Missouri Suspends Waddell's License
by Stephen Roth, The Business Journal of Kansas City
Missouri has suspended Waddell & Reed Financial Inc.'s state broker-dealer registration because of variable annuities the company sold four years ago.
David Cosgrove, securities commissioner for Secretary of State Robin Carnahan's office, suspended Waddell & Reed's registration in Missouri for 14 days, pending an April 7 hearing before the commissioner to review whether the company should be barred or censured. Assistant Securities Commissioner Mary Hosmer will represent the state at the hearing, Cosgrove said Monday.
The suspension basically means Waddell & Reed can't operate for two weeks as a broker-dealer in Missouri.
"You cannot engage in the sale of securities or investment adviser services without being registered to do so under (Missouri statute) Chapter 409," Cosgrove said.
In a prepared statement issued late Monday, Waddell & Reed (NYSE: WDR) said it cooperated fully with the state securities division's request for information related to the variable annuity transactions and "never again heard from the division before it took this drastic action." The Overland Park company said the order adversely affects more than 450 Waddell & Reed advisers registered in the state and "tens of thousands" of Missouri clients.
Waddell & Reed stated that it would work with the state to reach "a fair and reasonable resolution."
In a news release issued Friday, Carnahan said the order was necessary to "protect Missouri investors against investments that do not suit their needs or are not in their best interest."
The action involves Waddell & Reed's switch in variable annuity contracts it sold to investors from United Investors Life Insurance Co. to Nationwide Insurance Co. between January 2001 and August 2002.
In January 2004, the National Association of Securities Dealers filed a complaint against Waddell & Reed for recommending 6,700 variable annuity exchanges to its customers "without determining the suitability of the transactions." The NASD alleged that the variable annuity transactions cost customers nationally nearly $10 million in surrender fees and generated about $37 million in commissions for Waddell & Reed.
NASD spokesman Herb Perone declined to say Monday when a hearing will be scheduled on the agency's charge against Waddell & Reed. But in its statement, Waddell & Reed said the NASD hearing will take place in May.
Hosmer said Monday that the secretary of state's securities division began investigating Waddell & Reed's switch in variable annuity providers shortly after the NASD charge.
According to Carnahan's office, the switch in variable annuity providers netted more than $1 million in commissions for Waddell & Reed from more than 250 Missouri investors but cost those investors hundreds of thousands of dollars.
Waddell & Reed has waged a court battle for several years against former parent company Torchmark Corp., which owns United Investors Life Insurance. In September, a U.S. District Court judge dismissed Waddell & Reed's remaining claims against two Torchmark executives. In early 2004, an Alabama jury awarded Torchmark $45 million in damages from Waddell & Reed.
Variable annuities are contracts between investors and insurance companies in which the insurer agrees to make periodic payments to the investor.
Waddell & Reed ranks No. 17 on The Business Journal's list of area public companies.