Wednesday, September 7, 2016

Lawsuit charges MSMA Foundation-approved financial advisers ripped off doctors for millions

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.

The Program

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."

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 .
 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.

Thirty-seven doctors participated in the program.   Most investments were made between 1995 and 2000 although a few physicians participated until 2014.

The Train Wreck

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


30 comments:

Anonymous said...

This went on for a long time without anyone noticing? I call BS

Anonymous said...

Bunch of greedy ass doctors blinded by another deal that was too good to be true.

JG Wentworth said...

Where's the violation? Investments are crap shoots.

Anonymous said...

@10:25. Agree. This is, as normal, one side of the story. Reading the response should be interesting. MSMA can't be as naive as they profess to be in this filing.

Anonymous said...

Exaclty why doctors shouldn't be leading any business.

Anonymous said...

So these guys earn $185,000 over 20 years, $9,000/yr, and these doctors are suing them for $15 million? I call BS also. Damn greedy doctors.

Anonymous said...

So these guys earn $185,000 over 20 years, $9,000/yr, and these doctors are suing them for $15 million? I call BS also. Damn greedy doctors.

Anonymous said...

Greedy, greedy doctors. Where is this fictitious 1.5 million coming from? Sounds like FuZzY math to me...

Anonymous said...

3 sets of commissions -All American, JP, AXA. Fees/commissions on contributions.Liability and no funds in Foundation. Serious money. Life insurance only licenses and annuities of ANY kind are mucho trouble for anyone -ANYONE - Dr.,Lawyer,Indian Chief.

Anonymous said...

Money hungry, money hungry Doctors--- dont let dem nurses have ANY OF OUR MONEY

Anonymous said...

Churning... Churning... there's always Churning. This is why I avoid "funds" and "plans" as much as is possible. If I don't control it, I can be sure that someone will eventually bleed it dry.

Anonymous said...

I just hope one of these greedy, greedy doctors is available when you have your heart attack, stroke, or severe accident,and will come in the middle of the night to save your ignorant, pitiful ass.

Anonymous said...

so you are saying their greed is justified because the provide healthcare services in the middle of the night? if that's the case, let's just give them everything and worship them as our new God.

Anonymous said...

@ 11:54, they billed $185,000. But, they received commissions on the annuities (which they sold three times each). Their commissions depended on the amount invested and the commission option that they chose.On top of that, they sold life insurance policies totaling $9.5 million as a form of "reinsurance".

A commission calculation would look similar to this:
Annuity Commission 1 + Annuity Commission 2 + Annuity Commission 3 + Life Insurance Commissions + $185,000 management fees = Total Profits

Now, let's put some pen to paper. It says the life insurance was valued around $9,500,000. That tells us a few things. 1). The commissions were decent because they had to be permanent insurance and the insured lives were for older people. 2). The total value of the annuities had to have been greater (probably 2-3 times that amount).
Let's use $30,000,000 in annuities for our example. Let's guess that they took the commission option providing the highest compensation in Year 1 with no residuals. We'll assume that because the advisors tacked on the Monthly Fee signifying the gravy train had likely ended. That commission rate is about 5%. Some companies pay 7%, some pay 4.5%. Let's assume it to be 5%.
The first set of commissions would net around $1,500,000 for the advisors. Remember they surrendered the annuities twice and got 3 sets of commissions. So, that $1,500,000 is actually tripled just for the annuity commissions.
Now, 9,500,000 in permanent life insurance on people nearing or at retirement age isn't cheap. We'll assume that they brokered the policies (again for the highest First Year Commission with little or no renewals). (Note: If they were part of a long-term contract with a carrier the renewals could be much higher over a longer period of time). For that much coverage, they probably earned about $500,000 in commissions.
So, let's do the math now:
$1,500,000 + $1,500,000 + $1,500,000 + $500,000 + $185,000 = $5,185,000
That is $5+Million in FEES to make a $30,000,000 program insolvent through fraudulent accounting and deceitful sales practices (i.e. telling the Foundation that they had re-insurance through an insurer when they didn't).

Anonymous said...

Hey, 12:54 Is $5 million in fees over 20 years for ONE CLIENT (the Foundation) enough for all the hard work they put in deceiving the Foundation, or should the "greedy doctors" pay them even more?

Anonymous said...

"I just hope one of these greedy, greedy doctors is available when you have your heart attack, stroke, or severe accident,and will come in the middle of the night to save your ignorant, pitiful ass."

I would rather relay on a nurse...but thanks/

Anonymous said...

@3:43- Thanks for the breakdown. You sure have a lot of time on your hand. You must be one of those doctors who doesn't work (has their Nurse Prac see all their patients), over bills Medicaid and tries to pretend like they have a busy practice. Here is a thought, you should bill the Foundation for your public relations work.

Anonymous said...

Does this mean doctors' breakrooms can no longer get donuts every morning from the drug reps?

Anonymous said...

Hahahahaha expand Medicaid but give us our money, too! MSMA logic so saucy.

Anonymous said...

Come on people. Don't you understand that us docs are smarter than the rest of y'all about any and every subject. We are the only people that work hard. We are the only people that work long hours. We are the only people that know more than all other people. Please step back and give us our due.

Madison Doctor said...

Great to see these ignorant nurses commenting on here. Leave the mathematics to the grownups, ladies.

Anonymous said...

The Association Director and Board of Trustees have a fiduciary duty to these doctors. This all looks very similar to the Singing River cover up and Chris Anderson's failed leadership. Something about medicine handeling money. This is a serious issue. Thanks for reporting KF.

Anonymous said...

Who originally agreed to this plan and then 'sold'/hawked' it to these doctors? The Exec Dir of their association? And who approved all this scam? The MSMA Board of Directors? And why didn't they do their homework or monitor the plan? What about THEIR fiduciary responsibility in this situation?

Anonymous said...

Larry Fortenberry is a red faced, ass**** bully but I am surprised that he would get caught up in this sort of thing.

Anonymous said...

Wait amount, hold up, the champions of tort reform- do not sue anyone, ever are now plaintiffs?? Do as you preach, doctors. Shame shame shame.

Anonymous said...

Shut up Madison Doctor. MSMA and you= what is wrong with Mississippi's healthcare.

Anonymous said...

Listen to the chants coming from the docs: "Expand Medicaid, Expand Medicaid, Expand Medicaid!" And "Sue, sue, sue! I want my money!" Who is running MSMA? Moak and Baria? I never thought I'd see this day. Hell must have frozen over.

Anonymous said...

@ 4:16, Bless your heart.
Sincerely,
3:43

Kingfish said...

4:16, I seriously doubt that was a doctor making that comment. It sounded more like a finance person. Of course, you do know the difference, right?

Anonymous said...

Are there tax liabilities for the doctors? Usually schemes like this produce immediate tax benefits for the well heeled participants. Now that it's revealed as a potential failure and scam will the IRS be collecting?

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