Wednesday, April 29, 2015

No. 96: STOLI and the Bazemore Criminal Case

On April 21, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit handed down a unanimous ruling in a criminal case against Vincent Bazemore. I did not write about the case previously, but the appellate ruling prompted me to do so at this time.

The Criminal Charges
On October 3, 2012, a federal grand jury indicted Bazemore on four counts of mail fraud in a scheme to obtain commissions by inducing insurance companies to issue stranger-originated life insurance (STOLI) policies to unqualified applicants. The counts relate to three policies issued by Principal Life Insurance Company and one issued by Transamerica Occidental Life Insurance Company. Other companies mentioned in the indictment are ING Annuity and Life Insurance Company, John Hancock Life Insurance Company, Sun Life Assurance Company of Canada, and Metropolitan Life Insurance Company. (See U.S.A. v. Bazemore, U.S. District Court, Northern District of Texas, No. 3:12-cr-319.)

The Allegations
According to the indictment, the applications Bazemore submitted contained materially false and fraudulent representations. They include but are not limited to these seven areas: (1) false and grossly inflated statements of the applicant's net worth and income, (2) forged and fraudulent letters from Certified Public Accountants verifying the false financial information in the applications and related financial documents, (3) forged signatures of the applicant, (4) false statements that the purpose of the insurance policy was for estate planning, (5) false statements that the policy was not to be transferred to third parties, (6) false statements denying third parties had promised to pay premiums in return for an assignment of the policy, and (7) false statements that the applicant was not borrowing money to pay the premiums.

Subsequent Developments
Bazemore was arrested shortly after the indictment was filed, and he has been in custody ever since. In July 2013, after a three-day trial, the jury found him guilty on all four counts in the indictment.

In March 2014 the district court judge sentenced Bazemore to 240 months in prison on each of the four counts, to run partially concurrently and partially consecutively for an aggregate sentence of 292 months, followed by three years of supervised release. The judge ordered Bazemore to pay restitution of slightly more than $4 million and a special assessment of $400. The judge did not order a fine because Bazemore does not have the resources or future earning capacity to pay a fine.

Bazemore appealed the verdict, the sentence, and the restitution. The appellate panel affirmed the verdict, vacated the sentence and the restitution, and sent the case back to the district court for proceedings consistent with the appellate opinion. The appellate panel ruled that the district court judge had erred in the calculation of the length of the sentence and the amount of restitution. The appellate opinion explains the panel's reasoning. (See U.S.A. v. Bazemore, U.S. Court of Appeals for the Fifth Circuit, No. 14-10381.)

General Observations
Bazemore's actions that led to the indictment and the guilty verdicts are outrageous. However, my impression, based on my review of actions taken by the defendants in many other STOLI cases, most of which were civil rather than criminal cases, is that Bazemore's actions are typical of actions taken by STOLI defendants.

I am offering a complimentary 32-page PDF consisting of the 15-page indictment, the one-page jury verdict, and the 16-page appellate opinion. Send an e-mail to and ask for the Bazemore package.


Monday, April 27, 2015

No. 95: Life Partners and the Inadequacy of the Bankruptcy Trustee's Website

As I reported in recent weeks, the bankruptcy court judge in the Life Partners Holdings, Inc. (LPHI) case approved the appointment of H. Thomas Moran II as the Chapter 11 Trustee to operate the company in bankruptcy, and the Trustee established a website ( to keep affected parties informed of developments. In this follow-up I discuss the inadequacy of the Trustee's website.

The April 17 8-K Report
On April 17 LPHI filed an 8-K (material event) report with the Securities and Exchange Commission (SEC). The report contains four disclosures, which are paraphrased below. The expression "LP Market" refers to "a password-protected, limited access, web-based platform where investors in life settlement policies could place their positions for sale to a third party." Here are the disclosures:
  1. On April 9 the Trustee suspended all company activities related to the resale of positions, including suspension of the LP Market.
  2. The Trustee is investigating the business and will determine whether to reopen the LP Market. Should he decide to do so, he will make an announcement.
  3. LPHI updated its website ( to include a link to the Trustee's website. The LPHI website continues to provide access to all LPHI filings with the SEC.
  4. On April 17 the Trustee released a list of 19 frequently asked questions. They and the answers to them are in an exhibit attached to the 8-K. There are ten questions about life settlement policies, eight questions about the bankruptcy, and one question about the Official Unsecured Creditors Committee.
As of the end of the day on April 24, the Trustee's website had not disclosed the existence of the April 17 8-K, let alone its content. This is surprising, not only because the frequently asked questions and the answers to them are important, but also because the 8-K exhibit showing the questions and answers is entitled "LPHI Trustee Website FAQ."

Other Recent 8-K Reports
The April 17 8-K report was the fourth 8-K filed subsequent to the appointment of the Trustee. The first was filed March 31. It disclosed the suspension of trading in LPHI shares as of the opening of business on March 30, and also disclosed the March 25 resignations of Frederick J. Dewald and Harold E. Refuse as LPHI directors. The Trustee's website mentions the existence of the March 31 8-K and says "The filing can be viewed on the SEC's Edgar system." The reader who clicks "Read More" is given a link to the 8-K.

The second 8-K subsequent to the appointment of the Trustee was filed April 6. It disclosed the March 31 resignation of Tad Ballantyne as an LPHI director and the termination of the employment of R. Scott Peden as LPHI general counsel. The existence of the April 6 8-K is not mentioned on the Trustee's website.

The third 8-K subsequent to the appointment of the Trustee was filed April 9. It disclosed that the bankruptcy court judge held a hearing on April 6 on the Trustee's motion to amend company documents to appoint the Trustee as the sole director of LPHI's two operating subsidiaries and, if the Trustee so chooses, to place the subsidiaries in bankruptcy. It also disclosed that the judge granted the motion and that the Trustee is moving to place the subsidiaries in bankruptcy. The existence of the April 9 8-K is not mentioned on the Trustee's website, although elsewhere on the Trustee's website the reader is given access to the bankruptcy court documents relating to the Trustee's motion, the hearing on the motion, and the bankruptcy court judge's granting of the Trustee's motion.

General Observations
I still think the Trustee and the bankruptcy court judge will make their decisions in the best interests of all parties affected by the LPHI bankruptcy. However, I am disappointed by the inadequacy of the Trustee's website in keeping affected parties informed of developments.

In view of the importance of the frequently asked questions and the answers to them, I am offering a complimentary six-page PDF containing the April 17 8-K report and the exhibit showing the questions and answers. Send an e-mail to and ask for LPHI's April 17 8-K.


Monday, April 20, 2015

No. 94: The New York Times Article About the Life Insurance Shell Game—Further Observations

In No. 93 posted April 17, I discussed the April 12 article in The New York Times entitled "Risky Moves in the Game of Life Insurance." I also mentioned my writings about efforts to weaken life insurance reserves, including my recent blog items about some of the transactions mentioned in the Times article. Here I present some further observations.

Comment from Athene
In No. 93 I said Athene, one of the companies named in the Times article, released a two-page comment expressing disappointment with the article and the reporter. I am concerned about Athene's suggestion that everything is fine because the Iowa Insurance Division reviews and approves all the transactions. My concern stems from my belief that Iowa will approve anything. I am also concerned by the assertion that Athene is "well capitalized" because it has $59 billion of assets. My concern stems from the fact that Athene said nothing about liabilities or about the quality of the assets. I offered a complimentary PDF of the Athene comment, and that item remains available.

Comment from Accordia
Accordia, another company mentioned in the Times article, released a one-page comment telling its "key partners" it is "well capitalized and managed to meet its long-term commitments to policyholders." It mentions, among other things, its $7.7 billion of assets, its financial strength ratings, and its risk-based capital ratio. It also says its arrangements are approved by state regulators, reviewed by rating agencies, and assessed by an actuarial firm. Accordia does not directly criticize the Times article or the reporter.

More on Anagrams
I said in No. 93 that one of the phony entities mentioned in my No. 73 (posted November 16, 2014) and in the Times article is a Delaware-based LLC named Tapioca View, and that I learned recently the name of the entity is an anagram of "Iowa captive." I also mentioned several entities named Cape Verity, said "yer captive" was the best anagram I was able to see, and asked for help from readers who are good with anagrams.

One reader came up with "rye captive," but I think that is not much of an improvement. Another reader, with quite a sense of humor, came up with "creepy vatic." My dictionary says "vatic" is an adjective meaning "prophetic" or "oracular." I question such an anagram, because I think it should consist of an adjective and a noun rather than two adjectives. I remain open to further suggestions.

The Words of a Life Insurance Veteran
A few hours after No. 93 was posted, comments arrived from a person connected with the life insurance business for about 40 years. He called his comments a "rant," but I found them interesting. Here are some of them, which I edited without his permission.
Tax laws enacted for one reason are being used for a very different reason. But I guess it is the business of tax lawyers and CPAs to find every lawful means of reducing their clients' tax burdens, even if it means getting their clients into dubious and otherwise unnecessary business activities.
Buried deep in this is the fact that genuine captives, if any still exist, have a legitimate role for firms which would be tempted to self insure but want a degree of financial discipline behind self insuring—possibly to address concerns raised by nervous board members and others. The expression "captive insurer" is being used to describe wildly different things, which cannot be of much comfort to those with legitimate captives that have financial reality to them.
You mentioned Spencer Kimball, who wrote the insurance codes of two or three states. His philosophy of regulation differed from that in New York, where everything is prohibited unless specifically permitted. Kimball felt everything should be permitted unless specifically prohibited. Behind Kimball's philosophy was the idea that insurance companies would never do something to harm their own long-term interests. That is why codes developed by Kimball do not include insurable interest provisions. He asked why any insurance company would ever want to issue insurance that lacked insurable interest, not because of public policy, but because of bad claims experience. So there is no insurable interest statute in those codes, just common law.
I think Kimball did not anticipate a world of insurance companies run by non-insurance people. They do not understand reserves because the lines of business they came from have no reserves. They have no conception of long-term contractual obligations because the lines of business they came from freely and without consequence go out of business, or merge, or morph, and cease doing or making the things that gave their companies their names. Annuities with the name of a piano company on them [Baldwin United] were one of the first examples, and we saw how that turned out. I also think Kimball did not anticipate the rise of a class of actuary who is as much a loophole chaser as any tax and estate lawyer.
Even insurance companies that retain their fine old names are now run by folks from the securities business (you can blame or credit the rise in variable products for that) and they take a totally different view of long-term obligations and how they are funded. Ironically (and this may offend you and your lifelong crusade for rigorous disclosure) the securities business has become accustomed to doing whatever it damn well pleases, because no law tells them otherwise, so long as it can be obscurely but "lawfully" disclosed. But if those reading and actually understanding the disclosure do not care or react (Iowa Insurance Division, anyone?), a disclosure regime such as that on which securities laws are based can permit very adverse activity to go unchecked.
Disclosure is fine, but the history of the insurance business shows that what it needs is some substantive regulatory control and direction. I think most "real" insurance people understand that, but it is not a friendly or familiar concept to the many insurance company top officers who did not come from jobs in the insurance business. I think any number of regulatory problems facing the life insurance business are impacted by the fact that in cold reality there are precious few insurance people, as I would use the expression, left in charge or even in a position to act or speak.
The people running too many insurance companies today would be offended by the very thought of product design that rewards old customers who are no longer buying more stuff. And while they issue policies that in theory are good for 120 years, they do not look fondly on those who keep them in force for 40 years. In short, the world of life insurance has been turned on its head from everything I learned starting 40 years ago.
Available Material
In No. 93 I offered the Athene comment and mentioned the items I offered in my earlier related blogs. Those items are still available.

At this time I am offering a complimentary PDF containing the Accordia comment. Send an e-mail to and ask for the Accordia response to the Times article.


Friday, April 17, 2015

No. 93: The New York Times Examines the Life Insurance Shell Game

The Sunday, April 12, 2015 issue of The New York Times carried a 3,185-word article entitled "Risky Moves in the Game of Life Insurance." The subtitle is "Complex and mostly hidden maneuvers may end up costing taxpayers and policyholders." The article was written by Times reporter Mary Williams Walsh. It began at the bottom of the front page of the business section and the remainder filled the fourth page of the section. The article included a cartoon of a shell game, a chart, and a photograph of Elizur Wright. In 1858 Wright was appointed the insurance commissioner of Massachusetts, thereby became the first insurance regulator in the U.S., and is known today as the "Father of Life Insurance." The electronic version of the article was posted on the Times website on April 11.

Two Interesting Items
An interesting item in the Times article followed a discussion of details of transactions the reporter had seen in public documents. The discussion related to several companies controlled by Goldman Sachs and was followed by this sentence: "The company and its parent declined to confirm the details in those records or comment on the record." One can only wonder why a company would decline to confirm or comment on public information.

Another interesting item in the Times article was a statement that Nick Gerhart, the Iowa insurance commissioner, expressed in an e-mail to the reporter. He called captive reinsurance "a pragmatic approach to address the nationally recognized problem of redundant reserves." The expression "redundant reserves" is used by those intent on dismantling a regulatory system that has stood the test of time for more than 150 years. In other words, they want a system that allows them to reap short-term profits at the expense of long-term financial strength.

I am reminded of the views of the late Spencer L. Kimball, who during his career was the leading scholar in the area of insurance regulation. Kimball said the primary objective of insurance regulation is not the mere solvency of insurance companies, but rather the solidity of the companies. One can only imagine what he would say about promoters who embrace the expression "redundant reserves."

My Writings on the Subject
I wrote extensively in The Insurance Forum about efforts over the years to weaken life insurance reserves. I also wrote on my blog about some of the transactions mentioned in the Times article. See Nos. 44 (April 22, 2014), 66 (August 21, 2014), 71 (November 6, 2014), 72 (November 12, 2014), and 73 (November 16, 2014).

One of the phony entities mentioned in my blog post No. 73 and in the Times article is a Delaware-based LLC named Tapioca View. It issued a $499 million "contingent note," whatever that is, to be carried as an asset by an affiliate. I learned recently that the name of the entity is an anagram, the dictionary definition of which is "a word or phrase made by transposing the letters of another word or phrase." "Tapioca View" is an anagram of "Iowa captive." I think the name of the entity provides insight into the thought process of promoters of captive reinsurance. I do not know whether Commissioner Gerhart and his staff were aware of the anagram.

In No. 73 I also mentioned several entities named Cape Verity. I tried to figure out whether that name is also an anagram. However, all I could get out of it was "yer captive." I would welcome help from readers who are better than I am with anagrams.

General Observations
In my opinion, the Times article is an excellent study of a complex subject and an important contribution toward public understanding of captive reinsurance. Superintendent Benjamin Lawsky of the New York Department of Financial Services calls it "shadow insurance." It is a serious problem facing the life insurance business.

I think the Times article should be read by anyone with an interest in the welfare of the life insurance business and the millions of people who depend on life insurance to protect their beneficiaries. Many readers will find the article difficult to understand, but that is the fault of the perpetrators of the schemes rather than a shortcoming of the article. In other words, promoters of captive reinsurance schemes intend for the schemes to be opaque and incomprehensible, because they would not be permitted if they were disclosed and understood.

In my blog items mentioned above, I offered as complimentary PDFs some documents relating to matters discussed in the Times article. Those documents remain available upon request. At this time I am offering a complimentary two-page PDF containing an April 14 response from Athene, one of the companies mentioned in the Times article. The response apparently was prepared for agents who expressed concerns about the Times article. Send an e-mail to and ask for the Athene response to the New York Times article.