New Jersey Court Clears Financial Planners of Wrongdoing

The court conceded that James W. Barrett, of Cigna Financial Advisors, and Gerard T. Papetti, of U.S. Financial Services Corporation, did not disclose all they knew about the potential tax risks of establishing what they represented was a “tax qualified,” “419 annuity” by participating in a program known as the Employers Participating Insurance Cooperative (EPIC). The court also agreed the advisers withheld revelation of the insurance company’s control over the amount and issuance of conversion credits, and that their remuneration was paid from Finderne Management Company’s EPIC contributions.

The court also agreed that Barrett and Papetti were subject to the state’s Consumer Fraud Act (CFA), concluding that the lack of uniform regulation of an occupational group defeats its recognition as “learned professionals” exempt from the CFA. The appellate court said the lack of state or federal licensure or regulation of “financial planners” subjects Barrett and Papetti to CFA liability. Papetti used the designation of CFP, certified financial planner.

However, the court found that the EPIC plan did not fall under the scope of the CFA, warranting dismissal of the fraud charges. To be covered by the CFA, the purchase of the benefit must qualify as a consumer transaction generally of the type sold to the general public. The court determined EPIC was very complex and “it is clear this was a device to shelter income from taxation, which is not a consumer transaction as envisioned by the adopters of the CFA.”

The court further said it did not view plaintiffs as “unsophisticated buyers, victimized after being lured into EPIC through fraudulent, deceptive selling or advertising practices” since they sought advice from both an accountant and an attorney and since the EPIC documents were “replete with recommendations and disclaimers to seek independent guidance.”

Finally, the court rejected the plaintiffs’ argument that they should recover “benefit-of-the-bargain” damages equal to monies they lost due to the fact that the court would be required to enforce the EPIC plan provisions which were disallowed by the IRS.

Induced Participation

Plaintiffs Finderne Management Company, Inc. (FMC), Rocque Dameo and Daniel Dameo claimed Barrett and Papetti induced them to EPIC purporting it to be a multiple employer welfare benefit plan and trust that provided employers with a tax-deductible vehicle to fund pre-retirement death benefits for owner-employees through the purchase of specific life insurance products and allowed the individual insured to convert the insurance policy to obtain post-retirement benefits.

Six years after FMC commenced participation in EPIC, the Internal Revenue Service (IRS) audited the company and disallowed claimed deductions for two tax years. As a result of the IRS audit, plaintiffs paid additional taxes and interest deemed due. Thereafter, plaintiffs terminated participation in EPIC.

The plaintiffs sought recovery of losses allegedly resulting from Barrett and Papetti failing to warn them that the beneficial tax features of EPIC were not sanctioned by the IRS and failing to disclose they received commissions based on plaintiffs’ EPIC contributions. The plaintiffs also charged that Barrett and Papetti knew EPIC had no reserve fund to pay promised benefits upon the termination of participation because the contributions were used to pay the promoters’ commissions.

Prior to trial, defendants submitted a $350,000 offer of judgment, which the plaintiffs did not accept and the offer expired. A trial court entered judgment against Barrett and Papetti each for $36,734.60.

The case is Finderne Management Co. v. Barrett, N.J. Super. Ct. App. Div., No. A-1057-05T5, 9/9/08.