Merrill Lynch sued over variable annuity sales

By: EDMOND JACOBY - Staff Writer | Tuesday, January 25, 2005 10:34 PM PST ∞

SAN DIEGO ---- A second class-action complaint for violations of federal securities laws has been filed in U.S. District Court here, this time naming securities dealer Merrill Lynch & Co. Inc.

The suit, brought by Jane Westbrook of Santee, was filed Friday, a day after William Dornon of Vista lodged a nearly identical complaint against financial services giant Morgan Stanley Inc.

Both actions allege that the plaintiffs were induced by the companies through investment counselors to purchase securities known as variable annuities without being told that the firms would receive undisclosed sales commissions from the insurance companies issuing the annuities.

Both Westbrook and Dornon are represented by San Diego attorney Ronald Marron, who said the practice of selling variable annuities to elderly investors is so common that he is seeking to have the suits recognized by the court as class actions. He estimated that the number of people who may qualify as members of the class could be "from the thousands to the tens of thousands."

Merrill Lynch spokesman Mark Herr said his company is "going to decline to comment on this litigation."

A spokeswoman for Morgan Stanley said the suit against her company is without merit, and "we believe our variable annuity sales practices are appropriate and have been properly disclosed."

Dornon's suit was preceded by an arbitration claim filed with the National Association of Securities Dealers in Washington, D.C. NASD spokesman Herb Perone said that because arbitration claims are part of a confidential procedure until an award is made by the arbitration panel, he could not comment on any particular claim.

"But with regard to the (Dornon claim), I can go just a tad farther than that," he said. "We did say in that case that we are aware of the complaint and we are looking into the matter.

"It is no secret that variable annuity sales have been a matter of heightening concern here at NASD and at the Securities and Exchange Commission for the last three years or so," he said.

"In the past two years, we have carried out more than 80 enforcement actions in variable annuities cases, and we have proposed tighter rules for variable annuity sales," he said.

Dornon said that he sought a legal remedy after a Fallbrook-based Morgan Stanley investment adviser sold him a variable annuity in 1998, telling him that he could not lose any portion of his principal.

"She said that I would make more interest with it, and I cannot lose the principal."

After buying a second variable annuity on the adviser's recommendation in 2002, Dornon was "talked into selling the first annuity, so I went to her office and signed the papers," he said.

Earlier contacts by the North County Times seeking comment from personnel at the Fallbrook office were unsuccessful.

After vacationing in Mexico, he returned to find that the annuity had not been sold because of a records snafu ---- his signed sell order could not be located ---- "so I went over and signed another."

Both of his variable annuities then were sold, although he had agreed to sell only the older one.

"That one was sold for $15,000 less than they said it would bring," he said.

The company immediately bought back the second annuity, but the first was gone for good, Dornon said.

"She came to my house," Dornon said of the adviser, "and she was crying when she said the company had funds to take care of losses like that but for some reason I didn't qualify."

Dornon retired some 15 years ago after selling his business, Vista Brake Service and Supply, to his son.

"I started that company from scratch, and I retired from it. I was a graduate of (California Polytechnic Institute in) San Luis Obispo, and I did all right investing for myself before I met her, buying certificates of deposit and stuff," he said.

"I worked hard, and I had a good name. My biggest mistake was to trust" the Morgan Stanley investment adviser, he said.

According to Dornon, he was a reluctant litigant, because "I don't want to cause people trouble. But I don't want to let them do this and just walk away, either. Maybe I can help someone else."

Variable annuities generally are considered questionable investments for elderly investors, whose financial needs differ from people who have not yet reached retirement age, many financial counselors say. The instruments rarely are beneficial to seniors who have no other income except Social Security and whose principal investment goal is short-term income generation.

California's insurance commissioner maintains a toll-free hotline for consumer complaints, and a spokesman for Commissioner John Garamendi said investors who think they have been inappropriately sold a variable annuity should call the hotline at (800) 927-4357. The NASD also has a complaint procedure, and can be reached at (301) 590-6500.

Contact staff writer Edmond Jacoby at (760) 739-6675 or ejacoby@nctimes.com.