The Dangers of High-Speed Trading - US Business News - CNBC

Arbitrage potential at the speed of light at 11 millisecond between NYSE and CME...

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Eric Scott Hunsader has gone completely down the rabbit hole, and he doesn’t like what he’s finding there.

Hunsader is the CEO of a Chicago-based market analytics firm that specializes in high-frequency trading — super fast trades executed at the speed of light that can alter asset prices faster than human beings can react to the changes.

Based on his own analysis, Hunsader has come to a startling conclusion: Markets today are even more susceptible to sudden failure than they were two years ago during the “flash crash,” which brought the stock market down by about 1,000 points in mere minutes.

That’s because a new breed of trader armed with hundreds of millions of dollars to deploy is trading so fast—and with such spikes in volume—that he can dry up liquidity in an instant, causing severe price swings.

To explain to a lay person, Hunsader offers up two examples of the kinds of trades he’s seeing. The first happened less than a minute before the April Jobs report was released by the Department of Labor in Washington.

That report is traditionally one of the most dramatic market-moving events of each month. As a result, traders tend to lie low in the minute or so before the number comes out at 8:30 a.m. on the first Friday of each month, so they don’t get caught when the market changes.

But Hunsader argues that he’s seeing a small group of high speed traders who aren’t lying low. In fact, they’re taking advantage of the regular and predictable lull in the market to pop high speed trades in order to intentionally create a several hundred millisecond burst of volatility, and then execute follow-on trades to profit from that.

To understand what happens, you have to go inside just one second of trading and look at the way markets move at speeds that can be almost imperceptible to human beings.

On May 4, Hunsader says, he spotted those traders just before the April number was released. At 8:29:20 and about 200 milliseconds, he says, someone — he has no way of knowing who — executed a trade in the five year T-note futures market worth about $150 million.

A chart of that single second in the market shows that prices are relatively stable until the trade. And just after that, for the rest of the second, prices spike, and gyrate up and down as other automated high speed computers react to the trade.

Hunsader says he doesn’t know exactly how the traders make money off the volatility that they create, but he suspects they’re making other trades in the milliseconds following their market moving trade that take advantage of the relationships between this market and others that are impacted by it.

The traders that move first, and fastest, win, he says.

“It’s like two guys running in the woods, and they see a bear and one guy drops down and puts his shoes on and the other guy says, ‘what are you doing that for, you can’t outrun a bear,’” Hunsader says. “And the guy goes, ‘I don’t have to outrun the bear, I just have to outrun you.’”

On another occasion, Hunsader says he saw traders taking advantage of something as fundamental as the speed of light.

Because trades are executed by fiber-optic cable, the fastest they can travel—and the fastest anything in the universe can travel—is the speed of light. But even at that speed, it takes about 11 milliseconds for information from exchanges based in New York to get to exchanges based in Chicago. And that provides an opportunity for arbitrage for those who can move fast enough.

“Recently, they put in this new high speed line between Chicago and New York,” Hunsader says. “Essentially (they) drilled through mountains to shave a few milliseconds — thousandths of seconds — off, getting it down to 11 milliseconds. But I think somebody’s figured out how to get it to zero milliseconds.”

And the way they do that, in effect, became clear on May 3, Hunsader argues.

At 9:59:11 and about 620 milliseconds, someone executed a trade in Chicago, purchasing about 1,300 ES contracts for about $70 million. That happened to come in a lull just before two economic indicators were to be released at 10 a.m. that day.

At the exact same millisecond, 9:59:11 and about 620 milliseconds, Hunsader says, another trade was executed: Somebody bought 260,000 shares of a closely correlated product, SPY, for about $36 million.

Hunsader has no way of knowing for sure it was the same person executing both trades. But he says he sees same millisecond trades happening in both cities in related products often enough that he doesn’t think it can be pure coincidence.

In fact, he says, someone placing big orders in related products in both cities would gain a valuable advantage: for 11 milliseconds, they would be the only ones in the world who knew what happened in both markets.

By the time Chicago received the information about what happened in New York, and New York received the information about what happened in Chicago, Hunsader says, the traders who execute such trades would have a relatively long time to position themselves for the predictable fallout. And that’s a profit opportunity.

“The speed of light is fast,” Hunsader says, “But it’s not as fast as the high frequency traders would like it to be.”

The trick is, you have to have a super-fast computer and $100 million in deployable cash to make it work.

Hunsader says he sees these trades happening so frequently, in fact, that he advises individual investors not to make any trades at all between 9:58 and 10:02 a.m. Eastern, since many economic reports are released at exactly 10 a.m.

The high speed, high volume trading he’s seeing can cause asset prices to gap by small increments — so that if you’re executing a trade at that minute and a high speed trader is jamming data lines at the same time, you might not get the deal at the price you thought when you pressed the button to process the trade.

What’s more, Hunsader says, this kind of trading is causing market instability—to the extent that the right set of circumstances could set off a cascade much worse than the flash crash of 2010.

“You might hear, ‘we’re doing fine, now,’” Hunsader says. “Well, yes, everything will be just fine as long as, as the news is sunshine-y happy. If you get a shock to system, you’re going to see very quickly just how undercapacity we are.”

Not everybody sees high speed trading as dangerous, of course. CNBC spoke to Jim Overdahl, a vice president at NERA Economic Consulting, who argued that high frequency trades are an important tool for professional traders.

“I think the bottom line argument on the benefits of high-frequency trading: it’s a risk management tool for professional traders,” Oberdhal said. “It allows them to quickly revise their quotes and offer better quotes because they’re able to manage the risk of being picked off by better informed trader or traders with superior information about order flow or market moving news.”

by Eamon Javers CNBC May 15, 2012


The Dangers of High-Speed Trading - US Business News - CNBC

U.S. household wealth takes biggest hit since 2008

WASHINGTON -- Americans' wealth last summer suffered its biggest quarterly loss in more than two years as stocks, pension funds and home values lost value.

At the same time, corporations increased their cash stockpiles to record levels.

Household net worth fell 4 percent to $57.4 trillion in the July-September quarter, according to a Federal Reserve report released Thursday. It was the sharpest drop since the October-December quarter of 2008 and was the second straight quarterly decline.

Household wealth, or net worth, is the value of assets like homes, bank accounts and stocks, minus debts like mortgages and credit cards.

The value of Americans' stock portfolios fell 5.2 percent last quarter. Home values dropped 0.6 percent.

Lower net worth can hurt the economy. When people feel poorer, they spend less. That slows growth. Businesses typically then cut back on hiring and expansion.

Corporations held a record $2.1 trillion in cash at the end of September.

Stock market declines have held back Americans' long, slow quest to recover losses from the 2008 financial meltdown.

The Standard & Poor's 500 stock index tumbled about 14 percent in the July-September period, ending a streak of four straight quarterly increases. The decline was driven by worries about Europe's debt crisis and the U.S. economy.

Stocks have rebounded about 10 percent since last quarter ended. But the S&P index is still down about 20 percent from its peak four years ago.

Roughly half of U.S. households own stocks or stock mutual funds. Stock portfolios make up about 15 percent of Americans' wealth. That's less than housing but ahead of bank deposits, according to the Fed's report.

Most stock wealth is owned by the richest Americans, who also account for a disproportionate amount of consumer spending. Eighty percent of stocks belong to the richest 10 percent of Americans. And the richest 20 percent represent about 40 percent of consumer spending.

The average balance in company-run retirement plans managed by Fidelity Investments, the largest workplace savings plan provider, dropped nearly 12 percent in the July-September period.

Thanks largely to workers' added contributions and company matches, about 92 percent of people who have company-run retirement savings plans now have more money in their accounts than at the market top in October 2007, according to the Employee Benefit Research Institute in Washington.

A rise in housing prices would help increase net worth by increasing home equity. But that still hasn't happened.

Home values have fallen sharply since the Great Recession began in December 2007, and people have less equity in their homes. Home values fell to $16.1 trillion in the July-September period, down from nearly $21 trillion in 2007, before the recession began.

Most economists expect prices to fall further, as banks resume foreclosing on millions of homes with past-due mortgages. Many foreclosures have been delayed because of a government investigation into mortgage lending practices.

When their declining wealth is combined with stagnant incomes, many Americans are less likely to spend. That's a drag on the economy, since consumer spending accounts for 70 percent of economic activity.

Average household income, adjusted for inflation, fell 6.4 percent last year from 2007, the year before the recession, the Census Bureau said this week.

The Fed's quarterly report documents wealth, debt and savings for corporations, governments and households. It covers most of the financial transactions that take place in the United States.

by Derek Kravitz AP Business Writers Dec. 8, 2011 12:17 PM



U.S. household wealth takes biggest hit since 2008

After-tax return could alter look of investment

BOSTON - A surge of cash flow into a business can make it seem like a powerhouse. Yet its bottom line might be underwhelming after taxes and other expenses are figured in.

The same can hold true with investing. Enthusiasm about market-beating performance touted in a quarterly mutual-fund report can wither once an investor's after-tax return is calculated.

The gap between pre- and post-tax returns isn't an issue for mutual funds held in retirement accounts such as IRAs or 401(k)s, where investment earnings can grow tax-free. But the difference can be significant for funds held outside a tax-sheltered account, especially for an investor in a high tax bracket.

It's an especially timely consideration as the year draws to a close. In November and December, investors with taxable accounts should stay alert to disclosures about any capital gains distributions that mutual funds expect to make to their investors. A distribution may sound like a gift, but it's not -- it's a gain that Uncle Sam considers taxable income. Still, investors can limit their tax exposure with savvy end-of-year moves.

Investors can take some comfort in the stock market's lousy 2011 performance. The nearly 6 percent decline of the Standard & Poor's 500 index won't help investors meet long-term savings goals. But it does mean that relatively few stock funds have capital gains to pass on to investors. Foreign stocks have fared worse, so investors are even less likely to see tax bills from the international portion of their fund portfolios.

Diversified bond funds have returned an average of 2 percent this year, according to Morningstar. That makes taxable bonds -- a category that excludes municipal bonds, whose investors are exempt from federal taxes -- a logical place to begin when scrutinizing a fund portfolio for potential hidden tax hits.

But don't ignore the stock component. Dividend-paying stocks have generally fared better than the broader market, making them potential candidates to pass on capital gains. And stocks have been unusually volatile this year, which creates an opportunity for fund managers who frequently trade holdings in hopes of beating the market. If they succeed, an investor can get ahead. But the advantage could be minimal if an investor gets hit with capital gains. Here are tips and current considerations to make about mutual funds and limiting tax exposure:

Understand capital gains. When fund managers sell stocks or bonds that appreciated in value, they pass on the capital gains to investors each year. It can happen even if a mutual fund lost money. That's because it's the appreciation of the fund's individual holdings, rather than of the fund as a whole, that trigger capital gains.

Check the estimates. Fund companies are now giving investors a heads-up about which mutual funds they expect will generate short-term capital gains by the end of December.

Consider timing. If a fund expects to distribute a gain, wait until after the distribution date to invest any new cash in that fund, if it will be held in a taxable account.

Consider taking tax losses. To offset capital gains elsewhere in a portfolio, investors might want to consider selling some investments in their taxable accounts that have lost value.

by Mark Jewell Associated Press Nov. 27, 2011 12:00 AM




After-tax return could alter look of investment

Billionaires can avoid reporting gains on stocks

NEW YORK - When billionaire Billy Joe "Red" McCombs, co-founder of Clear Channel Communications Inc., reported a $9.8 million loss on his tax return, he failed to include about $259 million from a lucrative stock transaction.

After an audit, the Internal Revenue Service ordered him to pay $44.7 million in back taxes. McCombs, who is worth an estimated $1.4 billion and is a former owner of the Minnesota Vikings, Denver Nuggets and San Antonio Spurs sports franchises, sued the IRS, settling the case in March for about half the disputed amount.

McCombs' fight with the IRS illustrates an overlooked facet in the debate over tax rates paid by the nation's wealthiest. Billionaires -- from McCombs to Philip Anschutz to Ronald Lauder -- who derive the bulk of their wealth from stock appreciation are using strategies that reap hundreds of millions of dollars from those valuable shares in ways the IRS often doesn't classify as taxable income, securities filings and tax court records show.


"The 800-pound gorilla is unrealized appreciation," said Edward McCaffery, a professor of law, economics and political science at the University of Southern California.

While Warren Buffett has generated attention with his complaints that he and his fellow billionaires pay federal income taxes at a lower rate than his secretary -- about 17 percent -- the real figure is often smaller, said David Miller, former chairman of the tax section of the New York State Bar Association and a partner at Cadwalader, Wickersham & Taft in New York.

"The problem is not that people like Warren Buffett pay tax at a 17 percent rate, it's that they can use complex transactions not available to most Americans to get cash from their appreciated stock without paying any taxes at all," Miller said.

The rate at which the 400 U.S. taxpayers with the highest adjusted gross income actually paid federal income taxes -- their so-called effective tax rate -- fell to about 18 percent in 2008 from almost 30 percent in 1995, IRS data show. That's the tip of the iceberg, since much of their wealth never converts into income on a tax return, McCaffery said.

In the McCombs case, the billionaire entered into transactions known as variable prepaid forward contracts. He received about $259 million for lending an investment bank his Clear Channel shares with a promise to deliver the stock for good a few years later. The arrangement enabled McCombs to defer paying capital-gains tax because he hadn't sold his shares, lawyers for the billionaire said. The IRS deemed the transaction a sale because the bank paid McCombs cash and got the use of his stock almost immediately.

Transactions like these may complicate plans by President Barack Obama to help close the federal deficit by increasing taxes on millionaires. Obama has said the tax code should contain a "Buffett Rule" to ensure that millionaires pay taxes at least at the same rate as middle-class Americans. Republicans have said they prefer lowering tax rates for businesses and the wealthy. Buffett declined to comment.

In the past two years, some of the wealthiest U.S. executives have used deals similar to McCombs' to reap returns while deferring the taxes without running afoul of IRS rules, securities filings show.

Dole Food Chairman David Murdock received about $228.6 million in 2009 against his Dole shares -- tax-free until he is scheduled to deliver shares in November 2012, a filing shows.

Starr International, the investment vehicle run by Maurice "Hank" Greenberg -- forced from his position as chairman and chief executive officer of American International Group in 2005 -- utilized a prepaid forward agreement last year to receive $278.2 million from an investment bank, according to a March 2010 regulatory filing. The investment vehicle isn't slated to deliver the AIG stock until 2013.

Ronald Lauder received $72.9 million in June as part of a variable prepaid forward sale and is scheduled to deliver the Estee Lauder shares in June 2014, according to a filing with the Securities and Exchange Commission.

Spokespeople for Lauder, Murdock and Starr International declined to comment.

While the tax treatment of these plans isn't disclosed in the filings, "there's no other reason to enter into such a convoluted arrangement," said Robert Willens, an independent tax accounting analyst in New York. These arrangements can cost several million dollars in fees, according to tax planners.

Taxes on capital gains are triggered when assets like appreciated shares are sold -- a process called realization. What constitutes a realized, taxable sale is a frequent bone of contention between the IRS and the clients of tax planners.

Transactions intended to pull cash out of appreciated assets tax-free aren't limited to stock. Boston real-estate developer Arthur Winn exited his interest in a piece of real estate by converting his stake into a share of a partnership free of any capital-gains tax, court filings show.

The IRS objected and claimed Winn and his partner should have reported a $12 million taxable gain. A U.S. Tax Court judge sided with Winn on one aspect of the deal; others were settled with the government. The details haven't been disclosed.

Winn, who earlier this month pleaded guilty to making illegal campaign contributions, has retired from WinnCompanies. He did not respond to messages left with his attorney and with the company.

by Jesse Drucker Bloomberg News Nov. 23, 2011 07:38 PM




Billionaires can avoid reporting gains on stocks

Oil Hits $100 Per Barrel. It’s All About the Pipelines | Daily Ticker - Yahoo! Finance

Oil has hit $100 a barrel again. A host of factors play into the price of a West Texas Intermediate crude — demand, global market conditions, the activity of speculators. Evan Smith, co-manager of the Global Resources Fund at U.S. Global Investors believes the recent run-up can be ascribed in part to activity (or the lack of activity) surrounding pipelines.

It's hard to get excited about the tubes that facilitate the movement of crude oil around the country. But pipelines have been in the news in recent weeks. First, the U.S. government decided November 10 to postpone a decision about the proposed Keystone line, which would allow the movement of a large quantity of oil from Canada to the southern U.S. On Wedesday, Canadian company Enbridge said it would buy a 50% interest in a pipeline that runs from the huge oil terminal in Cushing, Oklahoma, to the Gulf Coast. As Smith tells me and The Daily Ticker's Aaron Task in the accompanying video, both moves have helped push the price of WTI up.

Here's why. Oil is priced on global markets. But the price can vary depending on where you're buying. WTI, the benchmark commonly used in the U.S., refers to the price of oil at the landlocked Cushing, Oklahoma terminal. Brent crude, the benchmark for oil traded in the U.K., is a much more (excuse the pun) liquid market, and is a better indicator of the global market price. Historically, WTI has traded at a small premium to Brent, in part because Americans guzzled gas as domestic production fell. But for much of the past year, WTI has traded at a huge discount to Brent — of up to $30 per barrel. As Smith explains, that's because demand for oil in the rest of the world is growing far more rapidly in the U.S., while production in the middle of the U.S. has soared, thanks to a boom in oil production in North Dakota.

On Wednesday, Enbridge said it would buy a stake in a pipeline that runs from Cushing, Oklahoma to the Texas Gulf Coast. The significance is that the company is going to reverse the flow, and start sending oil from the terminal to refiners operating on the coast. In theory, increasing the supply of crude to refiners on the Gulf Coast should bring down the price of oil. "Right now, there's too much oil production in the mid-continent, and not enough capacity to get it to the Gulf Coast," said Smith. But oil used by refiners on the coast can come from anywhere, and is therefore priced closer to global prices than to regional ones. "Now that there is a prospect that some of the oil will get down to the coast, it raises the price closer to global benchmarks," said Smith. In other words, opening up more of the supply languishing in Cushing to refiners who operate on the coasts has the effect of pushing up prices. That's bad news for consumers, on the one hand. But it also means that refiners will buy less foreign oil going forward.

That's a short-term impact. The decision on the Keystone pipeline will have a longer-term impact, and may serve to keep the price of domestic oil and gas high. On Monday, the State Department, responding to environmental concerns raised in Nebraska and elsewhere along the route, said it would defer until 2013 a decision on whether to permit the construction of the pipeline from Canada to the southern U.S. "That's a 700,000-barrel-a-day pipeline that would bring crude down to the Gulf Coast and keep the U.S. well-supplied," said Smith. The decision means it is likely that the supply of crude to U.S. refiners won't be as large as previously thought, and that Canadians might look for other routes to export oil production — to Asia, for example. All things considered, the prospect of less supply over the long-term will push prices higher.

Smith argues that bringing more crude from Canada is vital to the U.S. market. For even though production is booming in North Dakota and Texas,

Daniel Gross is economics editor at Yahoo! Finance Nov 18, 2011

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com



Oil Hits $100 Per Barrel. It’s All About the Pipelines | Daily Ticker - Yahoo! Finance

Arizona seniors lost millions in annuity fees

Hundreds of Arizona senior citizens cashed in their retirement investments and paid millions of dollars in unnecessary fees, according to lawsuits accusing a Scottsdale-based estate-planning company of taking advantage of vulnerable clients.

Federal and state court lawsuits claim officials with National Future Benefits Unlimited generated large commissions by scaring and misleading elderly clients into bailing out of existing annuities and buying new ones. The moves left the clients paying steep surrender fees to insurance companies and facing potential tax liabilities, according to the lawsuits.

Annuities, sold by insurance companies and meant to serve as long-term investments, are growing ever more popular as companies attempt to tap the burgeoning population of retirees with offers of lucrative interest rates and guaranteed incomes for life.

In one of the lawsuits, an insurance company is accusing National Future Benefits of systematically targeting clients to cash out their annuities; in the other, an elderly Phoenix couple contend they were defrauded out of most of their assets.

National Future Benefits President Randall Jaeger denies any wrongdoing. He said that facts in both lawsuits have been twisted to make his company look bad. Jaeger said in cases where his clients were hit with fees, bonuses and improved interest rates from new products more than covered the costs, so that no client lost money.

"I know how it looks," Jaeger said of the lawsuits. "I'm upset over how it was twisted and turned . . . how it was made to look like I was trying to take (clients') money."

Financial experts say the allegations in the two cases underscore the pitfalls that can be associated with buying annuities and the care seniors need to take when considering such an investment. Annuities can carry substantial fees and tax penalties for early withdrawal.

In addition to facing the two lawsuits alleging fraud and illegal activity, National Future Benefits has a history of state regulatory complaints and this year was investigated by Arizona Adult Protective Services. The lawsuit involving the elderly couple led to an $866,000 settlement this year and triggered an elder-abuse claim filed with the Arizona Attorney General's Office.

The Attorney General's Office would not discuss whether it opened an investigation into the claim.

But the Arizona Department of Insurance, which oversees the sale of annuities, renewed Jaeger's insurance license in July without raising any red flags.

Department officials acknowledged last week that they were unaware of allegations against Jaeger until contacted by The Arizona Republic. Now, a department spokeswoman said it has launched an investigation into whether Jaeger made false statements when he renewed his license.

Department spokeswoman Erin Klug said a review of Jaeger's license application found that he failed to report the lawsuits. The renewal form requires disclosure of any pending cases alleging fraud, coercion or dishonest business practices; Jaeger reported there was none.

Klug said the allegations against Jaeger are "concerning" and that Insurance Department investigators are scrutinizing the lawsuits.

Jaeger defended his company's record as exemplary. He said the failure to report the lawsuits on his license application was a clerical error made by another employee and promised quick correction.

"The last thing I would do is jeopardize my license," he said.

What are annuities?

As pension plans dwindle and individuals take greater personal responsibility for their retirement planning, it seems certain that annuities will play a larger role for more Arizonans as they try to supplement their Social Security benefits.

The product got a boost last month after the Government Accountability Office recommended annuities to investors as a way to bolster income after retirement, creating new interest in an already booming market.

But to many, annuities are an unknown quantity. Only licensed insurance agents can sell annuities, but annuities are not insurance policies. They are investment contracts in which insurance companies agree to pay regular returns based on premiums. There are various types of annuities with different selling points to entice buyers. The two most common annuities offer fixed and variable rates of return.

Fixed annuities offer guaranteed monthly payments. Variable annuities allow you to direct where a portion of your money is invested, which could affect the rate of return.

Annuities come with stinging penalties called surrender charges - often 9 percent of the balance - if a buyer wants out of a contract early. The amount of the surrender charges decreases each year of the contract until it reaches zero at the end of the penalty period, typically between seven and 14 years.

Retired Arizona Adult Protective Services investigator Bill Dettelback, who spent years in the banking industry before he began investigating scams against the elderly, said the lawsuits against Jaeger's company raise concerns about annuity sales to the elderly.

"There are banks and investors who sell annuities to people in their 60s, 70s and 80s. These are 20- to 30-year annuities," he said. "That ought to be against the law."

Dettelback said many senior citizens can't anticipate their future needs and shouldn't be risking their finances in an investment that might be delivering monthly payments but likely won't mature until after they have died.

"An elderly person doesn't know what his or her liquidity needs are going to be," Dettelback said, although he added that purchasing annuities late in life "does make sense under some circumstances."

20-year history

National Future Benefits, which also has offices in Oro Valley and in Henderson, Nev., has been in business since 1993.

Company agents evaluate their clients' financial needs, structure retirement plans, prepare trusts and draft wills and other documents. The company offers life insurance and annuities as part of its business.

Jaeger points to a near 20-year history of estate planning and says he has thousands of clients who have consistently ranked him at the top of satisfaction surveys.

Insurance records show that 10 complaints have been filed against Jaeger or National Future Benefits since 2001. At least four of the complaints alleged problems over annuities. Only one complaint, alleging inappropriate marketing practices in 2003, was substantiated and resulted in a fine. The rest were closed as unsubstantiated.

Two Iowa-based insurance companies claim that Jaeger and employees at National Futures Benefit caused hundreds of Arizona residents to get hit with surrender charges from the insurers after they were deceived into canceling their annuities.

In a U.S. District Court lawsuit filed in April, Midland National Life Insurance Co. and North American Company for Life and Health Insurance accused Jaeger of "engaging in a systematic and deceptive effort to replace large numbers of annuity contracts."

Agents working for National Future Benefits falsely told clients that Midland and North American were facing financial trouble and that if they didn't get their money out, they would lose it all, according to the lawsuit.

Midland and North American claimed the actions were orchestrated as a way to earn commissions on the sale of new annuities from other companies. As a result, many policyholders ended up with "tens of thousands of dollars less than the values accumulated under their existing . . . annuity contracts," according to the lawsuit.

Jaeger said the claims aren't true. He said his clients made money on the transfers or else they wouldn't have made them.

Jaeger said the Midland lawsuit is an attempt to stop him from moving clients into better, more profitable products. He said in the past 12 years his company has sold nearly $500 million worth of Midland and North American products and that the companies are balking now that he has found "better positions" for some of his clients.

"They are mad. But to tell us we can't move someone's money away is ridiculous," Jaeger said.

Midland and North American also accuse Jaeger of trying to end-run state consumer-protection laws.

The lawsuit alleges that to avoid complying with regulations that require clients to sign a form acknowledging the risks and advising them to consult with annuity providers prior to cancellation, National Future Benefits did not directly replace policies; company officials instead encouraged some clients to cancel their policies and request that the money be paid to them directly.

"The policyholder was then encouraged to submit the premium for the new annuity contract as if it were new money," the lawsuit states.

National Future Benefits denied skirting laws and maintained that proper forms were filled out. Because of market changes and timing, the company said it was sometimes in the client's best interest to surrender an annuity rather than make an immediate transfer to another one.

Investor lawsuit

Jaeger faced much more personal claims in a lawsuit filed by an elderly Phoenix couple in a Maricopa Superior Court in January.

While acting as their adviser, Jaeger defrauded them and persuaded them to loan him hundreds of thousands of dollars, according to the lawsuit. The suit also said he advised them to cancel annuities, costing them more than $145,000 in penalties and $30,000 in interest.

Henry Gardner, 89, and his wife, Dorothy, who died this year at 82 after complications from Alzheimer's disease, said in their suit that Jaeger befriended them, took over their finances and that nearly $1.4 million of their $1.5 million in assets ended up with Jaeger or one of his companies.

Court records show that Jaeger this year paid the Gardners $865,710 as part of a settlement agreement, which is awaiting court approval.

Jaeger says the Gardners' suit was a personal blow because he was friends with the couple for years before they invested any money with him. He says he reluctantly took over their finances after the couple begged for help.

"It hurt," Jaeger said. "They used to come to my home for Thanksgiving dinner."

Henry Gardner's attorney said the lawsuit speaks for itself.

"The Gardners firmly believed they were taken advantage of, and they fought to recover their property," Phoenix lawyer Paul Harter said.

Jaeger said the Gardners were happy with his services until a disgruntled former employee complained to Arizona's Adult Protective Services that he was targeting clients, a claim Jaeger rejects.

Jaeger said the subsequent Adult Protective Services investigation sparked the lawsuit and resulted in the settlement.

Dettelback, the former protective-services investigator, said he is familiar with the Gardner case. While he said he could not confirm any investigation, Dettelback said the allegations raised in the Gardners' civil lawsuit are accurate and comprehensive.

"It is a sin. It is very, very depressing," he said of the suit. "There is no question about it. It cost them money to cancel those annuities. They suffered."

In their 147-page lawsuit, the Gardners said that Jaeger, from 2004 through 2010, persuaded them to loan him $490,466 and later $458,573 and then to purchase a $407,000 ownership interest in National Future Benefits.

In their lawsuit, the Gardners say that Jaeger persuaded them to name him their trustee and personal representative. They say he advised them to surrender several annuity policies in which their money had been invested and that he reaped substantial commissions from new annuities that he persuaded them to buy.

In their lawsuit, the Gardners said the new policies cut them off from their money. In the event of financial problems or medical emergencies, the Gardners would have to pay steep fees to cancel the policies and sacrifice a substantial amount of their principal and interest.

And by the time the penalty periods expired on the new policies, the Gardners would be nearly 100 years old.

by Robert Anglen The Arizona Republic Nov. 7, 2011 12:00 AM




Arizona seniors lost millions in annuity fees

Many seek advice from financial experts

“How can I earn $1 million over the next month?”

OK, that question didn’t pop up during a free financial-advice event sponsored by The Arizona Republic, but readers did pose hundreds of other queries on money topics.

Local certified financial planners, certified public accountants and Internal Revenue Service officials answered questions over the telephone and Internet for two hours Wednesday.

Here are some of the queries that were posted on the Money section of azcentral.com. Some questions and answers have been edited for clarity and brevity.

Question: Three investment accounts totaling about $150,000 plus my house comprise my entire estate. The house is deeded as community property with right of survivorship, and the investment accounts have my wife listed as beneficiary.

When I die, are these accounts and the home still subject to probate or can they pass to my wife without legal complication? Is a will necessary? — John Clark

Answer: It sounds like you have set things up appropriately, as they will not have to go through probate. I would still recommend a will to cover anything else you might have, (but the will has) no impact on the assets you reference. — David Daughtrey, Copperwynd Financial

Q: Can I buy an annuity within my IRA? — Dick Kidney

A: Yes, but you need to think about why you are doing it. An IRA already has tax deferral. — Daughtrey

Q: I am a retired teacher struggling to live on my pension. I am supplementing my income by tutoring. I can collect (Social Security) in two years, and I believe I will be able to live comfortably without using any money I have saved in my Roth or (other retirement) accounts. I have $26,000 in a money market (account). Should I take $8,000 of that to pay off my car loan? The interest rate on my loan is 5.5 percent. I will be 60 next month, so I can tap my (retirement) accounts without penalty. — Pam

A: It sounds like paying off the loan might be a good idea for you, particularly if you are uncomfortable with the debt. I would only do so if you have other funds available in case of an emergency. (Because) you are over 59 ½ and able to tap your retirement accounts if needed, you should be OK. — Kimberly Bridges, Stoker Ostler Wealth Advisors

Q: Our house foreclosed in April 2009. Since then we have had a significant increase in income and have not taken on any new debt. Is there a long waiting period before we would be able to qualify for a new mortgage? — Tiffany

A: Negative marks stay on your credit report for seven years. Bankruptcy stays for 10 years. You may find a bank that will lend to you before it clears, but expect to pay higher interest rates. — Bridges

Q: I need advice on paying off credit-card debt — $30,000 on two cards. The interest rates are high, so even though I am paying twice the monthly minimum due, the principle doesn't seem to budge. I have good credit and no late or missing payments. I would like credit-card companies to work with me to lower the interest rates. — Ccard

A: It sounds like you are paying interest only, which is why the principle isn't changing. Consider contacting Take Charge America, a (Phoenix) non-profit that helps people with credit-card debt. You also might consider getting a loan from another source at a lower rate and using the funds to pay off the high-interest cards.

Also, consider calling the card companies to see if they will work with you to reduce the rate or write down the amount owed. — Armando Roman, Axiom Financial Advisory

by Russ Wiles The Arizona Republic Nov. 4, 2011 03:23 PM



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