MetLife Securities, Inc. Background Information
Metropolitan Life Insurance Company has operated under several names and is now branded as “MetLife.” It struggled into existence in the Civil War era of the 1860’s. With few regulations, life policies then sold were very expensive with high comnissions. Salespeople often collected weekly payments, often in cash. Income from new policies was used to pay small dividends to on older policies in a manner similar to a “Ponzi” scheme. MetLife indicates that competition for salesmen at the time forced insurance companies to engage in such abusive practices.
“The late 1890s and early 1900s were a time of journalistic muckraking, and insurance companies, like big business in general, became targets for the pens of journalistic zealots,” MetLife states, “Metropolitan spearheaded the defense of industrial insurance…” The tactic of “shooting the messenger” has thus been around for more than 100 years.
In 1905, New York’s state legislature launched an investigation to curtail insurance abuses. Top executives of major life companies, including 4th largest Metropolitan, were ordered to testify. Improper practices were acknowledged and changes were mandated, including the end of the Ponzi-like policies. MetLife says its competitors were more guilty than MetLife and it therefore only received a “wrist-slap.” MetLife also states that in 1939 “[a] federal investigation of life insurance companies is launched, but the industry ultimately is left to police itself.”
MetLife has a propensity for sky-high activities. In 1893, it completed Metropolitan Tower, a New York landmark for generations. The company was also instrumental in financing construction of Rockefeller Center and the Empire State Building. In 1980, it bought the highly-recognizable Pan Am building for $400 million, the most paid for a building at the time. Today, at no cost, it sends its blimps, “Snoopy I” and “Snoopy II,” to televised events and large gatherings.
After the federal tax system was created, many insurance companies, including Metropolitan in 1915, converted to “mutual” companies to save taxes. Policy holders purportedly owned the life firms but had little say in the operations – including executive pay. This structure later limited MetLife’s options and, when it recently sought to “go public” it was forced to offer its mutual owners policy credits or stock shares. The IPO in 2000 raised $2.5 billion. MetLife has since acquired Travelers Life & Annuity and most of Citigroup’s insurance businesses.
MetLife Securities, Inc. was licensed as a brokerage firm subsidiary in 1983. It is often difficult to ask someone to bet he or she will die sooner than expected. To create benefits for policyholders while alive, insurance companies long ago linked savings to life insurance. To later compete with growing interest in the stock market, variable life and variable annuity policies – mutual funds in insurance wrappers – were created. Because regulators required securities licenses to market these products, insurance companies, including MetLife, formed securities subsidiaries and licensed insurance agents to also sell variable products and mutual funds.
MetLife was transformed not only from a mutual life to a publicly held company, but also from a life insurance to a diversified financial services firm. Former Paine Webber executive Robert Benmosche was hired in 1995, and was soon promoted to CEO. MetLife Securities was expanded and a number of other securities subsidiaries have been acquired, including Nathan & Lewis Securities, Inc., New England Securities, Walnut Securities, Inc. and State Street Research & Management Company (later sold).
MetLife’s financial situation is not “Peanuts.” Boasting over $2 trillion in policies, and over a quarter trillion in reserves, it is the largest life insurer in North America and it is second in annuities. Its market capitalization is almost $50 billion, its latest reported annual gross receives is about the same and its net income was $3.27 billion. Without a breakdown of their functions, it reports 46,000 employees worldwide.
Marrying life insurance to investment portfolios did not come without problems. Scandal erupted in 1993 when lawsuits were filed in Florida against MetLife and its agents claiming the agents deceptively sold insurance policies to nurses disguised as retirement plans.
The revelation widened into a nationwide scandal in which similar claims were filed against MetLife and several other large insurance companies. Over several years, MetLife ultimately paid millions in regulatory fines and lawsuit settlements to resolve the claims.
As a further result of the scandal, MetLife’s earnings suffered and its credit ratings were negatively affected. This prompted wholesale changes in the company’s marketing and sales practices as well as its supervisory procedures. Yet, only a decade later the lure of trillions of dollars in potential sales would attract MetLife and other insurers into other similar practices which has placed them under additional regulatory scrutiny and has subjected them to more fines and lawsuits.
The National Association of Securities Dealers fined MetLife’s securities subsidiaries $5 million for their role a widespread scandal over late-trading in mutual funds. Included were MetLife Securities, New England Securities and Walnut Street Securities. The firms were also charged with providing inaccurate and misleading information and failing to timely produce email evidence to the NASD during the investigation.
Late-trading involves buying and selling mutual fund shares after the market closes at prices set on the close. This gives the traders the advantage of knowing events and after-hours trading prices on shares of stock owned by the funds. In addition to the late traders, others involved are those who assist by hiding the actual time of the trades and who conceal the traders’ identities to avoid detection. The victims are the innocent holders of the mutual funds whose portfolios were robbed of the illegally gained profits. Billions were stolen industry-wide.
The MetLife companies were charged in the scandal after a review of almost 20,000 suspect trades revealed at least 800 illegal transactions. I was also charged with providing the NASD with inaccurate and misleading responses to its inquiries, when contrary evidence was available. The inaccurate responses were apparently coordinated by a coordinated group of employees from the three firms and their law firm. Relevant emails were also withheld for months.
“NASD relies on firms to respond accurately and promptly to requests for information on matters of regulatory concern,” said the NASD’s Head of Enforcement. “Ultimately, this case should send a strong message that NASD expects firms to provide accurate information to regulatory inquiries in a timely manner – and that failures to provide accurate information will draw severe sanctions.”
Metropolitan Life Insurance Co. (MetLife) paid a $250,000 fine and agreed to a cease-and-desist order to settle allegations it failed to supervise its a registered representative, according to an April 11, 2006, report in the Atlanta Business Chronicle. MetLife neither admitted nor denied the SEC’s findings.
In what must be near the top of the list of dumb crimes, a MetLife agent was charged by the SEC with defrauding the Fulton County Sheriff’s Office over investments of $7.2 million in public funds. MetLife was charged with for failing to supervise the agent and for failing to retain required books and records relating to the investments.
Metropolitan Life Insurance Co. paid a fine of $250,000 fine and agreed to a cease-and-desist order to settle the allegations that it failed to supervise its a registered representative, according to an April 11, 2006, report in the Atlanta Business Chronicle. MetLife neither admitted nor denied the SEC’s findings.
The SEC found that the MetLife agent falsely told the Fulton County Sheriff’s Office that the entity which received the funds was an affiliate of MetLife when it was not. The MetLife representative also sent bogus account statements to the Sheriff’s Office. Meanwhile, said the SEC, MetLife was on notice of compliance issues concerning the representative when he was hired in 2000 and, despite repeated violations and ongoing compliance concerns, permitted the representative to work at an offsite location, without a supervisor present.
In July 2002, the representative’s new supervisor asked MetLife to investigate the representative for potential money laundering but MetLife did not have policies or procedures in place to timely conduct an appropriate investigation. A later investigation revealed a suit by another, but this did not prompt any further investigation of the agent.
The NASD fined MetLife Securities, Inc. $500,000 failing to establish systems and procedures to supervise the sales of 529 College Savings Plans and ordered the firm to reimburse approximately 300 of its clients a total of $375,000.
529 College Savings Plans, available in most states, offer tax-deferred growth for families to save for higher education costs. The NASD found that sales such plans exceeded $150 million, but MetLife did not have proper procedures to supervise the sale of 529 Plans including suitability requirements. MetLife agreed to the sanctions and entry of the findings without admitting or denying the NASD’s charges.
“Firms must take steps to ensure that investors are aware of the critical features of the many different 529 Plans that are being offered today, so investors are better able to choose a plan that’s right for them,” said the NASD Head of Enforcement. “Brokers must consider all relevant factors – including possible state tax benefits, investment choices and expenses, and more in determining whether a 529 Plan is a suitable investment for a particular customer. And brokers must disclose those relevant factors to the customer.”