On June 29, 2015, the Supreme Judicial Court denied an application for further appellate review of the May 18, 2015 Appeals Court decision entitled Cohen vs. Brokers’ Service Marketing Group II, LLC., (“Brokers’”). The Cohen case arose out of Brokers’ alleged failure to advise insureds dealing with one of the agents it managed of serious allegations of fraud involving that agent.
The Appeals Court decision reversed a Superior Court decision and allowed a suit under G.L. c. 93A, for unfair and deceptive business practices to proceed against Brokers’ based upon what the Appeals Court described as Brokers’ “failures to disclose allegations of fraud and embezzlement by [the agent in question] both to potentially affected insurance consumers and to Sun Life and Allianz, who, on the basis of the same information, would most likely have taken steps to terminate their relationship with him.”
Producer vetted by Brokers embezzles $2 million from clients
Brokers’ is a managing general agent for life, annuity and long-term care insurance carriers. Brokers’ recruits producers for these insurance companies, and vouches for the character and reputation of the producers it recruits and gets licensed to sell these companies’ products.
In the summer of 2005, Brokers’ signed an agent application for John Mr. Baldo (Mr. Baldo), to sell annuities offered by Allianz Life Insurance Company of North America (Allianz). Mr. Baldo claimed to be a certified financial planner working through his company, Freedom Financial.
Around December 2005, a former business associate of Mr. Baldo informed Brokers’ that Mr. Baldo “had been living a life of lies and was a thief.” Also, in December, 2005, Brokers’ received a letter written by an attorney stating that Mr. Baldo had forged a signature on a client’s check and had embezzled the proceeds.
Brokers’ did not disclose any of this information to the insurers or to any of the clients that Mr. Baldo had placed through Brokers’.
However, the client whose lawyer had reported Mr. Baldo’s forgery to Broker’s also went to the FBI. Over the course of a year the FBI obtained access to Mr. Baldo’s bank and credit card records. The bank records showed deposits of almost $1.8 million from two elderly brothers in Connecticut, Albert and Harold Cohen, 88 and 85, respectively. Mr. Baldo had told the brothers that they would earn high returns with him if they allowed him to manage or invest their money in annuities that were supposedly to be placed with Allianz and Sun Life Financial, Inc. (Sun Life).
By the time he was arrested in January 2007, Mr. Baldo had spent over $1.2 million of mostly the Cohen brothers’ money on fast cars, fine jewelry, Las Vegas gambling junkets, and exotic dancers at his favorite strip club in Peabody. He pleaded guilty in 2008 to a variety of federal fraud charges and was sentenced to serve seven years in a federal prison.
Vouching for investigation of producer’s character, general reputation, and background
In January 2010, the Cohens filed a complaint in the Superior Court alleging that Brokers’, Allianz, Sun Life, and Mr. Baldo had committed various acts resulting in the embezzlement and conversion of approximately $1.6 million of the Cohens’ retirement funds.
Initially, Brokers’ successfully moved for its dismissal from the case of both claims against it that asserted the aiding and abetting of Mr. Baldo’s fraud. The Superior Court allowed Brokers’ motion because the complaint did not allege that Brokers’ had knowledge of the scheme.
However, two years later, pretrial discovery resulted in the Cohens’ obtaining a clearer picture of Brokers’ actions in licensing Mr. Baldo and of the General Agent’s overall inaction when it learned about his criminal record and the allegations against him. As a result, the Cohens’ moved to vacate the dismissal and to file a second amended complaint.
In their proposed second amended complaint, the Cohens alleged that Brokers’ committed unfair and deceptive business and insurance practices by, among other things, vouching for the character of Mr. Baldo to Allianz and Sun Life, despite its knowledge that he had a prior criminal record for fraud; continuing to act as an intermediary for Mr. Baldo even after receiving reports of his forgery, embezzlement, and pattern of lies; and in failing to disclose these reports to Allianz, Sun Life, and the Cohens.
The Superior Court denied the Cohens’ motion to vacate the dismissal and refused to allow the Cohens’ second amended complaint to proceed. The Cohens appealed the denial to the Appeals Court.
Appeals Court decision holds general agencies may have to advise of credible allegations against producer
The Appeals Court’s decision on the Cohens’ appeal substantially broadens the potential duties of general agents under G.L. c. 93A to disclose to insureds, annuitants, or insurance companies credible allegations of a producer’s possible fraud or embezzlement.
The Appeals Court affirmed the Superior Court decision to not allow the claims against Brokers’ of aiding and abetting Mr. Baldo’s fraud to proceed, but reversed the trial judge’s decision on Brokers’ having potential liability under G.L. c. 93A for unfair and deceptive business practices. The Appeals Court put the issue as:
- “Given the reports it had received about Mr. Baldo, particularly the notification, in writing, that he had stolen money from another client, Brokers’ inaction could fairly be deemed unfair and unethical, and a foreseeable cause of the Cohens’ injuries”
- “… A fact finder could determine that Brokers’ failures to act in the face of likely and substantial injury to Mr. Baldo’s clients, as alleged, constituted violations of the broad remedial language of c. 93A.”
The Appeals Court gave no credence to Brokers’ argument that it had no 93A liability because:
- “they [the Cohens] neither had direct contact with Brokers’ in completing their transactions with Mr. Baldo and the insurance companies, nor,
- [did they] in fact, even [know] of Brokers’ existence or the role it played in the insurance transactions…
In disposing of these arguments, the Appeals Court noted that there was no legal requirement that the Cohens establish that they were in any actual or implied contractual relationship or in any consumer relationship with Broker’s in order to bring a c. 93A claim against it.
Agency takeaway on handling serious allegations against a producer
The Cohen case against Brokers’ leaves a lot of unanswered questions. The Appeals Court’s decision put forth this statement of how Brokers’ might have ultimately avoided this lawsuit:
Had Brokers’ acted in some fashion (whether by investigating or, absent an investigation, simply informing interested parties), it is foreseeable that the Cohens would not have suffered the losses they did.”
The words “Some fashion” do not offer an agency a clear guideline if a customer or third-party alleges unethical or criminal conduct against an agency’s producer. Simply “informing interested parties” could easily lead to defamation suits embroiling everyone involved in costly and nasty lawsuits.
Until clearer guidelines emerge from further proceedings in the Cohen or in similar cases that may seek to apply the broad rule of potential liability contained in the Cohen case, the prudent course for an agency faced with disturbing allegations of wrongdoing against a producer should be to investigate, document the investigation, and report the results of the investigation, if warranted, to the Division of Insurance or law enforcement. If such report is made in good faith, the agency’s action would likely be privileged and, if the person reported against filed a retaliatory defamation or interference with business relations suit, that suit would probably be dismissible under the SLAPP suit statute.
Copy of decision
A copy of the decision can be accessed by clicking on this link: Cohen vs. Brokers’ Service Marketing Group II, LLC.
