Friday, July 17, 2015

No. 110: Aviva, Guggenheim, Allegations of Phony Reinsurance, and a Strange Coincidence

In No. 107 posted June 30, 2015, I wrote about a federal class action lawsuit filed on June 12 against Aviva, Athene, and Apollo alleging phony reinsurance and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). At the time I vaguely recalled a similar lawsuit filed earlier and withdrawn without explanation the next day. I located the earlier lawsuit and found a strange coincidence. The earlier case was against Guggenheim and others. There were differences from the Aviva case; however, the earlier case involved the same plaintiffs' law firms, many of the same plaintiffs' attorneys, similar allegations of phony reinsurance, and similar RICO allegations. Here I update the Aviva case and describe the earlier Guggenheim case.

The 2015 Complaint against Aviva
In No. 107 about the Aviva case, I identified the plaintiffs' attorneys. The defendants' attorneys are Bruce Roger Braun, Hille von Rosenvinge Sheppard, Joel Steven Feldman, Peter K. Huston, and Sarah Alison Hemmendinger of Sidley Austin LLP; and Reginald David Steer and Steven M. Pesner of Akin Gump Strauss Hauer & Feld LLP. The parties have consented to proceed before a magistrate judge, and have agreed that the defendants will answer, move, or otherwise respond to the complaint by August 24. (See Silva v. Aviva, U.S. District Court, Northern District of California, Case No. 5:15-cv-2665.)

The 2014 Complaint against Guggenheim
On February 11, 2014, the plaintiffs' attorneys filed a federal class action lawsuit against Guggenheim and others. The 105-page complaint alleged phony reinsurance transactions with affiliates and participation in a RICO enterprise. The lead plaintiffs were Clarice Whitmore, an Arkansas resident who bought an annuity in 2012 from Security Benefit Life Insurance Company; and Helga Maria Schulzki, a California resident who bought an annuity in 2013 from EquiTrust Life Insurance Company.

The plaintiffs' attorneys in the 2014 case (italics indicate those involved in the Guggenheim case but not involved in the Aviva case) were Steve W. Berman, Sean R. Matt, Elizabeth A. Fegan, and Robert B. Carey of Hagens Berman Sobol Shapiro LLP; Andrew S. Friedman and Francis J. Balint Jr. of Bonnett Fairbourn Friedman & Balint PC; Erin Dickinson and Chuck Crueger of Hansen Reynolds Dickinson Crueger LLC; and Ingrid M. Evans and Elliot Wong of Evans Law Firm Inc.

The defendants in the 2014 case were Guggenheim Partners LLC, Guggenheim Life and Annuity Company, Security Benefit Life, and EquiTrust Life. Other participants in the alleged RICO enterprise were Mark Walter, chief executive officer of Guggenheim Partners and chairman and controlling owner of the Los Angeles Dodgers; Todd Boehly, president of Guggenheim Partners; Robert Patton Jr., client and associate of Walter and Boehly; Paragon Life Insurance Company; and Heritage Life Insurance Company. The docket does not identify the defendants' attorneys because the case ended almost immediately after it was filed. (See Whitmore v. Guggenheim, U.S. District Court, Northern District of Illinois, Case No. 1:14-cv-948.)

The Allegations against Guggenheim
The introduction to the 2014 complaint against Guggenheim contained 30 paragraphs summarizing the allegations. Here were ten of them:
7. This case is about the fraud that Guggenheim and others working in association with it committed to sell Guggenheim Insurers' annuity products to unwitting annuity purchasers, many of whom are elderly, while concealing the adverse effects of their depletion of the funds needed to satisfy the Guggenheim Insurers' long-term obligations to these annuity purchasers.
8. Guggenheim's plan was pernicious: acquire insurance companies weakened by the recession and use them to sell seemingly safe and secure annuity products (particularly annuities with large, upfront premiums) while funneling cash out to Guggenheim and its affiliates, friends and associates rather than holding or reserving it to satisfy their long-term obligations to the annuity holders.
11. In addition to saddling the Guggenheim Insurers with the highly illiquid affiliated promissory notes and billions of dollars of highly illiquid mortgage and other risky asset-backed securities, Guggenheim Chief Executive Officer Mark R. Walter, Guggenheim President Todd L. Boehly, and Guggenheim business associate Robert "Bobby" Patton Jr. used the Guggenheim Insurers as a cash machine to buy the most expensive sports franchise in world history, the Los Angeles Dodgers, with over a billion dollars in policyholders' funds.
13. To accomplish their illicit goals Defendants took a page out of the Enron playbook, creating a fraudulent scheme through complicated accounting machinations that gave the false appearance of financial strength and stability to Security Benefit Life, Guggenheim Life and EquiTrust Life by: (1) moving liabilities off their books to affiliated and secretly affiliated entities (primarily through non-economic "reinsurance" transactions with affiliated entities), (2) inflating their assets by counting already encumbered assets as though they were available to make annuity holder payments, (3) executing billions of dollars of what appear to be essentially uncollateralized loans to affiliated entities or associates and portraying the related-party unsecured paper as assets, and (4) hiding their non-performing assets.
14. At the center of this scheme was a shell game that Defendants hoped no one could follow, where money and liabilities were continuously shifted between companies with whom the Guggenheim Insurers acknowledged an affiliation (Security Benefit Life, Guggenheim Life, EquiTrust Life and Paragon Life Insurance Company of Indiana) and with a separate, secretly affiliated company that Defendants acquired and corrupted to facilitate the fraudulent scheme, Heritage Life Insurance Company (AZ).
18. At the same time Defendants were hiding the Guggenheim Insurers' liabilities, Defendants were also inflating their assets by additional fraudulent accounting machinations.
19. For example, collectively the three Guggenheim Insurers improperly counted as "admitted assets" over $2.59 billion of collateral that was already pledged to repay loans to the Federal Home Loan Banks.
23. In sum, after their acquisition by Guggenheim each of the Guggenheim Insurers was in short order rendered statutorily impaired, each having an essentially negative surplus (which means annuity holder funds were consequently impaired).
25. Flush with their annuity holders' cash, for example, Security Benefit Life and EquiTrust Life paid over $445 million in dividends to their respective Guggenheim parents, over $217 million in management fees to Guggenheim affiliates, and over $55 million in investment fees to Guggenheim affiliates. Additionally, beyond the $5.1 billion the Guggenheim Insurers paid to various affiliates within the Guggenheim family of companies in what appears to be largely unsecured promissory notes, they loaned almost $1 billion to Guggenheim business associates. Perhaps the most perverse aspect of Defendants' fraudulent scheme, however, is the acquisition of the Dodgers by Guggenheim, Walter, Boehly and Patton for $2.15 billion—$1.2 billion of which was financed by policyholder and annuity holder money from the Guggenheim Insurers.
30. Defendants' fraudulent scheme constitutes a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1962(c) and (d). Plaintiffs and the Class have been damaged by Defendants' pattern of racketeering activity because they were misled into purchasing annuities based on material misrepresentations of the financial strength of the issuing companies, annuity products that no reasonable person would purchase if not deceived. This suit is necessary to remedy the injury caused by Defendants' racketeering activity.
The Withdrawal of the 2014 Complaint
The 2014 complaint against Guggenheim was assigned immediately to District Judge Samuel Der-Yeghiayan. (In 2003 President George W. Bush nominated him and the Senate confirmed him.) On February 12, 2014, the day after the complaint was filed, one of the plaintiffs' attorneys filed a notice of voluntary dismissal. The notice contained no explanation. On February 13, the case was dismissed without prejudice.

General Observations
The preparation of the elaborate 2014 complaint against Guggenheim undoubtedly required a major expenditure of resources. I asked one of the plaintiffs' attorneys to explain why the complaint was withdrawn the day after it was filed, but he did not respond. Thus the reason for the abrupt withdrawal of the complaint is a mystery.

Available Material
I am offering a complimentary 172-page PDF consisting of the 105-page complaint against Guggenheim and 67 pages of exhibits. E-mail and ask for the Whitmore/Guggenheim complaint.

At the outset I mentioned No. 107 (6/30/15). I wrote about related matters in Nos. 44 (4/22/14), 66 (8/21/14), 71 (11/6/14), 72 (11/12/14), 73 (11/19/14), 93 (4/17/15), 94 (4/20/15), 99 (5/6/15), 100 (5/11/15), and 109 (7/13/15).


Monday, July 13, 2015

No. 109: Iowa's Frightening Accounting Rules—An Update

In Nos. 71, 72, and 73 posted November 6, 12, and 19, 2014, I discussed Iowa's frightening accounting rules. Iowa statutes allow for limited purpose subsidiaries (LPSs), which are reinsurance entities created by Iowa-domiciled insurance companies. Iowa allows the LPSs to treat as assets items that are not treated as assets under generally accepted accounting principles (GAAP) and under statutory accounting practices (SAP) adopted by the National Association of Insurance Commissioners. This update is based on May 2015 independent auditor reports on the Iowa LPSs as of December 31, 2014. The reports are filed only in Iowa, and I obtained them in accordance with Iowa's Open Records Law.

The LPSs and Their Auditors
The eight Iowa LPSs are Cape Verity I Inc. (CV I), Cape Verity II Inc. (CV II), Cape Verity III Inc. (CV III), MNL Reinsurance Company (MNL Re), Solberg Reinsurance Company (Solberg Re), Symetra Reinsurance Corporation (Symetra Re), TLIC Oakbrook Reinsurance Inc. (Oakbrook), and TLIC Riverwood Reinsurance Inc. (Riverwood). CV I, CV II, and CV III are subsidiaries of Accordia Life and Annuity Company. MNL Re and Solberg Re are subsidiaries of Midland National Life Insurance Company. Oakbrook and Riverwood are subsidiaries of Transamerica Life Insurance Company. Symetra Re is a subsidiary of Symetra Life Insurance Company. (See No. 44 posted April 22, 2014 for a discussion of Symetra's redomestication from Washington State to Iowa.)

The reports for seven of the Iowa LPSs were prepared in the Des Moines office of PricewaterhouseCoopers LLP (PwC). The other, for Symetra Re, was prepared in the Seattle office of Ernst & Young LLP.

The Dubious Assets
All eight reports include an adverse opinion with regard to GAAP, and most of them also identify differences between SAP and practices permitted by Iowa. The reports on MNL Re and Solberg Re do not state whether the LLC note guarantee and the irrevocable standby letters of credit are treated as assets under SAP.

The differences among GAAP, SAP, and Iowa relate to items that are not treated as assets under GAAP or SAP but are treated as assets by Iowa. Here is a list of the dubious assets as of December 31, 2014 (the parenthetical figures are to the nearest million):
CV I: Contingent note ($459) is not an asset under GAAP or SAP, but is treated as an asset by Iowa.
CV II: Parental guarantee ($688) by Global Atlantic Financial Group Ltd. is not an asset under GAAP or SAP, but is treated as an asset by Iowa.
CV III: Contingent note ($223) is not an asset under GAAP or SAP, but is treated as an asset by Iowa.
MNL Re: LLC note guarantee ($705) is not an asset under GAAP, but is treated as an asset by Iowa.
Solberg Re: Irrevocable standby letters of credit ($514) are not assets under GAAP but are treated as assets by Iowa.
Symetra Re: Variable funding note ($71) is not an asset under GAAP or SAP but is treated as an asset by Iowa.
Oakbrook: Credit linked note ($884) is not an asset under GAAP or SAP, but is treated as an asset by Iowa.
Riverwood: Parental guarantee ($1,930) by Aegon USA is not an asset under GAAP or SAP but is treated as an asset by Iowa.
General Observations
Several reports mention a high risk-based capital (RBC) ratio if the item in question is treated as an asset, but say the LPS would be below the RBC mandatory control level if the item is not treated as an asset. The fact is that the LPS would be insolvent if the item is not treated as an asset.

In some of the reports the dubious assets are described briefly, and in some they are not described. Also, documents associated with those assets are not available under Iowa's Open Records Law. The Iowa Insurance Division says each item in question is part of the LPS's "plan of operation," which is confidential under the Iowa LPS law and regulations. The secrecy associated with those assets is one reason why I describe the LPSs as part of a shell game that eventually will collapse, with dire consequences for policyholders and the life insurance business.

Available Material
As an example of the reports, I am offering a complimentary 48-page PDF of the PwC report on Riverwood. It refers to the $1.93 billion parental guarantee by Aegon USA. See especially PDF page numbers 3, 4, 5, 9, 12, 14, 16, 17, and 35. E-mail and ask for the PwC report on Riverwood dated May 29, 2015.


Monday, July 6, 2015

No. 108: Guardian Life's Rectification of an Unsuitable Rollover—An Update

In No. 104R posted June 22, 2015, I discussed an unsuitable rollover of a client's retirement accumulation at College Retirement Equities Fund (CREF) into an individual retirement account containing a variable annuity issued by a subsidiary of Guardian Life Insurance Company of America. Guardian initially rejected the client's complaint, but later resolved the complaint to the client's satisfaction. This is an update on the case.

The client was Beatrice (not her real name). She was aged 78 at the time of the rollover. Edgar Montenegro (CRD# 4768006), a registered representative of Park Avenue Securities, a Guardian subsidiary, sold Beatrice on the idea of using $200,000 of her $325,000 CREF accumulation to buy the annuity from Guardian Insurance & Annuity Company, another Guardian subsidiary. However, through what has been referred to as "a mistake in the purchase paperwork," the entire $325,000 accumulation was rolled into the annuity. Consequently Beatrice had to take withdrawals from the annuity to meet required minimum distributions, thereby forfeiting an enhanced lifetime guarantee. The guarantee was an annuity benefit for which she had paid.

The Financial Industry Regulatory Authority (FINRA) shows "BrokerCheck Reports" on its website ( The BrokerCheck report on Montenegro originally said the complaint was denied. Although reports do not identify cases by the names of clients, in this instance the case was identifiable from the facts shown in the report.

The Updated BrokerCheck Report
I saw the updated BrokerCheck report on June 30. It shows a "status" of "settled," a "status date" of June 10, 2015, a "settlement amount" of $342,902.18, and an "individual contribution amount" [presumably the amount contributed to the settlement by Montenegro] of zero. The "broker statement" in the updated report reads:
A firm affiliate [presumably Guardian Insurance & Annuity Company] entered into a confidential settlement with the customer without the firm [presumably Park Avenue Securities] or the firm affiliate admitting liability.
The "employment history" section of the updated BrokerCheck report says Montenegro is employed by Park Avenue Securities from June 2011 to "Present." However, the report contains this note:
Please note that the broker is required to provide this information only while registered with FINRA or a national securities exchange and the information is not updated via Form U4 after the broker ceases to be registered. Therefore, an employment end date of "Present" may not reflect the broker's current employment status.
I asked Jeanette Volpi, a Guardian spokeswoman, whether Montenegro is currently employed by Park Avenue Securities. In her prompt response, she said Montenegro is currently employed by Park Avenue Securities.

General Observations
Guardian's settlement with Beatrice could have been for the rollover amount of $325,000 without a surrender charge. However, the settlement amount shown in the updated BrokerCheck report suggests that the settlement was for the full current value of Beatrice's account without a surrender charge. Although it is regrettable that Guardian initially rejected Beatrice's complaint, I am favorably impressed by, and commend the company for, the manner in which the company handled the complaint in the end.