client of Neasham’s brought to Neasham’s office the woman with whom he had lived for quite some time—83-year-old Fran Schuber. Suggesting that Ms. Schuber would benefit from the same type of annuity the client had recently purchased, Neasham appears to have taken the time to determine her financial situation (her home was mortgage-free, and apparently she had enough income to live in the style to which she had become accustomed) and her general suitability for a deferred annuity. In the several meetings he had with his new client and her “boyfriend,” Neasham and several administrative assistants later claimed to have discerned no signs of mental incompetence. One issue that Neasham did notice—and which was of sufficient concern to ask for clarification in writing—was Ms. Schuber’s insistence that she was estranged from her son (her only natural heir) and wanted her boyfriend to be the annuity’s beneficiary.

When Ms. Schuber attempted to withdraw $175,000 for her annuity from a bank CD of approximately $225,000, local bank authorities notified the district attorney (as required under California’s elder abuse statute) of their concern—not for the annuity but for the beneficiary designation and the suspicion that Ms. Schuber was being manipulated by her boyfriend, not the agent. The bank’s concern reflected curious timing, as the CD acquired several years earlier had also reflected the boyfriend and not the son as beneficiary.

As a result of the report of suspected financial elder abuse, Ms. Schuber was subsequently interviewed by an elder abuse investigator, whose report concluded “… Schuber says she is happy with the investment,” but the investigator also indicated that she noticed signs of dementia.

The local prosecutor apparently did not like (or understand) annuities for seniors, according to the report of an interview by the editor of InsuranceNewsNet.com, and she referred the situation to CA DOI, which more than a year later recommended that the agent be charged under the elder abuse statute’s criminal offense definition. The theft in this bizarre case was the annuity’s contingent surrender charge—approximately 12 percent of Ms. Schuber’s $175,000 single premium. Little credit was given to the fact that the annuity allowed for an annual penalty-free withdrawal of up to 10 percent of the annuity value from the very first year and, in the instance of the annuitant subsequently becoming a patient in a nursing home, a penalty-free withdrawal of up to 20 percent of the annuity value from the very first year.

Let’s be clear about the issues so far

There are several important issues to clarify and/or emphasize. The initial financial elder abuse report was against the client’s boyfriend, not the agent. When the complaint was handed off to CA DOI, the resulting investigation found that the agent had used questionable, self-created marketing material. However, neither the suitability of the product (it was, in fact, approved for sale by CA DOI for individuals up to age 85) nor the agent’s marketing material was an issue in the trial. No claim was made by the prosecution regarding any issue other than that the agent had not determined that the client may have been cognitively impaired at the time of the purchase—and the contrived and unprecedented claim that the inability to get her money back immediately after the sale constituted theft. It should also be noted that neither at the time of the annuity purchase—nor at any time since—has Ms. Schuber lodged a complaint against the agent. Quite to the contrary, Ms. Schuber stated on several occasions that she was happy with her investment.

Conclusion

Ms. Schuber did, in fact, develop Alzheimer’s disease; the question is when? And to what degree would it have been obvious to someone who didn’t know her well? She was legally determined to be unable to manage her own affairs in a separate judicial action on September 30, 2011, (Neasham’s trial began September 2, 2011) and conservatorship was awarded to her son, who then surrendered the annuity.

One of the most interesting aspects of this case was that the insurance company didn’t treat the surrender request as a surrender with penalties for “premature withdrawal.” Instead the company refunded the entire premium (plus some interest) without a surrender charge. One could assume that the insurance company appreciated the fact that if the client allegedly was not competent in early 2008 when she acquired the annuity, then under the principal of void ab initio (void at the outset because a person who lacks capacity cannot enter into a contract), then the insurance company had no choice but to refund the premium.

In the next installment of this series, we’ll connect the alleged failure to detect mental incompetence with the rationale for a finding of felony theft and an initial sentence of 300 days in jail.


About the Author

Richard M. Weber is an insurance fiduciary whose firm is retained by wealthy individuals and families to evaluate and actively manage existing coverage and to assist in assembling customized portfolios of life insurance policies that optimize client objectives. More information about Weber and his firm is available at www.EthicalEdgeConsulting.com(or email him at Dick@EthicalEdgeConsulting.com).