Powerball to Pitfall: The High Price of Trust

Join Darry Lyons as he tells the heartbreaking story of Paul and Sue Rosenau, winners of the $180 million Powerball in 2008. What started as a life-changing win for a humble, small-town couple quickly spiraled into a tale of financial deceit, predatory practices, and devastating consequences.

Key show highlights include:

The incredible story of Paul and Sue Rosenau’s $180 million Powerball win.
An explanation how their financial advisor knowingly mismanaged their assets, leading to significant financial losses.
Details of the legal battles the Rosenaus fought to reclaim their lost money.
A look into the tragic consequences of greed, culminating in the financial advisor’s eventual discharge and ruin.

Tune into this week’s episode as we explore the dangers of trusting the wrong professionals and the severe consequences of unchecked greed. Keep your head on a swivel, and let’s navigate this dark side together. If you found this episode insightful, be sure to share with a family member or loved one.

Transcript:

This is Darryl Lyons, Co-founder of PAX Financial Group, and this information is general in nature only. It’s not intended to provide specific investment, tax or legal advice. Visit PAXFinancialGroup.com for more information.

So, imagine walking in your house late at night. It’s [10:00] and the news comes on. You’ve already unwound from your day, ready to hit the hay. You just want to hear the lottery numbers. You’ve heard them before, but just in case. This time it’s different. The lady speaks every number.

The final two numbers are four and zero. You stand there in silence, disbelief. You get numb, almost. You shake. Is this a joke? I’ve heard of jokes like this before. This happened to Paul and Sue Rosenau in 2008. He couldn’t sleep that night. He counted all the indentations on the ceiling. Nana was her name, right, her grandma name. She fell asleep. He lay there thinking, “If this is real, I don’t, I just don’t know what to do. I mean, I’ll never have to smell the fuel of heavy equipment ever again. Maybe, maybe we can buy a winter home in Florida or Texas and get away from this Minnesota weather.”

They lived in a small town, Waseca, which is in southern Minnesota. He finally fell asleep for a few minutes. But the next morning, with his orange juice, he checked the paper again, and sure enough, the numbers matched. And you can’t help but ask yourself, okay, who checks the paper still? Paul and Sue Rosenau, salt of the earth people, still a little old school, reading the paper, listening to the nightly news. Just good, trustworthy people. And they won the Powerball.

Powerball is an American lottery offered in 45 states. And you play for two bucks, but you can do a power play or you can double play to improve your odds. Did I tell you how much they won? $180 million. Now, let’s break this down a little bit. That’s an annuity over 30 graduated payments that increase by 5% each year.

The Rosenaus elected to not take the annuity, so they took a lump sum which amounted to $88 million. Nobody’s crying, but you are seeing a considerable difference between the two numbers. After taxes, it’s just right around $60 million. $59.6 million. Now, what do you do if you’ve just won the lottery and you’re just a hard working family, loves your children, they have three children, what do you do?

Not a sophisticated investment family. You know, just grinding in life. Just, just trying to make ends meet sometimes, do the right thing. Most, most of the business deals that have ever been done, whether it’s, you know, with the plumber or with the mortgage, it’s a lot of a handshake, I trust you kind of family.

We love those families in America. They make America. But it’s not as though the Rosenaus have a network of sophisticated financial people around them. So, what do they do? I mean, their town itself has less than 10,000 people. What’s your next step? You call an accountant of course, but even your local accountant doesn’t deal with lottery winners every day.

I mean, he’s going to have to brush up on how to help lottery winners, right? He’s going to have to either Google search it or call some friends or start doing some research. They’re going to have to find an attorney, right? That’s going to be a part of their team. They’re going to need a financial guy. So they ask themselves, what about, what about John? He’s a nice guy. His dad was in the business and he’s married, has a couple boys. Yes, he’s a one man show, but we’ve known him for such a long time. He has a good reputation. He’s active in the community. He participated in this program called Books for Kids, Farm America. He’s been in the business 18 years. He must be doing something right.

His wife, Jenny. Sweet lady. So they call John up and say, “John, we need your help.” So now they’ve got their accountant, their attorney and their financial advisor. They have to set up a trust. They decide to set up a foundation, we’ll talk about that in a minute, and also something called an irrevocable life insurance trust. They’re all legal entities that have a unique purpose. So while they’re orchestrating this, of course, word got out, “Someone in Minnesota won the Powerball.” Right? So that’s how it usually is, “Someone in Minnesota.”

And they had a press conference. And in that press conference, something happened that I thought was unique. They said that the day they won the lottery was an anniversary, a very, very sad anniversary. Not a happy day for their family. It was the day that they lost the life of a grandchild from a terrible genetic disease. Their granddaughter passed away at age two, her name is Makayla Lynn Pike, from a rare neurodegenerative illness.

This illness has different stages to it. Stage one would be restlessness, vomiting, fever, muscle weakness. And you can imagine as a grandma and grandpa and then the kids, the parents as well, seeing restlessness, vomiting, fever, I mean, how overwhelming and scary that can be. And then it moves to a second stage- seizures, slower development. And then a third stage where it’s blindness, deafness.

The average life expectancy from this disease is 13 months, and she died in two years. The disease is called Krabbe disease. And the day they announced publicly their lottery winnings, they also shared the story of this anniversary. And Krabbe disease was the most searched word on Google that day. Now you see where I’m going with this. Paul and Sue, they are good people. They don’t love money.

As a matter of fact, as a matter of fact, they gave away all but $10 million to nonprofits, to the church, to local hospitals, to the community fund. Now, again, they have to have specific tools to be able to do these things. So they set up a trust, the trust is specifically designed to tell a family this is what you do if I become incapacitated or die. There’s many different types of trusts. They set up one called Dynasty Trust.

They also set up something called an irrevocable life insurance trust. This is money that you use typically for estate tax purposes. And then they set up a foundation. This is a nonprofit entity that’s specifically used to fund a nonprofit, a mission, something that tugs at your heart. So they put, for this nonprofit, they put $26 million in this nonprofit. I mean, the money wasn’t going to be used right away. They wanted to make sure that they could fund research on the Krabbe Disease. That was their priority; that was where their heart was; they wanted to help future families attack this disease. They know the pain that they went through. And so they put $26 million in a foundation to be able to fund research for this terrible disease.

Now, the foundation doesn’t necessarily need the money right away, right? They, you know, they’re obviously going to hire a few people and start their projects and initiatives, but you’re going to typically park it, and you don’t want to park it in just a bank account. You want to invest it. And that’s where their financial advisor, who worked at Principal, came in and provided direction.

Now, he was an agent of a company, very large company, called Principal. Principal has a great reputation. They’ve been around a long time. But when you see the word, you’re an agent, a principal, the agent by definition means that you have agency and you’re an extension of a larger firm. So to a certain degree, we’ve talked before about fiduciary, what that means. This has a contrasting posturing to a fiduciary because as an agent he represents Principal. But he’s also representing his client, the Rosenaus. So herein lies a conflict.

Now again, the Rosenaus are used to just, I trust you. You’re a man of your word. I give you a handshake. And from there, their financial advisor coordinated a private plane to Principal’s headquarters and they met with everyone but the janitor. The intent was to build trust with Principal. And sure enough, they did. But ultimately, what happened is they ended up buying an exorbitant amount of variable annuities. A ridiculous amount.

Now, variable annuities are, in and of themselves, not terribly bad. They’re not. They have a place. But if you have a financial advisor that’s pushing them and selling them, and they’re- by the way, these financial advisors that do this, they’re very, very smooth. And the problem is they pay a lot of commissions to these advisors or agents, however they’re represented. Now, annuities would be very attractive to the Rosenaus because the annuities have some features of protection. So the posturing could have been, “We don’t want to lose all your money in the market, so let’s add this protection piece for you guys, and we’ll do it through an annuity.”

And the Rosenaus are like, “Well I don’t want to lose money. I want to be a good steward.” The other feature of the variable annuities is tax deferral, which wasn’t needed because nonprofit foundations typically don’t pay taxes. Now, this financial advisor wanted to make sure he maintained the relationship, so they visited Omaha twice to Berkshire Hathaway’s annual meeting, featuring, of course, the legendary CEO Warren Buffett. And they went with their wives and discussed investments.

But it really wasn’t about investments, it was about these variable annuities. Now, maybe he could have, the financial advisor could have put some in variable annuities, maybe just a little bit. But nope. By the end of 2011, this financial advisor put 93% of the nonprofit’s total assets in variable annuities. 93%. He ended up, at the time, earning $1.2 million in commissions.

But that wasn’t enough. He started convincing the Rosenaus to sell some annuities and buy others. So, this is called churning, and he was selling some annuities. He would sell one from Principal and buy one from John Hancock. Sell one from John Hancock, buy Guardian, Pacific Life, Nationwide. He would do this each time he would exchange annuities, he would generate more commissions.

So then the commissions started to go higher, ended up being about $3.3 million in commissions. Altogether, he sold about $47 million of variable annuities. The Rosenaus started to become a little bit uncomfortable, so they sent him an email, according to the Wall Street Journal, asking about fees. Financial advisors said there’s no fees on these products. This financial advisor was the Agent of the Year for Principal for five years, and I’m sure he got royal treatment.

He was probably on panels, flew him across the country. $3.3 million, $3.3 million in commissions was stolen from children who were suffering and families who were suffering from the Krabbe disease. And that wasn’t enough. Another event happened to their family, and the Rosenaus in 2015 learned that Sue had cancer.

Now the financial advisor, obviously he was very commission focused. He had sold them a life insurance policy which might have been appropriate because of estate taxes. Estate taxes are due within nine months, having life insurance paid immediately provides liquidity. It’s purposeful owning life insurance in this situation. I could see it, maybe some questionable ways that it was done, but I could see life insurance being sold.

So, Sue bought. She had $3 million life insurance on her, but she had cancer. So this life insurance; unfortunately, was going to pay earlier rather than later. But this financial advisor from Principal, this agent, he convinced the Rosenaus to sell her $3 million life insurance policy for a little over $1 million in cash today. She died in 2018.

Why would he tell her to sell a life insurance policy if she’s going to die and the estate’s going to receive $3 million? Why would he do that? Because he got a handsome commission from the companies that do viatical settlements.

So by the end of 2011, I had mentioned earlier that he sold $47 million, this was altogether kind of churning, but in the nonprofit, he had put in $28 million, just over $28 million in variable annuities into this as a part of the investment plan. In 2011, now six years later, the stock market had doubled, but their $28 million went to $26 million.

So, not only did he steal from generating an exorbitant amount of commissions over $3 million, the opportunity cost. Now, maybe they wouldn’t have doubled their money, but what if I’m half wrong? He actually stole the time value money that amounts to tens of millions of dollars. Now, Principal has denied all allegations of making unsuitable investments. But based on this information, it’s clear that there was a fiduciary expectation, and Principal failed to reasonably, suitably supervise this agent.

And so it went before on June 5th, FINRA, the Financial Industry Regulatory Authority, a panel of arbitrators, and the Rosenau Foundation, they did sue for this churning. And they won $7.3 million in an arbitration judgment. But they did not get compensatory damages or attorney fees, and they did not recover the lost opportunity, which again, the portfolio was $28 million, went down to$26 million, but they lost opportunity, it was about $22 million if you did the math. They didn’t recover that.

So the family sued again. That one is still pending. That one’s through Waseca County. So Principal’s headaches are far from over. And the financial advisor, his name was John. He did violate state and U.S. securities laws. Rosenaus asked the question, they said, and it’s a reasonable question, “What the heck is wrong with you? How much is enough?”

Foundation terminated his, the relationship with his financial advisor in 2017. Principal discharged him in October of ‘19 on concerns with his business practices and lack of documentation supporting him. According to the FINRA document, three months later, this financial advisor, John, killed himself at the age of 49, leaving behind his wife and two children.

Greed. Love of money. Could the Rosenaus have seen this coming? Were there some clues? Looking through this situation, there weren’t a lot of clues. If you look, there’s a website called The Broker Dealer Check. And if you look at this financial advisor’s background, there was a complaint, but it wasn’t a material one. And that happens. You know, sometimes people get crossed and you’re in the business 18 years, you’re going to, you might have a bad experience with a client or vice versa.

But there really wasn’t a lot here. He’d been in the business 18 years, good reputation in the community. I think the idea that he was an agent for Principal was, it was a red flag, at least a yellow flag. But any financial advisor that over-recommends annuities, you walk away from that person.

There’s too much in commissions associated with it. If it’s a reasonable annuity recommendation that’s, you know, a portion of your overall investment portfolio, okay, that is fine. But if you are working with a financial advisor and they sell are annuities, they’ll reframe it in very creative ways. But if you find that you’re always talking about annuities, you should walk away.

Fin-crime is much, much closer than you think. Keep your head on a swivel to protect you, your family, and your loved ones. Have a great day.