NO. A11-1848

State of Minnesota

In Court of Appeals _______________________

State of Minnesota, by its Attorney General, Lori Swanson,

Respondent, vs.

American Family Prepaid Legal Corporation, d/b/a American Family Legal Plan, Heritage Marketing and Insurance Services, Inc., and Jeffrey Norman,

Appellants,

and

Stanley Norman, Defendant, __________________________

BRIEF AMICUS CURIAE OF AARP IN SUPPORT OF RESPONDENT SUGGESTING AFFIRMANCE

_________________________________

OF COUNSEL: JULIE NEPVEU (DC BAR #458305) AARP FOUNDATION LITIGATION MICHAEL SCHUSTER (D.C. BAR # 934133) AARP 601 E Street, N.W. Washington, DC 20049 (202) 434-2060

SEAN BURKE (#0392115) EQUAL JUSTICE WORKS FELLOW LEGAL AID SOCIETY OF MINNEAPOLIS 430 First Avenue North, Suite 300 Minneapolis, MN 55401-1780 (612) 746-3759 Attorneys for Amicus Curiae AARP

Martin A. Carlson (#0299650) Law Offices of Martin A. Carlson. LTD. 247 Third Avenue South Minneapolis, MN 55415 (612) 359-0400 Robert Espeset (#0123705) Espelaw PLLC 4525 Allendale Drive White Bear Lake, MN 55127 (651) 426-9980

Attorneys for Appellant Stanley Norman P.O.Box 54210 Irvine, CA 92619 Defendant

James Canaday (#030234X) Assistant Attorney General Office of the Attorney General 445 Minnesota Street, Suite 1400 St. Paul, MN 55101 (651) 757-1421 Attorney for Respondent

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TABLE OF CONTENTS TABLE OF AUTHORITIES ............................................................................................... ii ARGUMENT ....................................................................................................................... 1

I. Sales Of Inappropriate Annuity Products By Fraudulent And Deceptive Practices Are Devastating For Older Consumers ................................... 1

A. Individual Investors Rely On Financial Advisors To Make Investment Decisions ......................................................................... 3

B. Minnesota Law Protects Vulnerable Consumers From Practices

That Objectively Have A “Tendency Or Capacity To Deceive” .................. 4 1. Fear and Confusion ............................................................................ 5 2. Affinity-Based Marketing .................................................................. 6 3. Diminished Financial Decision-Making Capacity ............................. 7 4. Isolation .............................................................................................. 9

II. Minnesota’s Suitability Standard Aims To Prevent The Sale of Inappropriate Annuities To Avoid Irreparable Harm ................................ 10

A. Minnesota’s Suitability Standard Is Clear And Consistent

With Settled Industry Standards .................................................................. 11

B. Appellants Never Evaluated Their Victim’s Financial Status ........................................................................................................... 12

III. The Trial Court Did Not Abuse Its Discretion To

Fashion An Appropriate Restitution Remedy ................................................... 13 CONCLUSION ................................................................................................................. 19

CERTIFICATE OF COMPLIANCE ................................................................................ 20 CERTIFICATE OF SERVICE .......................................................................................... 21

ii

TABLE OF AUTHORITIES Pages

Cases

Clark v. John Lamula Investors, Inc., 583 F.2d 594 (2d Cir. 1978) .................................................................................. 12 Cooper v. Pac. Life Ins.,

229 F.R.D. 245 (2005) ............................................................................................ 11 CFTC v. Am. Metals Exchange Corp.,

991 F.2d 71 (3d Cir. 1993) ..................................................................................... 16 Feigin v. Alexa Group, Ltd.,

19 P.3d 23 (Colo. 2001) ......................................................................................... 17

Janigan v. Taylor, 344 F.2d 781 (1st Cir. 1965), cert. denied, 382 U.S. 879 (1965) ........................... 15

Levine v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

639 F. Supp 1391 (S.D.N.Y. 1986) ........................................................................ 12 Ly v. Nystrom,

615 N.W.2d 302 (Minn. 2000) ............................................................................... 17 Mooney v. Allianz Life Ins. Co.,

244 F.R.D. 531 (2007) ............................................................................................ 16 People ex rel. Bill Lockyer v. Fremont Life Ins. Co.,

104 Cal. App. 4th 508 (2002) ................................................................................. 15 Porter v. Warner Holding Co.,

328 U.S. 395 (1946) ............................................................................................... 15

Randall v. Loftsgaarden, 478 U.S. 647 (1986) .............................................................................................. 15

SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) ................................................................................... 16

SEC v. Haligiannis,

470 F. Supp. 2d 373 (S.D.N.Y. 2007) .................................................................... 16

iii

SEC v. Tome,

833 F.2d 1086 (2d Cir. 1987) ................................................................................. 16

Shields v. Texas, 27 S.W.3d 267 (Tex. Ct. App. 2000) ............................................................... 16, 17

State v. DeAngelis, 747 A.2d 289 (N.J. Super. Ct. App. Div. 2000) ..................................................... 15

State by Humphrey v. Alpine Air Products, Inc.,

490 N.W.2d 888 (1992) .......................................................................................... 14 State by Humphrey v. Ri-Mel, Inc.,

417 N.W.2d 102 (Minn. Ct. App. 1987) ................................................................ 14

State of Minnesota v. Standard Oil Co., 568 F. Supp. 556 (D. Minn. 1983) ......................................................................... 14

United States CFTC v. Hays,

No. 09-259, 2011 U.S. Dist. LEXIS 9243 (D. Minn. Jan. 27, 2011) ..................... 16

Rules and Statutes

FINRA Rule 2310 .............................................................................................................. 11 FINRA Regulatory Notice 07-43, 2 (Sept. 2007).............................................................. 11 Minn. Stat. § 8.31 ............................................................................................................. 17 Minn. Stat. 60K.46, subd. 4 (2010) ......................................................................... 3, 10, 11 Minn. Stat. § 8.31, subds. 3a, 2c, 3c .................................................................................. 14

Miscellaneous

Nevin E. Adams, Annuities Get A Behavioral Finance Makeover,

Asset Int’l, Inc. (May 17, 2010) available at http://www.standard.com/finpros/newsletter/annuity_news/previous/ 2010-07/story5.html ................................................................................................. 5

iv

Agarwal. S., Driscoll, J, Gabaix, X., and Laibson, D., The age of reason: Financial decisions over the life-cycle and implications for regulation, 2, Brookings Papers on Economic Activity, 51-117 (2009).................. 8

Basel Committee on Banking Supervision, The Joint Forum, Customer

suitability in the retail sale of financial products and services, Bank for International Settlements, 52 (April 2008), available at http://www.bis.org/publ/joint20.pdf ......................................................................... 3

Carolyn Carter, Consumer Protection in the States: A 50 State Report

on Unfair and Deceptive Acts and Practices Statutes, 22, Nat’l Cons. Law Cntr. (2009) .......................................................................................... 17

Prentiss Cox, Goliath Has the Slingshot: Public Benefit and Private

Enforcement of Minnesota Consumer Protection Laws, 33 William Mitchell Law Rev. 163 (2006) ............................................................ 17

Dobbs, LAW OF REMEDIES § 4.1 (1973) ........................................................................... 14 Government Accountability Office, CONSUMER FINANCE,

Regulatory Coverage Generally Exists for Financial Planners, but Consumer Protection Issues Remain, GAO-11-235 (Jan. 2011) ...................................................................................... 2, 4

Merlyn Griffiths and Tracy Harmon, Aging Consumer Vulnerabilities

Influencing Factors of Acquiescence to Informed Consent, 45 J. of Cons. Aff. 445 (2011) ............................................................................ 9, 10

Hearing, Senate Select Comm. on Aging (statement of Sandy Praeger,

Kansas Ins. Comm. and NAIC Pres.-Elect), 2 (Sept. 5, 2007) ................................ 2 Hearing before Sen. Special Comm. on Aging, 109th Cong.,

1st Sess. (2006) (opening statement of Sen. Herb Kohl), available at http://aging.senate.gov/events/hr153hk.pdf ............................................................. 1

Hearing before Sen. Special Comm. on Aging, 109th Cong.,

1st Sess. (2006) (statement of Sen. Gordon H. Smith, Chairman, Special Comm. On Aging), available at http://web.archive. org/web/20061227193223/http://aging.senate.gov/public/_ files/ht153gs.pdf ....................................................................................................... 2

v

Ryan Hall, Richard Hall and Marcia Chapman, Exploitation of the Elderly: Undue Influence as a Form of Elder Abuse, 13 Clinical Geriatrics 32 (Feb. 2005) ........................................................................ 7, 9

Naomi Karp, T. Ryan Wilson, Protecting Older Investors:

The Challenge of Diminished Capacity, AARP Public Policy Institute (Nov. 2011) ................................................................................. 7, 8

Annamaria Lusardi, Olivia S. Mitchell, and Vilsa Curto, Financial Literacy and Financial Sophistication Among Older Americans, Nat’l Bur. of Econ. Res., Working Paper No. 15469 (Dec. 2009), available at http://www.nber.org/papers/w15469.pdf ............................................. 4

MetLife, The MetLife Study of Elder Financial Abuse: Crimes of

Occasion, Desperation, and Predation against America’s Elders (June 2010) .................................................................................................... 7

NASD Foundation, Fraud Study Final Report (May 12, 2006) ....................................... 10 Nat’l Cons. Law Cntr, UNFAIR AND DECEPTIVE ACTS AND

PRACTICES § 13.3.2.4.1 (7th ed. 2008) .................................................................... 14 North American Securities Administrators Association,

Member Enforcement Statistics 2010 (Oct. 2011), available at http://www.nasaa.org/regulatory-activity/ enforcement-legal-activity/enforcement-statistics/ ................................................ 17

Johnny Parker, Company Liability for a Life Insurance Agent’s Financial

Abuse of an Elderly Client, 2007 Mich. St. L.Rev. 683 (2007) ............................ 10 SEC, http://www.sec.gov/investor/pubs/affinity.htm .......................................................... 6 Aaron Smith, A Suitability Standard for Mortgage Brokers:

Developing a Common Law Theory, 17 Geo. J. Poverty Law & Pol'y 377 (2010) ............................................................................ 11

Statement of Patricia D. Struck, NASAA Pres., at SEC Senior

Summit (July 17, 2006), http://www.nasaa.org/Issues___ Answers/Legislative_Activity/Testimony/4999.cfm .......................................... 1, 2

John W. Wade & Robert D. Kamenshine, Restitution for Defrauded Consumers: Making the Remedy Effective Through Suit by Governmental Agency, 37 Geo. Wash. L. Rev. 1031 (1969) ................................. 15

vi

Anthony Web, Providing Income for a Lifetime: Bridging the Gap between Academic Research and Practical Advice, AARP Public Policy Institute (June 2009) ............................................................. 13

Lisa Yurwit, Restitution in Consumer Protection Actions: Stop the Reliance on Reliance, 36 U. Balt. L. Rev. 393 (2007) ..................................... 14, 15

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ARGUMENT1, 2

I. Sales Of Inappropriate Annuity Products By Fraudulent And Deceptive Practices Are Devastating For Older Consumers

Legislators and enforcement officials have long decried the sale of unsuitable

annuities and other investment products using outrageous practices such as those evident

in this case because of the devastating impact they have on older people. “The current

landscape facing senior investors is littered with slick schemes and broken dreams.

While our cases of senior investment fraud may not make national headlines, they are

devastating in their impact on victims and their families.” Statement of Patricia D. Struck,

NASAA Pres., at SEC Senior Summit (July 17, 2006), http://www.nasaa.org/Issues___

Answers/Legislative_Activity/Testimony/4999.cfm (hereinafter “Struck, SEC Senior

Summit”). Many older people “are turning to investments to increase their retirement

income,” and “are proving too easy prey for con artists ready to steal their hard earned

and harder to replace money. . . . Regardless of the scam, the outcome remains the same:

seniors lose their irreplaceable retirement income.” Hearing before Sen. Special Comm.

on Aging, 109th Cong., 1st Sess. (2006) (opening statement of Sen. Herb Kohl),

available at http://aging.senate.gov/events/ hr153hk.pdf.

Older people often rely heavily on financial advisors due to limited financial

literacy and the complexity of the investment products being sold. This makes them 1 This brief was prepared solely by the undersigned attorneys and funded by Amicus Curiae AARP and the Legal Aid Society of Minneapolis. 2 AARP has entered into a confidential settlement in AARP v. American Family Prepaid Legal, et al., No. 1:07-CV-202, Document #132 (M.D.N.C. Aug. 9, 2011) (alleging trademark infringement in a “fraudulent scheme to pass off living trusts and financial services to older Americans as AARP-endorsed.”).

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more vulnerable to fraud. See Struck, SEC Senior Summit (testifying that “[c]on artists

… know that today’s retirees are facing greater responsibility for their financial security

because of the decline of traditional defined benefit pension plans, and they need to

maximize their retirement investments”). Unfortunately, “retirement nest eggs are

attractive targets for fraud, and once lost, the money often cannot be recovered.” Hearing

before Sen. Special Comm. on Aging, 109th Cong., 1st Sess. (2006) (statement of Sen.

Gordon H. Smith, Chairman, Special Comm. On Aging), available at http://web.archive.

org/web/20061227193223/http://aging.senate.gov/public/_files/ht153gs.pdf.

“Some insurance products, such as annuities, are complex and can be difficult to

understand, and annuity sales practices have drawn complaints from consumers and

various regulatory actions from state regulators as well as [Security and Exchange

Commission] SEC and [Financial Industry Regulatory Authority] FINRA for many

years.” Government Accountability Office, CONSUMER FINANCE, Regulatory

Coverage Generally Exists for Financial Planners, but Consumer Protection Issues

Remain, 20, GAO-11-235 (Jan. 2011). The sale of inappropriate annuities to people over

age 65 has been “identified as subject to the greatest abuse” by the National Association

of Insurance Commissioners (hereinafter “NAIC”). Hearing, Senate Select Comm. on

Aging (statement of Sandy Praeger, Kansas Ins. Comm. and NAIC Pres.-Elect), 2 (Sept.

5, 2007) (discussing NAIC’s model suitability standards for all life insurance and annuity

products). “According to NAIC, [32] states have requirements that insurance

salespersons sell annuities only if the product is suitable for the customer.” GAO,

CONSUMER FINANCE, at 20.

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Minnesota legislators have enacted statutes to protect older consumers from being

sold inappropriate investment products. Of particular relevance to this case, Minnesota

law prohibits the sale of insurance products that are unsuitable based on the individual

facts and circumstances of the consumer. See Minn. Stat. 60K.46 subd. 4 (2010). Such

suitability laws have been recognized by regulators and legislators across many financial

services industries as essential to protect consumers who have limited knowledge and

rely upon professionals to advise them about the products being offered.

A. Individual Investors Rely On Financial Advisors To Make Investment Decisions

Many older people are ill-equipped to make appropriate investment decisions

without assistance due to a relative lack of financial literacy and the increasingly complex

financial services marketplace. An international commission of banking and insurance

regulators in which the Federal Reserve participated found that

Individuals in many jurisdictions are forced to take greater personal financial responsibility as reliance on the state and employers for retirement/pension benefits decreases. The need for financial advice and recommendations will therefore continue to increase. As customers look for better returns and as firms continue to innovate, the complexity of financial products is also likely to increase. The coincidence of these trends should not be lost on regulators or firms – consumers will need to be able to rely on good advice about products that are suitable for them, with conflicts of interest, if not avoided, clearly disclosed.

Basel Committee on Banking Supervision, The Joint Forum, Customer suitability in the

retail sale of financial products and services, 52, Bank for International Settlements

(April 2008), available at http://www.bis.org/publ/joint20.pdf.

4

Despite needing to make decisions about increasingly complex products and

services, many older people do not have even the most rudimentary knowledge needed to

make informed investment decisions. See Annamaria Lusardi, Olivia S. Mitchell, and

Vilsa Curto, Financial Literacy and Financial Sophistication Among Older Americans,

Nat’l Bur. of Econ. Res., Working Paper No. 15469 (Dec. 2009), available at

http://www.nber.org/papers/w15469.pdf. Individual investors therefore rely heavily on

third parties such as brokers and other financial advisors for investment advice. See

GAO, CONSUMER FINANCE, at 15.

B. Minnesota Law Protects Vulnerable Consumers From Practices That Objectively Have A “Tendency Or Capacity To Deceive” The trial court applied the appropriate standard in finding appellants violated

Minnesota’s consumer protection statutes, holding them liable because their practices had

a “tendency or capacity to deceive” the older investors targeted by their schemes. See

Order on Liability, Conclusions of Law ¶18, 30 (Add38, 40).3 Applying this correct

Minnesota standard is critical to protect older consumers from the type of deceptive

business practices perpetrated here, to which older people are particularly vulnerable.

From beginning to end, the practices appellants employed were designed to exploit the

vulnerabilities to which older people are predisposed: fear that they will outlive their

assets; limited financial knowledge of complex products; hyper risk aversion;

susceptibility to affinity based marketing and sales tactics; diminished financial decision-

3 “Add” refers to Appellant’s addendum.

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making capacity, and; susceptibility to isolated decision-making based on impressions

rather than informed consent.

1. Fear and Confusion

Older consumers are especially susceptible to fear-based marketing strategies,

which formed the foundation for appellants’ sales tactics. AFLP and Heritage

exaggerated the potential cost of probate to drive their victims to purchase their products,

deceiving them into believing they would save money. See Order on Liability, Findings

of Fact ¶¶56-59 (Add13). Such fear-based strategies are particularly effective against

older investors generally, especially because complex concepts such as probate and

financial products are very confusing. See Nevin E. Adams, Annuities Get A Behavioral

Finance Makeover, Asset Int’l, Inc. (May 17, 2010), available at http://www.standard.

com/finpros/newsletter/annuity_news/previous/2010-07/story5.html.

While all “investors experience the pain of a financial loss much more acutely

than they feel the pleasure of the same size gain – and by a factor of about 2-1,” the

magnitude of the loss is even more greatly exaggerated for older people. Id. Many older

consumers display “‘hyper’ risk aversion – which meant that they tended to weight losses

about 10 times more heavily than gains.” Id. Playing to the psychological needs of their

intended victims, Heritage introduced and exaggerated the problem that their investments

were not safe, then offered the allure of their annuity product as a safe and easy solution

to those problems, making their products seem more attractive. See Findings of Fact ¶

170 (Add30) (agents were instructed to tell consumers that “[a]nnuities are very similar

to a savings account with a bank, except that it is a savings account with an insurance

6

company.”). Essentially, appellants sold feelings of relief to older people who are

generally deeply concerned with avoiding loss. They did not adequately explain,

however, that the annuities would tie up their liquid assets for many years and came with

heavy penalties for early withdrawals. See Order on Liability, Findings of Fact ¶¶169-

170 (Add29-30).

2. Affinity-Based Marketing

Appellants’ training materials stressed to its sales agents the importance of

relationship-building and trust-building strategies, including warm-up and cool-down

periods of conversations at the time of the sale. See RSR 45, 49 (Ex. 27).4 Such tactics

are typical of affinity scams, which involve gaining the trust of the victim and using that

trust and relationship to mislead, deceive, or defraud. See SEC, http://www.sec.gov/

investor /pubs/affinity.htm (defining “[a]ffinity fraud [as] investment scams that prey

upon members of identifiable groups, such as religious or ethnic communities, the

elderly, or professional groups.”).

Appellants used their relationship with older Minnesota consumers who had

purchased the appellants’ prepaid legal services – after being instilled with fear about the

exaggerated costs of probate – as an entrée to sell their annuity products. Heritage agents

presented themselves as “asset protection specialists” and persuaded older consumers,

sometimes forcefully and other times more subtly, to purchase the company’s products

using both misleading and patently false presentations. See Order on Liability,

Conclusions of Law ¶30 (Add40). 4 “RSR” refers to Respondent’s Supplemental Record.

7

Appellants urge this Court to find error because consumers “overwhelmingly

denied feeling deceived.” Appellant Brief at 32. This is neither relevant to the court’s

findings regarding the appellants’ violation of law nor is it surprising: the agents used

proven tactics of gaining customer trust through in-home marketing presentations. See

MetLife, The MetLife Study of Elder Financial Abuse: Crimes of Occasion, Desperation,

and Predation against America’s Elders, (June 2010) (describing category of crimes of

predation which occur when trust is engendered for the specific intention of financial

abuse later). A polite and courteous sales demeanor is well known to be effective in sales,

whether or not it is deceptive. Victims of affinity scams are frequently unaware they are

being scammed and often do not report “feeling scammed” until after learning that what

they had been sold is not in fact as advertised. See Ryan Hall, Richard Hall and Marcia

Chapman, Exploitation of the Elderly: Undue Influence as a Form of Elder Abuse 13

Clinical Geriatrics 32 (Feb. 2005). The trial court correctly recognized that objectively,

the tactics appellants employed deceived older consumers into purchasing unsuitable

annuity products.

3. Diminished Financial Decision-Making Capacity

Diminishing financial decision-making capacity, which often accompanies

advancing age, intensified the vulnerability of older consumers to the appellant’s

deceptive sales tactics. See Naomi Karp, T. Ryan Wilson, Protecting Older Investors:

The Challenge of Diminished Capacity, 11, AARP Public Policy Institute (Nov. 2011)

(finding that “[w]ith age, adults experience substantial diminution in cognitive function

that affects financial decision making. Evidence indicates that, after peaking in middle

8

age, the ability to make effective financial decisions declines”). Among those skills that

decline significantly with age are numeracy and basic math skills required to navigate

daily activities or to understand simple charts, tables, and basic measures of risk and loss.

Id.

Unfortunately, older consumers are likely to be unaware of their declining

financial decision-making capacity, which occurs with age even absent any sign of

dementia or Alzheimer’s. Id. “[B]y the time people reach their 80s, more than half will

suffer from either dementia or other ‘significant’ cognitive deficits.’” Agarwal. S.,

Driscoll, J, Gabaix, X., and Laibson, D. The age of reason: Financial decisions over the

life-cycle and implications for regulation, 2, Brookings Papers on Economic Activity, 51-

117 (2009). Such cognitive decline makes older consumers more vulnerable, as they have

a lesser understanding of what they own and how best to manage their income and assets.

Appellants intentionally sold inappropriate annuities to thousands of “older people

averaging age 75.” Order on Liability, Findings of Fact ¶7 (Add4). In at least 20 cases,

appellants sold annuities to people who displayed clear visible signs of cognitive

impairment, including Alzheimer’s. See RA 195-97 (Ex. 266).5 Agents focused on

making a sale to earn the corresponding commission rather than raising appropriate red

flags in such cases.

5 “RA” refers to Respondent’s Appendix.

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4. Isolation

Perpetrators of exploitation and abuse of older individuals “progressively breed

fear and helplessness in their victims.” See Hall, et al., at 30. AFLP training materials

encouraged agents to engage in tactics commonly used by such perpetrators, including

isolating older consumers from their spouses or children in order to be the sole influence

over the older person’s financial decision-making. See Appellant’s Index at AA0036-39;

Order on Liability, Findings of Fact ¶ 160-62 (Add27, 28). Heritage actively preyed

upon the vulnerability of older consumers, who – despite limited financial knowledge or

financial decision-making capacity – want to save face and maintain control over their

finances, by encouraging them not to talk to their sons or daughters. See Order on

Liability, Findings of Fact ¶ 161 (Add27, 28). Each customer signed up for significant

financial commitments the very same day that the sales person met with them in their

home, significantly limiting their opportunity to counteract the isolation tactics.

Older consumers “often behave in ways that allow them to save face and maintain

personal pride.” See Merlyn Griffiths and Tracy Harmon, Aging Consumer

Vulnerabilities Influencing Factors of Acquiescence to Informed Consent, 45 J. of Cons.

Aff. 445, 446 (2011). “Aging consumers, more than any other consumer segment value

their autonomy and ability to maintain control of their daily life as they progressively

mature. Many strive to hold on to their independence and self-sufficiency and avoid

feelings of helplessness.” Id. Despite limitations in financial decision-making or the

complexity of the products, “aging consumers may make decisions based on impression

management, rather than on self-preserving interests. In other words, aging consumers,

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in an effort to preserve self-dignity, are likely to acquiesce to informed consent without

being truly informed.” Id. at 447. This predisposition makes older consumers particularly

vulnerable to isolation tactics, such as those employed by appellants.

The various tactics used by appellants to deceive older consumers into purchasing

inappropriate annuities are sophisticated and well known to both con artists and

regulators as being particularly effective in targeting and deceiving older people. See

NASD Foundation, Fraud Study Final Report, 9 (May 12, 2006) (finding that

“investment fraud pitches, more than any other type of fraud examined, used the highest

total number of tactics” to persuade victims). The trial court appropriately found that

appellants’ deceptive practices violate Minnesota laws.

II. Minnesota’s Suitability Standard Aims To Prevent The Sale Of Inappropriate Annuities To Avoid Irreparable Harm Most cases of financial fraud go unreported by older people because they are

either too embarrassed about being duped or are unaware that the theft is happening. See

Johnny Parker, Company Liability for a Life Insurance Agent’s Financial Abuse of an

Elderly Client, 2007 Mich. St. L.Rev. 683, 685 (2007). To protect against irreparable

harm, Minnesota, like most states, seeks to stop such abuse before it occurs, including

through the use of suitability standards applicable to the sale of financial investments.

See Minn. Stat. 60K.46 subd. 4. Enforcement mechanisms and remedies are in place to

protect against abuse of a consumer’s trust by an investment advisor who – despite the

suitability precautions – employs fraud, deception, or misinformation to make a sale of an

inappropriate product.

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A. Minnesota’s Suitability Standard Is Clear And Consistent With Settled Industry Standards

The suitability standard enacted to protect vulnerable Minnesota consumers is

consistent with settled industry-wide suitability standards. Order on Liability, Findings

of Fact ¶176 (Add31). See Aaron Smith, A Suitability Standard for Mortgage Brokers:

Developing a Common Law Theory, 17 Geo. J. Poverty Law & Pol'y 377, 378 (2010)

(describing the historical development of a suitability standard beginning with the 1934

Securities Act). It is similar to that imposed by other regulators, including by FINRA

Rule 2310, available at http://www.sec.gov/pdf/nasd1/2000ser.pdf.

Both Minnesota and FINRA set forth a flexible suitability test that takes into

consideration the pertinent facts and circumstances of the investor: one prong requires

“reasonable grounds for believing that the recommendation is suitable for such customer

…” and a second prong lists customer variables that impact suitability (for example,

customer financial information, needs and objectives). See Minn. Stat. 60K.46, subd. 4

and FINRA Rule 2310. It is crucial to evaluate the customer’s age or life in determining

the suitability of investment recommendations. See FINRA Regulatory Notice 07-43, 2

(Sept. 2007), available at http://www.finra.org/RulesRegulation/NoticestoMembers

/2007NoticestoMembers/P036815.pdf.

Although there is no definitive bright-line suitability test, the suitability standard is

not vague. Regulators and courts recognize that “the issuer [is] in a better position to

determine suitability on a customer-by-customer basis.” Cooper v. Pac. Life Ins., 229

F.R.D. 245, 256 (2005)). Courts have had no difficulty interpreting and applying such

12

flexible standards that impose a duty to evaluate the suitability of a product for the

customer. See e.g. Clark v. John Lamula Investors, Inc., 583 F.2d 594, 600-01 (2d Cir.

1978); Levine v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 639 F. Supp 1391

(S.D.N.Y. 1986).

Appellants knew how to make a suitability determination, as evidenced by the

suitability forms they developed. Despite knowing how to make such determinations,

“the evidence suggests that [the forms were never used] but [were] meant to provide the

appearance (but not the substance) of an actual suitability review.” Order on Liability,

Findings of Fact ¶176 (Add31).

B. Appellants Never Evaluated Their Victim’s Financial Status

No suitability review was even attempted when thousands of inappropriate

annuities were sold to thousands of “older people averaging age 75.” Order on Liability,

Findings of Fact ¶7 (Add4). Moreover, appellants admitted that no sales were ever

rejected as unsuitable. See Order on Liability, Findings of Fact ¶ 181(Add31). It is clear

appellants did not struggle with how to comply with the allegedly vague suitability

standard under Minnesota law. Instead, appellants intentionally sold inappropriate

annuities, thereby making unavailable the limited funds older consumers had saved to

sustain them through the end of their lives. Heritage agents asked only the most basic of

questions and regardless of the answers, always recommended their product as a solution

to the problem of unsafe investments that many of the victims did not even have. In at

least eleven sales, the annuity purchaser had no fixed assets. See RA 254, 255 (Ex. 281).

No fixed asset amount was recorded or legible for another eighty-one customers. Id.

13

Appellants also have no basis for asserting that many customers were better served

by placing their assets in their annuity product, having never evaluated the facts and

circumstances of the individual investors. The annuities product was patently unsuitable

for many older people because it eliminated or severely reduced their only liquid assets.

It is widely acknowledged that having an adequate rainy day fund is essential to tide

unexpected expenses. See Anthony Web, Providing Income for a Lifetime: Bridging the

Gap between Academic Research and Practical Advice, 7, AARP Public Policy Institute

(June 2009). But appellants studiously avoided learning about whether the victims had

sufficient income to meet their daily living expenses or pay for unexpected medical or

other expenses before selling them the annuity product. See Ex. 281(RA 266, 267)

(establishing that in at least eighty transactions, the sales representative did not record the

amount of the consumer’s available emergency funds).

III. The Trial Court Did Not Abuse Its Discretion To Fashion An Appropriate Restitution Remedy

The trial court found the appellants’ actions blatantly disrespectful of Minnesota’s

older consumers and its laws regulating consumer protection, deceptive trade practices,

in-person solicitation of insurance sales, home solicitation sales, fiduciary duty,

suitability requirements, and deceptive acts against seniors. See Order on Liability,

Conclusions of Law (Add35-47). The restitution remedy ordered by the court is well

within the court’s discretion to fashion appropriate relief in this case.

The Minnesota statute that authorizes the Attorney General to pursue claims

against those engaging in unfair business practices explicitly authorizes equitable

14

remedies. Minn. Stat. § 8.31, subd. 3a; see also Order on Liability, Conclusions of Law

¶87 (Add49), citing subds. 2c and 3c. The Attorney General is authorized to seek

restitution and other equitable remedies to protect the economic health of its citizens. See

State by Humphrey v. Ri-Mel, Inc., 417 N.W.2d 102, 112 (Minn. Ct. App. 1987), citing

State of Minnesota v. Standard Oil Co., 568 F. Supp. 556, 563 (D. Minn. 1983) (relating

to the attorney general’s power to “assure its citizens the full benefit of the legislation”).

“The granting of equitable relief is within the sound discretion of the trial court; only a

clear abuse of discretion will result in reversal.” State by Humphrey v. Alpine Air

Products, Inc., 490 N.W.2d 888, 896 (1992).

Restitution has become a common and important remedy for the prevention of

deception and unfair practices. See Lisa Yurwit, Restitution in Consumer Protection

Actions: Stop the Reliance on Reliance, 36 U. Balt. L. Rev. 393, 397 (2007). The

majority of states today either specifically allow restitution as a remedy for unfair and

deceptive practices, or they “authorize equitable relief in general terms or give judges

broad discretion in fashioning an appropriate remedy.” Nat’l Cons. Law Cntr, UNFAIR

AND DECEPTIVE ACTS AND PRACTICES § 13.3.2.4.1 (7th ed. 2008).

Restitution removes the unfairness of allowing a business to profit from violations

of the law by “disgorge[ing] benefits it would be unjust for [them] to keep.” Dobbs, LAW

OF REMEDIES § 4.1 (1973). Because businesses can gain a great competitive advantage

and large profits through unfair or deceptive practices, “[a]n offender might perceive civil

penalties ‘as merely a hunting license for earning large profits.’” Yurwit, at 397, citing

John W. Wade & Robert D. Kamenshine, Restitution for Defrauded Consumers: Making

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the Remedy Effective Through Suit by Governmental Agency, 37 Geo. Wash. L. Rev.

1031, 1051 (1969).

Appellants challenge the restitution order, alleging it amounts to a windfall to the

customers because the commissions did not come directly out of the consumer’s pocket.

This challenge reveals a fundamental misunderstanding – or intentional distortion – of the

nature of the restitution remedy, which aims to deter unfair, deceptive, and fraudulent

practices and prevent unjust enrichment there from. As the Supreme Court instructed,

[It] clearly does more than simply make the plaintiff whole for the economic loss proximately caused by the [ ] fraud. Indeed, the accepted rationale underlying this alternative is simply that ‘[i]t is more appropriate to give the defrauded party the benefit even of windfalls than to let the fraudulent party keep them.’

Randall v. Loftsgaarden, 478 U.S. 647, 663 (1986) (quoting Janigan v. Taylor, 344 F.2d

781, 786 1st Cir. 1965), cert. denied, 382 U.S. 879 (1965)). One court eloquently

explained,

[R]estitution has an understandable logic. It is directly related to the offense and the attitude of the offender. . . society does not sanction fraud or other forms of theft; it does not approve injury inflicted upon an innocent person. Society wants to make sure the offender realizes the enormity of his conduct, and it asks him to demonstrate this by making amends . . .

State v. DeAngelis, 747 A.2d 289, 293 (N.J. Super. Ct. App. Div. 2000).

The Supreme Court has also recognized that “[f]uture compliance may be more

definitely assured if one is compelled to restore one’s illegal gains.” Porter v. Warner

Holding Co., 328 U.S. 395, 400 (1946). Restitution is appropriate to “deter future

violations of the unfair trade practice statute and to foreclose retention by the violator of

its ill-gotten gains.” People ex rel. Bill Lockyer v. Fremont Life Ins. Co., 104 Cal. App.

16

4th 508 (2002) (rejecting arguments that proof of individual damages must be shown to

support restitution and that restitution amounts to a windfall).

Thus, “[t]he primary purpose of disgorgement is not to compensate victims or

punish the wrongdoer, but rather ‘to prevent wrongdoers from unjustly enriching

themselves through violations,’ and thereby deter subsequent fraud.” SEC v. Haligiannis,

470 F. Supp. 2d 373, 384 (S.D.N.Y. 2007) (quoting SEC v. Cavanagh, 445 F.3d 105, 117

(2d Cir. 2006)). Therefore, a district court can order disgorgement of all profits reaped

from securities fraud, even if it exceeds actual damages to victims.” Id., citing SEC v.

Tome, 833 F.2d 1086, 1096 (2d Cir. 1987).

The restitution ordered in this case is also supported by Minnesota’s strong policy

against unjust enrichment, particularly relating to corporate fraud. See Mooney v. Allianz

Life Ins. Co., 244 F.R.D. 531, 537 (2007) (noting Minnesota legislature’s commitment to

end fraudulent business practices). “District courts have the power to order disgorgement

as a remedy for violations of the Act for the purpose of depriving the wrongdoer of his

ill-gotten gains and deterring violations of the law.” United States CFTC v. Hays, No. 09-

259, 2011 U.S. Dist. LEXIS 9243, at *12 (D. Minn. Jan. 27, 2011) (quoting CFTC v. Am.

Metals Exchange Corp., 991 F.2d 71, 76 (3d Cir. 1993) (internal quotations and citations

omitted).

The valid and important remedial goals restitution serves derive from the authority

to enforce the law, not the rights of the victims. State enforcement actions are “an

exercise of the legislature’s police power to constrain the conduct of securities dealers for

the public’s protection.” Shields v. Texas, 27 S.W.3d 267 (Tex. Ct. App. 2000); see

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Feigin v. Alexa Group, Ltd., 19 P.3d 23, 29-30 (Colo. 2001) (denying motion of injured

investors to intervene in enforcement action seeking restitution because individual injury

did not form the basis for the legal claim). While restitution may restore money lost as a

result of deceptive sales practices, the remedy is not determined with respect to the value

of individual losses. See Shields, 27 S.W.3d at 275 (finding “[t]he fact that the money the

State recovers benefits individual investors does not in any way alter the character of the

suit as one to enforce the state’s securities laws”). Every year, state securities regulators

recover restitution of a substantial amount of gain obtained through fraud. See North

American Securities Administrators Association, Member Enforcement Statistics 2010

(Oct. 2011), available at http://www.nasaa.org/regulatory-activity/enforcement-legal-

activity/enforcement-statistics/ (reporting $14.1 billion in restitution awarded in 2010).

Moreover, enforcement by the state is the only litigation deterrent available in

Minnesota because individual damages claims to enforce a consumer protection statute

may only be pursued if brought for a “public benefit.” Minn. Stat. § 8.31; Ly v. Nystrom,

615 N.W.2d 302 (Minn. 2000). This is a particularly difficult standard for individual

litigant to prove. See Carolyn Carter, Consumer Protection in the States: A 50 State

Report on Unfair and Deceptive Acts and Practices Statutes, 22, Nat’l Cons. Law Cntr.

(2009) (concluding that: “[s]ome Minnesota courts impose a barrier so high that no

consumer is ever likely to meet it.”); Prentiss Cox, Goliath Has the Slingshot: Public

Benefit and Private Enforcement of Minnesota Consumer Protection Laws, 33 William

Mitchell Law Rev. 163, 182-185 (2006) (noting that “[t]he lower courts and the Eighth

Circuit have interpreted the public benefit limit as almost a per se exclusion of suits by

18

individual consumers alleging statutory consumer fraud claims.”). Restitution, which

disgorges ill-gotten gains, is therefore the primary, if not the only remedy available in

Minnesota to deter the outrageous sales practices perpetrated by appellants.

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CONCLUSION

For the reasons stated above, AARP respectfully urges this court to affirm the

decision of the trial court.

Dated: Respectfully submitted,

_____________________________ Attorney for Amicus Curiae AARP

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CERTIFICATION OF COMPLIANCE

WITH MINN. R. APP.P 132.01, Subd. 3

The undersigned certifies that the Brief submitted herein contains 4,386 words and

complies with the type/volume limitations of the Minnesota Rules of Appellate Procedure

132. This Brief was prepared using a Times New Roman a proportional spaced font, size

13 pt. The word count is stated in reliance on Microsoft Word 2007, the word processing

system used to prepare this Brief.

_____________________________ Julie Nepveu

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CERTIFICATE OF SERVICE

I, Julie Nepveu, being duly sworn, depose and say that on January 24, 2012, I

served the attached BRIEF AMICUS CURIAE OF AARP IN SUPPORT OF

RESPONDENT SUGGESTING AFFIRMANCE, on the following parties by mailing to

each of them two copies thereof, enclosed in an envelope, postage pre-paid, and by

depositing the same in the United States Mail, directed to said party as follows:

Martin A. Carlson (#0299650) Law Offices of Martin A. Carlson. LTD. 247 Third Avenue South Minneapolis, MN 55415 (612) 359-0400 Robert Espeset (#0123705) Espelaw PLLC 4525 Allendale Drive White Bear Lake, MN 55127 (651) 426-9980 Stanley Norman P.O.Box 54210 Irvine, CA 92619

James Canaday (#030234X) Assistant Attorney General Office of the Attorney General 445 Minnesota Street, Suite 1400 St. Paul, MN 55101 (651) 757-1421

________________________________ Julie Nepveu