An arbitration panel has ordered Iowa-based broker-dealer Principal Securities to pay $7.3 million in damages to a Minnesota family foundation that said an ex-rep with the company who has since died piled most of its assets into unsuitable variable life insurance contracts and variable annuities.

The foundation, set up by two former Powerball winners to advance disease research, say these annuity products were excessively traded to generate commissions, that the products' true costs were obscured to them and that almost $20 million was wasted.

The award was announced yesterday by the Financial Industry Regulatory Authority (Finra), whose arbitration panel heard the case.

The Rosenau Family Research Foundation says on its website that its mission is to help those with Krabbe disease and cystic fibrosis. According to the full Finra complaint, provided by the foundation’s attorney, Donald R. McNeil, the foundation was set up by Paul Rosenau and his late wife Susan, who in 2008 won $180 million in the largest Powerball jackpot in the state up to that time. They used $26.4 million of the payout to fund the foundation researching Krabbe disease, a rare neurological condition that had taken the life of their 2-year-old granddaughter five years before in the early 2000s. (The foundation was first known as the Legacy of Angels Foundation, according to McNeil, an attorney with Heley, Duncan & Melander in Minneapolis.)

After they won the lottery, the Rosenaus were introduced to Waseca, Minn., advisor John P. Priebe. Waseca is a small town (its population is less than 10,000) where many people know each other; the complaint says the Rosenaus were familiar with Priebe through their kids’ school relationships, and that he was the only professional in his small office. He apparently gave the Rosenaus the royal treatment and took them to Principal’s headquarters in Des Moines, Iowa, on a private jet. According to the complaint, they met with company managing directors who told them that their money would be well taken care of. Priebe, said the complaint, was named “agent of the year” for five consecutive years.

But the family claims the company then put 99% of the foundation’s assets in nonqualified variable annuities and eight life insurance policies, including products from John Hancock, Guardian, Pacific Life and Nationwide.

“A substantial portion of these investments were churned by Principal,” the complaint said. “Sales of the annuities and life insurance policies generated millions of dollars in revenue for Principal and Priebe.” (Churning is the act of excessive trading to generate commissions.) The foundation claims the investments lost it more than $20 million. “The foundation assets were wasted because of unnecessary commissions, fees and costs that were paid to Mr. Priebe and Principal.”

Despite his reported accolades as agent of the year, Prieve was fired by Principal in late 2019 over “concerns with his business practices,” according to his disclosures on Finra’s BrokerCheck page. Priebe committed suicide a few months later in early 2020, according to McNeil.

Principal Securities had not returned a phone call by press time, though the company talked about the dispute with the foundation in a recent filing with the Securities and Exchange Commission, listing a possible $5 million loss among its contingencies.

Originally there were other claimants in the Finra dispute, including the Rosenaus’ adult children: Stacy Pike-Langenfeld, Heather Techmeier, and Brett Rosenau, named as beneficiaries of the Paul and Sue Rosenau Family Delaware Dynasty Trust and the Paul and Susan Rosenau 2012 Irrevocable Life Insurance Trust. However, these parties left the claim, said McNeil, to pursue further claims against a related Principal company in state court, which means the company’s headaches might not be over. (The original Finra claim was for $22.9 million.)

McNeil emphasized that the current Finra award itself would go toward furthering the foundation’s mission.

“The foundation is obviously very pleased with the results of this arbitration,” said McNeil, “and the money will be going towards research to find a cure for Krabbe disease and treatment for this neurological disease.”