The Case of the Dubious Investment

Hear Ye! Hear Ye! explores a real court case. Read about it below and decide how you would rule. Then read the actual verdict and let us know whether you agree.

In 2003, Marie Mear was 75 and living on a Social Security income of $750 a month. Her entire liquid net worth was $50,125.65, which she had invested in an Individual Retirement Account (IRA).

According to Mear, Karl Powell, a salesman for the Sun Life Assurance Company based in Arizona where Mear lived, had been calling her for about two years about an investment opportunity. He became “a phone friend,” she says. “He knew how much money I had. I didn’t tell him.” When Mear decided she wanted a little more security and a better return on her money, she decided to meet with Powell.

The plan

Sun Life offered an equity-indexed annuity that Powell said would be perfect for Mear. The annuity had a term of 10 years. At the end of the term, the holder would receive the entire amount invested, plus 3 percent interest. The annuity would also accrue a return calculated as 70 percent of any increase in the value of the Standard and Poor’s 500 index. While the return calculated on the index could be as low as zero, it could never be negative so the investor couldn’t lose money. The income accumulated from the annuity was tax-deferred.

The investor could also withdraw up to 90 percent of the balance—less $4,000—at any time without being subject to a penalty. Withdrawing the entire amount before the end of the term, however, would incur a penalty of 10 percent of the initial investment. The amount available for withdrawal without penalty increased each year as the 3 percent interest and interest from any index appreciation was credited to the account. At the end of the 10 years, the investor could withdraw the principal and accumulated interest as a lump sum, roll the total over into a new policy, or receive monthly payments for life.

Second thoughts

Mear decided to invest her entire savings in the plan. After signing the documents, Mear began to have doubts. Had Powell pushed her into a financial product that she didn’t need? Would the annuity be a problem in the future if she needed access to her money? Was Sun Life targeting older Americans, like herself, pushing these financial products and getting massive surrender fees when their customers needed the money in an emergency? As she looked more closely at the documents, Mear thought she had been tricked. She decided to sue Sun Life for damages.

Side A

Mear argued that neither Powell nor the Sun Life materials he gave her fully explained the annuity. She hadn’t understood the terms for early withdrawal, she said. She also alleged that undisclosed sales charges and high commissions to sales people like Powell would eat away at her money.

Mear argued that the materials Powell gave her were meant to misrepresent and conceal information. Powell had used “deceptive sales tactics,” Mear told the court, to lure her into buying the annuity and that Sun Life trained its sales force to focus only on the benefits of the annuity, not the shortcomings. The complexities of the product would be hard for even a sophisticated investor to understand, Mear said, and Sun Life had a duty to train and supervise its staff to be especially careful when promoting the product to older clients.

Side B

Sun Life denied all of Mear’s claims. The company said that its materials presented full and factual information about the annuity Mear bought and that she was given all relevant details to make her decision. In addition, Powell answered all of her questions, Sun Life told the court, and it was Mear’s responsibility to understand what she was signing. She should not be allowed to cancel the annuity because of “buyer’s remorse.”

Should Marie Mear be allowed to cancel her annuity? How would you decide? (Read the verdict.)