Rogue Reps Often Retain Insurance Licenses
Neal Smalbach was fired in 2008 by a broker/dealer for selling securities while unregistered. It was the second time that a securities firm had given him the boot.
The Financial Industry Regulatory Authority (FINRA) later suspended Smalbach for six months.
Smalbach, however, kept selling even though he no longer had a securities license to do so. What he did have was a license to sell insurance.
On April 29, Smalbach, 48, was arrested in Florida by the Pinellas County sheriff and charged with one count of insurance fraud and one count of organized fraud.
Smalbach’s case highlights a key problem in the investment advice world: Registered representatives who permanently or temporarily lose their license to sell stocks, bonds and mutual funds often retain a license to sell insurance.
According to FINRA’s BrokerCheck, there are 37 pending customer disputes against Smalbach during time as a broker.
As reported May 29 by Investment News, while state agencies that regulate insurance agents and securities brokers try to work together to monitor brokers who are fired from either side of the industry, regulators are sometimes limited in their authority because of a lack of information sharing regarding reps and agents.
One common criticism among registered representatives is the fact that insurance agents who lose a license to sell securities products often sell equity-indexed annuities, a product that is marketed as an investment and can compete with a mutual fund or variable annuity.
In the case of Smalbach, he was pitching mortgage insurance policies. The policies promised to pay the balance of a policyholder’s mortgage in the event the policy holder dies. In reality, Smalbach’s clients were sold whole-life policies that were worth no more than $20,000.
Smalbach also exploited another loophole in the law when he sold stock in a firm called Transfer Technology International Corp. – the shares of which are currently listed at less than a penny a share. At least a dozen elderly investors, some in their 80s and 90s, bought nearly $1 million of the stock from Smalbach, according to a story in the St. Petersburg Times.
Although he didn’t have a securities license, Smalbach was an employee of Transfer Technology and could sell shares in the company to accredited investors legally. One of Smalbach’s clients was Bob Fox, 78, according to the Investment News story. Fox says he lost $100,000 in his Transfer Technology investment with Smalbach.
“He was a really smooth talker,” Fox said, adding that he was often hurried by Smalbach to complete paperwork when buying an investment.
Fox and other former clients of Smalbach are now suing Smalbach and his former broker/dealers in a class action lawsuit.