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Jeanette Rasgaitis and Robert Rasgaitis v. Waterstone Financial Group

February 20, 2013


Appeal from the Circuit Court ) of Du Page County. No. 10-L-471 Honorable John T. Elsner, Judge, Presiding.

The opinion of the court was delivered by: Justice Schostok

JUSTICE SCHOSTOK delivered the judgment of the court, with opinion. Justices Hutchinson and Zenoff concurred in the judgment and opinion.


¶ 1 The plaintiffs, Jeanette and Robert Rasgaitis, appeal from the trial court's dismissal of their second amended complaint. The trial court dismissed the complaint on the basis that it was barred by the statute of limitations. The plaintiffs' complaint alleged claims against the defendants, Waterstone Financial Group, Inc. (Waterstone), Ronald Fara, and Vicki Diggles, for alleged fraud in soliciting the plaintiffs to mortgage their home and invest the equity in certain life insurance policies and annuities. We affirm in part, reverse in part, and remand for additional proceedings.


¶ 3 The plaintiffs filed their original complaint on April 12, 2010, and their first amended complaint on September 8, 2010. The defendants filed motions to dismiss the plaintiffs' complaint pursuant to section 2-619.1 of the Code of Civil Procedure (Code) (735 ILCS 5/2-619.1 (West 2008)). On March 7, 2011, following argument on the motions, the trial court dismissed the plaintiffs' first amended complaint without prejudice, with leave to refile.

¶ 4 The plaintiffs' second amended complaint was filed on April 8, 2011. The complaint alleged as follows. The plaintiffs are married. Waterstone is an investment advisory firm and an independent brokerage firm. Waterstone is licensed to provide financial services and also sells products including securities, annuities, and life insurance policies. Waterstone is a member of the Financial Industry Regulatory Authority (FINRA).

¶ 5 The complaint alleged that, during the relevant time frame, Fara was registered with the State of Illinois as an agent of Waterstone to sell financial products and offer investment advice. Fara operated a registered branch office of Waterstone in Oak Brook. The office was identified as a Waterstone branch office in the building directory on the first floor and on signs located in the office. Waterstone allowed Fara to provide business cards "identifying Fara as a registered representative with and offering the sale of securities through Defendant Waterstone." Pursuant to FINRA rules, Waterstone was required to supervise Fara. Fara was also registered as an investment advisor for "Fara and Diggles Wealth Management LLC." Fara represented to the general public that this business entity was also affiliated with Waterstone. Fara used the same Waterstone office and telephone number when operating his outside business entities.

¶ 6 According to the complaint, Diggles was held out to the public as a partner of Fara and an actual or apparent agent of Waterstone. Diggles worked out of Fara's Waterstone office performing duties for the benefit of Waterstone at the direction of Fara. Waterstone allowed Fara to hold out Diggles as a financial planner in the business he operated out of the Waterstone office.

¶ 7 In March 2004, December 2004, August 2005, and May 2006, FINRA warned its members, including Waterstone and Fara, that 100% mortgages were not suitable and that investors were not aware of the significant risks of 100% mortgages. Despite these warnings, Waterstone by and through its agents Fara and Diggles intentionally and fraudulently (1) advised the plaintiffs to mortgage near all of the equity in their home and invest in "an investment plan" proposed by Fara; (2) reassured the plaintiffs that the investment plan was appropriate for their needs; (3) reassured the plaintiffs that the investment plan was "safe and secure"; and (4) advised the plaintiffs to invest in equity-indexed annuities without any attempt to explain the associated fees, expenses, and surrender charges.

¶ 8 The complaint alleged the following specific facts. On or about September 19, 2006, the plaintiffs received a written solicitation to attend a seminar entitled "Mortgage mistakes and Misconceptions: how to save a fortune on your mortgage." The written solicitation stated that Fara would "educate homeowners on the many mistakes they could be making on their home mortgage." Waterstone either did review and approve or should have reviewed and approved the content of the seminar. The plaintiffs attended the seminar because they wanted to pay off the balance of their mortgage prior to retirement. At the October 3, 2006, seminar Fara indicated that his investment plan had been successful for other clients. On October 15, 2006, the plaintiffs met with Fara and Diggles at Fara's Waterstone office to discuss the investment plan, which involved mortgaging their home and investing the proceeds. Fara again indicated that his plan had been successful with other clients, who earned generous returns.

¶ 9 On October 20, 2006, the plaintiffs met with Fara and Diggles for a second time at the Waterstone office. At that meeting, the plaintiffs provided the defendants with information concerning their financial status. They informed Fara that the balance on their mortgage was $66,000 and that they had about $250,000 in equity in their home. They told Fara that their primary financial objectives were to pay off their mortgage and earn income for retirement. They also provided information about their Charles Schwab individual retirement accounts (IRAs) that were invested in Standard & Poor (S&P) indexed mutual funds. Fara informed the plaintiffs that there were benefits to mortgaging their home and investing the equity. Fara represented that (1) the funds the plaintiffs invested through Fara would be 100% safe and guaranteed; (2) his investment plan was a proven method to increase their net worth; (3) his plan would provide more than enough funds to pay off their mortgage and provide retirement income; and (4) the plaintiffs' funds would always be available to pay off their proposed second mortgage at any time.

¶ 10 On October 29, 2006, the plaintiffs met with Fara and Diggles for a third time at the Waterstone office. At that meeting, Fara presented the plaintiffs with a personalized binder that promised guaranteed benefits after implementation of Fara's investment plan. Fara represented that his investment plan, involving their home and both of their IRAs, would result in hundreds of thousands of dollars in benefits. Specifically, Fara told the plaintiffs that his investment plan would generate returns to pay off their mortgage; provide them with retirement income; be safe and appropriate, offering high returns without risk of loss; and result in tax benefits of 31%. Fara also told them that they could remove their funds from his investment plan at any time. Fara represented that his investment plan would provide guaranteed safe returns of $96,376 above the costs of the mortgage.

¶ 11 The next day, the plaintiffs again met with Fara and Diggles at the Waterstone office. The purpose was to implement the investment plan. The investment plan was to mortgage the plaintiffs' home to nearly 100% of its value and use the equity to purchase a five-year term annuity that would fund two life insurance policies. The plaintiffs signed various papers at this meeting but alleged that Fara and Diggles did not explain or show all of the various papers to them but, rather, just indicated where they should sign. Fara and Diggles again represented to the plaintiffs that their funds could be removed from the investment plan at any time and be used to pay off the proposed $280,000 mortgage. Fara and Diggles stated that they would provide a breakdown describing how the assets were invested in the plan. The plaintiffs signed applications for the life insurance policies. Diggles sold the mutual funds in the plaintiffs' respective Charles Schwab IRAs. The plaintiffs also signed application forms for "Midland individual flexible premium equity indexed annuities."

¶ 12 On November 17, 2006, the plaintiffs obtained a 30-year adjustable rate mortgage on their home in Wheaton for $280,000. The plaintiffs were issued funds of $213,115.56. The defendants failed to tell the plaintiffs that the loan they were taking out was a subprime mortgage with interest rates above the market rate. The mortgage included enhanced fees and incentive payments to Fara for initiating the mortgage.

¶ 13 On or about November 29, 2006, the plaintiffs signed the application for a "Great American Single-Premium Immediate Annuity," contract number 06007934. The single premium payment was $213,125.56, which represented the full amount of the proceeds from the new mortgage on their home. The Great American annuity was to give the plaintiffs five annual payments of $43,942.07, with the first payment to be issued on January 1, 2007. The first payment was used to pay the initial premium payments on the plaintiffs' life insurance policies. The initial premium payment on Jeanette's Midland universal life insurance policy, number 1502731746, with a policy date of January 1, 2007, was $23,050. The initial premium payment on Robert's Midland universal life insurance policy, number 1502731736, with a policy date of January 4, 2007, was $20,892.

¶ 14 In January 2007, funds were received from the sale of the plaintiffs' Charles Schwab IRA mutual funds. On January 9, 2007, a Midland individual flexible premium equity-indexed annuity, number 8500292198 in Jeanette's name, was issued for an initial premium payment of $21,753.63. On January 30, 2007, Midland individual flexible premium equity-indexed annuity number 8500293080 in Robert's name was issued for an initial premium payment of $19,707.03.

¶ 15 The plaintiffs further alleged that Fara's investment plan was unsuitable and could never earn the returns promised. After the fifth premium payment for the Great American annuity, the annuity would be exhausted and the plaintiffs would be unable to afford the continuing annual premiums on their life insurance policies. The life insurance policies "would then lapse due to insufficient cash value to maintain coverage." Fara failed to inform the plaintiffs that, short of one of them dying, "the guaranteed returns illustrated would never be attainable." Fara failed to inform them that it would be impossible for them to fully recover their investments and pay off their $280,000 mortgage. The annuities funded with the plaintiffs' IRAs caused the plaintiffs "to incur excessive annual fees and commissions." Moreover, the two Midland annuities were no different from the plaintiffs' Charles Schwab indexed mutual fund IRAs, and the Schwab IRAs contained no additional fees and commissions. The defendants failed to inform the plaintiffs that their life insurance policies and Midland annuities were subject to significant surrender charges.

¶ 16 The plaintiffs further alleged, on information and belief, that the defendants earned significant commissions on the sale of the life insurance policies and Midland annuities, and for the initiation of the mortgage. The defendants also solicited the plaintiffs to deposit $20,000 into Midland flexible premium equity-indexed annuity number 8500292024, which was issued on November 21, 2006. The defendants earned a commission in excess of $2,000 on this annuity. The defendants failed to inform the plaintiffs that this annuity was subject to a surrender charge of up to 10% for the first seven years.

¶ 17 Finally, the plaintiffs alleged that the defendants continued to misrepresent that the investment plan was working. At a January 30, 2008, meeting at the Waterstone office, the plaintiffs inquired about the safety of the investment plan and Fara told them "that their money was safely invested in his plan and available to pay-off their mortgage in its entirety if Plaintiffs decided to do so." Fara also stated that his investment plan was generating large returns that would be available in the following years. In August 2008 they called Diggles to express concern over their investments due to the volatility of the stock market. Diggles assured them that their money was safe and earning good returns without risk of loss.

¶ 18 In February 2009, the plaintiffs left multiple messages at the Waterstone office, but received no responses. They then sought out other professional investment advice. After receiving other advice, they learned that Fara's investment plan could never earn the returns promised and that Fara's and Diggles' representations were false. "The only way the 'investment plan' could generate a positive return would be if one or both of the [p]laintiffs died causing the survivor to receive the insurance death benefits." The sale of the Schwab IRA mutual funds to buy S&P 500-indexed annuities was not suitable. The promise of guaranteed returns was false.

ΒΆ 19 The plaintiffs alleged that the defendants earned over $40,000 in fees and bonuses due to the home mortgage and over $30,959 in commissions on the first-year premiums for the respective policies and annuities. Additionally, the plaintiffs incurred $10,405 in unnecessary closing costs, paid over $75,249 in unnecessary interest-only mortgage payments, and incurred ...

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