A lawsuit charges financial advisers ripped off doctors who used a Mississippi State Medical Association Foundation program for millions of dollars for twenty years. The Foundation sued Larry Fortenberry, Philip Metz, Richard Howard, and companies they owned in Madison County Circuit Court last week. The complaint alleges the trio sold and operated charitable gift annuity programs to member physicians. The Foundation claims losses are at least $15 million.
The Mississippi State Medical Association established the Mississippi State Medical Association Foundation in 1990 as a 501(c)3 organization so it could receive charitable gifts. The foundation allowed the defendants to sell charitable gift annuity programs to MSMA members from 1995 to 2015.
Charitable gift annuity programs are allowed by Section 170 of the Internal Revenue Code. They allow member physicians to donate assets to the MSMA for an immediate tax deduction. The donor receives an annuity until the time of his death in exchange for the donation. Some donations allow the spouse to receive the annuity after the donor's death as well. The contributed assets become assets of the charity, and the payments become the liability of the charity. The annuity is backed by the charity's entire assets, not just the property/money contributed.
After the death of the investor and the spouse, the payout/balance goes to the charity. Rates of return on charitable gift annuities are lower than commercial annuities, so that the charity benefits more than the investor/donor. There is a greater risk to the charity, as it must continue the payments even if the investment declines. A portion of the payments are considered to be a partial tax-free return of the donor's gift.
Fortenberry and his company, Executive Planning Group, formed an exclusive "sponsorship agreement" in 1993 with the MSMA Foundation. Fortenberry is a CPA, CLU, and ChFC*. He provided financial and estate planning to MSMA members. The Foundation also allowed him to sell insurance programs to its member physicians as well. In other words, he carried the seal of approval from the Mississippi State Medical Association for Mississippi doctors who looked to their state association for help in managing their finances. The agreement gave the CPA "exclusive access" to the member physicians - a prospect list financial advisers dream of having.
The financial adviser began promoting Philip Metz's Section 170 program to MSMA members in 1995. Metz and his company, Association Plan Management, operate in Florida. Metz, Howard, and Fortenberry split the commissions. The complaint alleges the pair told MSMA that the Foundation's liability was assumed by a "major life insurance company" (p.5). Metz operated as the plan administrator for the foundation.
The complaint charges:
21. Metz, Howard, and Fortenberry represented to MSMA physician members directly and through the Foundation, among other things, that the Section 170 Plan was a method to receive a "current year tax deduction each year" in which an investment was made along with a "Guaranteed Internal Rate of Return - General in Excess of 10%" that provided "Guaranteed Income for the Life of Two People."The trio told the Foundation that a life insurance policy was purchased for each donor so the Foundation would receive a death benefit upon the donor's death. The complaint alleges (p.9) that the promised future death benefits in 2004 were $9.6 million.
22. Metz, Howard, and Fortenberry also represented to the Foundation that it could fund a "50% match" of the physician's deferred annuity benefit by using "normal residuum [of the charitable portion of the investment] on the front" in order "to fund an enhanced benefit to the participant. " They designed promotional material to be sent to physicians that represented the so called enhanced "50% match" increase in retirement benefits and in essence gave additional safety to the participants' investments in the Section 170 Plan .
Thirty-seven doctors participated in the program. Most investments were made between 1995 and 2000 although a few physicians participated until 2014.
Metz started charging a $1,000 per month "administrative fee" in 1998 but no worries, the fee was covered by the program's assets. The Foundation agreed to pay the fee as long as it didn't come out of the Foundation's own pockets.
Metz drew $185,000 in fees until May 2014.
The Foundation discovered near the end of 2015 that "the Section 170 plan was insolvent". To make matters worse, any cash value of the life insurance policies had to be used to pay the annuities. The promised future death benefits will never be realized by the Foundation.
Churning? Did someone mention churning? As is all too often the case in these cases, allegations of churning are made. The trio moved the annuities from All American Life Insurance Company to Jefferson-Pilot Life Insurance Company in 1999. Metz told the Foundation that All American was sold and the new owners wanted to discontinue its Section 170 program. The complaint states:
36. Metz stated moving the commercial annuities would incur surrender charges of "3.58% of the total cash values in the annuity contracts, after a 2% premium bonus on amounts transferred." Metz represented Jefferson-Pilot's fixed income rate was 1.25% higher than that on commercial annuities being surrendered, thus by the fifth policy year the new annuity would recover the surrender charges. Metz stated, "the plan's current cushion of excess plan assets over plan obligations will keep the plan on sound financial footings until such time as the surrenders are recaptured."
The psychohistory reveals the Foundation relied on its financial adviser's advice and moved all of the annuities to Jefferson-Pilot. The Foundation later learned that no reinsurance agreements were made, contrary to what the trio claimed. However, Metz said in 2004 that the annuities needed to be transferred from Jefferson-Pilot to Allianz Life Insurance Company:
41. In mid-2004, with Howard and Fortenberry's knowledge and support, Metz told theFoundation the commercial annuities at Jefferson-Pilot should be moved to Allianz Life Insurance Company ("Allianz"). Metz stated a "10% premium bonus on all contributions in the first 5 policy years exceeds any surrender charges associated" with the transfer. Metz also claimed the move "effectively [reduced] the surrender period from 8 years on the current contracts (with Jefferson-Pilot) to 5 years." Metz also stated the "total benefits to the Foundation 'over the 5 year bonus period would' exceed $70,000." Metz claimed the "penalty free annuitization option after the fifth year anniversary makes this an attractive opportunity to the Foundation with no downside risk."
The Foundation claims that the defendants said in 2007 that the plan was solvent and fully-funded. It also alleges that Metz provided annual reports for many years that he knew were false.
The Foundation considered terminating the program in 2012 but Fortenberry allegedly defended the program and Metz's role as administrator. It claims they again provided false annual reports in 2012 and 2013. The Foundation suspended the program in 2014 and fired Metz as plan administrator.
The true nature of the program's finances was discovered when outside experts reviewed the program in 2015. They reported the program did not have enough assets to meets its obligations.
53. After further investigation in late 2015, the consultants determined that Section 170 Plan commercial annuities were never sufficient to pay the deferred annuity obligations undertaken in the Charitable Gift Annuity agreements. Accordingly, it was discovered for the first time that the representations of guaranteed income for the two lives, safety of the plan through legal guarantees and re-insurance, guaranteed internal rate of return of 10%, passing all Foundation's liability to a top-rated insurance company, sound financial footing and being fully funded, and solvency of the Section 170 Plan were false and known or reasonably should have been known, or in reckless disregard of the truth, to be false, deceptive, and misleading when made. These false, deceptive, and misleading representations were calculated to mislead, deceive, and lull the Foundation and participating physicians into a false sense of financial security and to enable Metz, Howard, and Fortenberry to enrich themselves.The complaint charges the defendants with fraud, breach of fiduciary duty, negligence, gross negligence,
The MSMA Foundation claims the actual damages are at least $15 million (p.18). It said the plan was always insolvent and was a rip-off scheme from start to finish. The foundation also asked for another $9.6 million in damages for the promised death benefits as well as the $185,000 administrative fees that were paid to Metz. The usual demand for punitive damages is included in the complaint.
Attorneys Rueben Anderson and Frank Trapp of Phelps Dunbar represent the foundation. The case is assigned to Circuit Judge Steve Ratcliff.
*Certified Public Accountant, Charter Life Underwriter, Chartered Financial Consultant