Broker Allegedly Sold Customers’ Personal and Confidential Information to Insurance Agents as Sales “Leads” for Annuity Products
Washington, D.C., Dec. 6, 2007 – LAWFUEL – The Legal Newswire – The Securities and Exchange Commission today charged a former San Francisco-area stockbroker with securities fraud and regulatory violations in connection with his selling of confidential personal information about his customers – many of them elderly – as insurance sales “leads.”
In a complaint filed today in the U.S. District Court for the Northern District of California, the SEC alleged that from December 2002 through August 2005, former Castro Valley, Calif., stockbroker Sidney Mondschein reaped illegal profits by secretly selling the names and other confidential personal information of over 500 of his customers to six different insurance agents. According to the complaint, Mondschein sold this information as sales “leads” solely to enable insurance agents to solicit these customers, many of whom had already purchased fixed or equity-indexed annuity products, to buy additional annuity products.
The complaint alleges that Mondschein never disclosed to any of these customers that he intended to sell, and did sell, their confidential personal information to insurance agents, and further alleges that he affirmatively misled his clients as to the nature of his compensation arrangements and relationships with the various insurance agents. According to the complaint, virtually all of Mondschein’s customers were senior citizens.
Linda Thomsen, Director of the SEC’s Division of Enforcement, said, “This case is an example of our ongoing commitment to combat abusive and illegal conduct that targets senior citizens. We take seriously a broker’s duty to protect customers’ personal information and will not hesitate to take strong action when a broker exploits that information for his or her own gain – as allegedly happened here.”
Cheryl Scarboro, Associate Director in the Division of Enforcement, stated, “Today’s action is the Commission’s second enforcement action alleging violations of Regulation S-P, which requires brokerage firms to let customers know how their personal information will be used. Brokers have an obligation under this regulation not to reveal their customers’ personal information without giving their customers advance notice and an opportunity to opt out.”
The SEC complaint also alleges that:
All of the “leads” that Mondschein sold were customers who previously used Mondschein to sell securities or other assets to fund the purchase of annuities. Thus, Mondschein believed that these leads presented marketing opportunities for new insurance agents to sell additional annuity products to the leads.
The confidential personal information Mondschein sold to insurance agents included, at a minimum, the customer’s name, address, phone number, and in certain instances, the dollar amount the customer invested in a previous annuity, the insurance company that issued the previous annuity, the agent who sold the customer the previous annuity, and the date of the annuity sale.
In exchange for the leads, the insurance agents compensated Mondschein on either a price-per-lead basis (ranging between $50 to $150 per lead) or, in at least two instances, by paying Mondschein a two percent kickback of the total amount that the lead invested in a new annuity.
Mondschein further collected brokerage commissions from those leads who ultimately purchased new annuities and used Mondschein to sell securities to fund the purchases. In such cases, Mondschein reaped illegal profits on both ends of the round trip transactions.
To facilitate this fraudulent scheme, Mondschein created a separate entity, called UNCI, Inc., to market insurance leads, collect leads fees, and participate in the commissions that those leads generated. In contravention of his broker-dealer firm’s policies, Mondschein never disclosed UNCI’s existence to his firm; nor did he comply with his obligation to disclose it on broker-dealer registration documents filed with the National Association of Securities Dealers.
UNCI is named in the SEC’s complaint as Relief Defendant based on its receipt of Mondschein’s ill-gotten gains.
According to the complaint, over the course of his numerous years as a broker, Mondschein allegedly developed an extensive securities liquidation business that he marketed exclusively to insurance agents. Mondschein allegedly promised the insurance agents speedy transfer and liquidation services to help close more annuity sales. The insurance agents recommended to their clients that they use Mondschein, instead of their existing broker, to sell their securities. The complaint alleges that Mondschein collected substantial brokerage commissions and other fees for selling the securities of elderly persons to fund their annuity purchases.
The Commission’s complaint alleges that Mondschein committed securities fraud in violation of Section 10(b) of the Securities and Exchange Act of 1934 and Exchange Act Rule 10b-5. The complaint also alleges that Mondschein aided and abetted his broker-dealer firm’s violations of certain of the customer privacy provisions of the federal securities laws, namely Rules 4(a), 5(a), and 10(a)(1) of Regulation S-P. The Commission’s complaint seeks a judgment permanently enjoining Mondschein from violating these provisions of the securities laws, and ordering Mondschein to pay civil penalties and provide an accounting of, and disgorge, his ill-gotten gains with prejudgment interest. The Commission also seeks a judgment that Relief Defendant UNCI is in possession of illegally obtained funds to which it has no legitimate claim.
The Commission is committed to protecting older Americans from investment fraud, and has prioritized this initiative in its examination, enforcement and investor education programs. In addition to this case, the SEC has brought more that 40 enforcement actions in the last two years against frauds targeting retirees and other older investors. In September 2007, the SEC held its second annual Seniors Summit, where the SEC joined with state regulators and others to examine how to best protect older Americans from investment fraud. A webcast of the Sept. 10, 2007, event is available at http://www.sec.gov/news/otherwebcasts.shtml. Materials related to the Seniors Summit are located at: http://www.sec.gov/spotlight/seniors/seniors_summit.htm.