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Investment firm to pay back $1.1M to Tucson-area investors after state probe
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Investment firm to pay back $1.1M to Tucson-area investors after state probe

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A Kansas-based investment firm has agreed to pay more than $1.1 million in restitution to more than 200 Tucson-area clients to settle state fraud charges involving the sale of military pension benefits as investments.

The Arizona Corporation Commission found that AE Wealth Management LLC deceived investors by failing to disclose the company’s ties to a Tucson firm that was subject to a state enforcement action in 2018.

As part of a larger case, the commission ordered Topeka-based AE Wealth to pay $1,159,400 in restitution to 240 former clients in the Tucson area to reimburse them for advisory fees they paid, as well as a $150,000 administrative penalty.

In a cease-and-desist and consent order, the commission’s Securities Division said the federally-licensed AE Wealth agreed to become co-investment advisers with Arizona-licensed Smith & Cox LLC in Southern Arizona.

In March 2018, the Commission’s Securities Division filed an enforcement action against Smith & Cox and related respondents concerning their sales between 2013 and 2015 of U.S. military veterans’ retirement and disability benefits payments to investors as “pension income streams.”

With such investments, pensioners agree to sell the income streams from their military retirement or disability benefit payments for a period of months or years to investors in exchange for a discounted lump sum.

The regulators charged that the investments were unregistered securities under state law, and that sales of U.S. military pension or disability benefits are illegal under federal law.

Last October, the commission ordered Smith & Cox and its principals to pay restitution of about $2.6 million and a $105,000 fine, but the company appealed the decision and that action is pending in Maricopa County Superior Court.

In the recent case, regulators found that AE Wealth had learned of the state action against Smith & Cox, which changed its name to Cornerstone Wealth Management, in September 2019 but failed to disclose that and continued to allow Smith & Cox to act as investment advisor to its clients for eight months.

Chris Radford, president of AE Wealth Management, said that after the state filed its action and the company learned more, the company terminated the advisors involved and gave affected clients the option to move their assets freely without penalties.

“We take these incidents very seriously; as a result, we are also refunding all advisory investment fees charged to the affected clients,” Radford said in an email.

Part of the case involving five remaining respondents — Cornerstone Wealth Management LLC, Nathaniel S. Barnhart, Christopher Spence Cox, William Andrew Smith and Smith & Cox LLC — is still pending at the Corporation Commission.

Mark Chester, a Scottsdale attorney representing Smith & Cox and its principals, said the company believes that the challenged sales of military benefits are not securities.

“They’re not stocks, they’re not bonds, they’re not the typical products you have to concede are securities,” he said. “They share some of the characteristics of securities, but we don’t think they have enough to be classified as securities.”

Chester said investor returns on the pension sales are typically in the 5% range, with commissions similar to those for annuities.

But at least six states have taken action against companies selling pension income-stream investments, according to documents filed in the case, and federal and state regulators have warned that investors remain cautious about such deals.

During Corporation Commission hearings in 2019, five Tucson-area investment clients of Smith & Cox detailed how they lost thousands of dollars in principal and expected income from their income-stream investments through the firm, including a Green Valley couple that at the time had yet to recover more than $100,000 of $138,000 invested.

Contact senior reporter David Wichner at dwichner@tucson.com or 573-4181. On Twitter: @dwichner. On Facebook: Facebook.com/DailyStarBiz


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