A jury in federal court in Georgia found that a former LPL registered rep, Jonathan Dax Cooke, 39, and the Atlanta-based company he founded committed fraud by posing as federal investment counselors to lure government employees into rolling over significant funds from their federal Thrift Savings Plan (TSP) accounts into higher-fee variable annuities.

The jury made its decision Monday in a suit brought by the Securities and Exchange Commission in the U.S. District Court for the Northern District of Georgia.

Between March 2012 and November 2014, the SEC said, Cooke and his company sold approximately 200 variable annuities with a total face value of approximately $40 million to federal employees, who used funds rolled over from their TSP accounts to fund the purchases. Cooke and the company collectively earned approximately $1.7 million in commissions on the sales, the SEC said.

“We are pleased with the jury’s verdict holding former registered representative Jonathan Dax Cooke and the entity he co-founded, Keystone Capital Partners Inc., known as Federal Employee Benefit Counselors, liable for fraudulently selling variable annuities to hundreds of federal employees who were at or near retirement age,” said Gurbir Grewal, the director of the SEC’s Division of Enforcement, in a statement.

Cooke, who worked out of LPL’s Alpharetta branch office during this period, “falsely portrayed himself and his company as counselors hired by the federal government to educate federal employees about their retirement benefits, convincing them to roll over funds from their retirement accounts to fund the purchase of higher-fee variable annuity products,” Grewal added.

Cooke was affiliated with LPL between 2009 and December 2014, at which point he was terminated by the company amid customer complaints, according to his BrokerCheck record.

The SEC filed fraud charges against Cooke and his firm in July 2017, charging him and the brokers who worked with him with misleading investors about significant details of their variable annuity investment recommendations, including the associated fees and guaranteed investment returns. 

The brokers fostered “the misleading impression” that they were in some way affiliated with or approved by the federal government, the SEC argued.

“It’s a great result for the commission and for investors,” Joe Wojciechowski, managing partner of Chicago-based Stoltmann Law Offices said.

“Annuity products remain the darling of commission–based financial advisor and insurance agents alike. What these guys did was garish. Taking TSP accounts, which are already eligible for rollover into tax-deferred, traditional, IRAs, and selling them VA’s is unreal and designed for one purpose – to get 5% to 8% of that retirement money for themselves,”

There were other options available at far lower costs, “but the most obvious to me is the traditional rollover route,” said Wojciechowski, who also questioned why LPL was not named in the SEC complaint.

“One thing that’s frustrating about this is, the complaint lays cover for LPL by alleging these brokers lied to LPL on their Outside Business Activities forms where they disclosed these affiliations, as “non-securities related” as if that takes LPL off the hook.  It doesn’t,” he argued.

Beyond posing as representatives of the government, “in some instances, investors were led to believe that their funds would be invested in a product that was offered, vetted or specifically selected by the TSP,” the SEC said. 

Cooke and his fellow reps even sent investors incomplete or modified transaction forms as well as written materials they devised that obscured the fact that the investment was a privately issued variable annuity with no connection to the TSP and would be processed through a private brokerage firm the brokers were associated with, the SEC said.

Cooke and the reps “were motivated by the prospects of higher commissions as they targeted federal employees age 59½ and over and intentionally obscured important details when recommending variable annuity purchases. They even allegedly excluded the words ‘variable annuity’ from some materials they shared with TSP account holders,” said Aaron W. Lipson, then-associate director of the SEC’s Atlanta regional office, in the original suit. (Lipson is now a partner in the law firm of King & Spalding.)

Some of the reps even opened up brokerage accounts at LPL in their customers’ names without the customers’ knowledge or consent, because the broker-dealer required customers to have accounts before reps could sell variable annuities, the SEC said.

 “Some of the investors did not learn of the creation or existence of these accounts in their names until after their TSP accounts had been liquidated (that is, when the underlying securities were sold) and the funds transferred to purchase the variable annuity,” the agency said in its complaint.

While the SEC is seeking penalties and restitution for the affected federal employees, to date Cooke has settled with just one customer (for $20,254.87 in 2014). The customer said Cooke misrepresented himself as a federal employee and that they were misled into purchasing a variable annuity, according to Cooke’s BrokerCheck record.