The latest example of dramatic institutional failure – that somehow was entirely accidental – comes to us from MetLife.

The story begins with variable annuities, a product that might be suitable if you’re trying to shelter your assets from a lawsuit, but otherwise one whose chief virtue lies in its capacity to serve as a litmus test for the honesty of your broker. 

After the financial crisis, insurance companies decided that their outstanding variable annuities were too good for existing customers, and began offering very high commissions to any brokers who could persuade their clients to exchange an older one for a newer, less generous model.

Enter MetLife.  From 2009 to 2014, MetLife brokers churned $3 billion worth of variable annuities, resulting in $152 million in dealer commissions.  Customers were told that the newer annuity was less expensive or comparable, when in fact, 72% of the time, this was, shall we say, not so much true.   For example, 30% of the replacement applications falsely stated that the new contract was less expensive than the old one.  Applications also failed to disclose benefits and guarantees that the customer would forfeit in making the exchange, understated the value of existing benefits, and overstated the value of the benefits on the new contracts. 

MetLife approved the exchange applications despite the errors.  And as icing on the cake, sent false quarterly account statements that understated customer fees on their variable annuities.

For these sins, FINRA charged MetLife with “negligently misrepresent[ing] … material facts” and failure to “reasonably supervise” its annuity replacement business.  Without admitting or denying wrongdoing, MetLife consented to censure, a $20 million fine, and to pay damages to customers up to $5 million.

Now, forgive me for being perhaps a touch cynical, but it strikes me as a bit farfetched to imagine that a 5 year course of conduct that affected nearly 75% of a $3 billion business line represented merely “negligent” behavior – i.e., a mere failure to exercise due care – especially at a time when exchanges were being pushed precisely to persuade customers to shed the desirable features of older annuities.

Notably, these “mistakes” never resulted in customers being falsely told the new contract was worse than the old one; somehow, these happy accidents consistently worked to benefit MetLife at the customers’ expense.  It’s hard not to suspect MetLife would have discovered the errors a lot more quickly if they were working in the other direction.

In recent years, the SEC and DOJ have both promised to put more teeth into investigations of corporate misconduct by pursuing individuals, avoiding “neither admit nor deny” settlements, and calling out intentional misbehavior for what it is.  I guess FINRA hasn’t gotten the Yates Memo.