Thursday, March 31, 2016

No. 153: Vermont's Frightening Accounting Rules and the Secrecy Surrounding Them

Primerica Life Insurance Company is domiciled for regulatory purposes in Massachusetts and headquartered in Georgia. It is a wholly owned operating subsidiary of Primerica, Inc. (NYSE:PRI). The Primerica organization is the successor to the A. L. Williams organization (ALW). My first article about ALW was in the April 1981 issue of The Insurance Forum, and later I wrote 50 other articles in the Forum about ALW.

Recently I reviewed the two most recent 10-K annual reports filed by Primerica, Inc. with the Securities and Exchange Commission (SEC). The reports illustrate the contrast between the strong disclosure requirements imposed by federal securities regulators and the weak disclosure requirements imposed by state insurance regulators. Here I describe information from various reports about the accounting practices of one of Primerica Life's captive reinsurance companies.

Peach Re
Peach Re, Inc., which is wholly owned by Primerica Life, is a special purpose captive reinsurance company domiciled in Vermont. Thus Peach Re is regulated by the Vermont Department of Financial Regulation. Primerica, Inc. refers to it in 10-K reports as the "Vermont DOI," but I refer to it as the "Vermont DFR."

When Primerica Life formed Peach Re in 2012, the Vermont DFR issued a "licensing order" that explicitly permits Peach Re to treat a letter of credit (LOC) as an admitted asset. Thus Peach Re accepts reserve liabilities transferred to it from its parent, Primerica Life, and the Vermont DFR permits Peach Re to offset those liabilities in large part with an LOC that Peach Re treats as an admitted asset on its balance sheet.

It is important to understand that accounting rules adopted by the National Association of Insurance Commissioners (NAIC) prohibit companies from treating LOCs as admitted assets. The Vermont DFR, however, deviates from those accounting rules by permitting captive reinsurance companies domiciled in Vermont to treat LOCs as admitted assets. Primerica says in its 10-K reports that this accounting practice permitted by the Vermont DFR "was critical to the organization and operational plans of Peach Re."

Primerica says in its 10-K reports that Peach Re's statutory financial statements "are prepared in accordance with statutory accounting practices prescribed or permitted by the NAIC and the Vermont DOI." The word "and" implies that the practices are permitted by both the NAIC and Vermont. That implication is false because the NAIC prohibits treating LOCs as admitted assets. The problem could be avoided by saying the practices are permitted by the NAIC "or" the Vermont DFR.

Peach Re's LOC
The 10-K reports provide information about Peach Re's LOC. Effective March 31, 2012, Peach Re entered into an agreement with Deutsche Bank. The purpose of the agreement was to support reserve liabilities associated with level premium term life insurance policies that Primerica Life ceded to Peach Re through reinsurance. Primerica Life has issued many such term life policies, which are subject to enhanced reserve liability requirements imposed by state insurance regulators.

Under the agreement, Deutsche issued an LOC in the initial amount of $450 million with a term of about 14 years. The LOC amount may be increased to a maximum of about $507 million. The LOC is for the benefit of Primerica Life. If Primerica Life should draw from the LOC, Peach Re would be obligated, with limitations, to reimburse Deutsche, with interest. Peach Re collateralized its obligations to Deutsche by granting Deutsche a security interest in all of Peach Re's assets, with exceptions.

Peach Re's LOC and Primerica's Risk-Based Capital
An insurance company's risk-based capital (RBC) ratio is total adjusted capital divided by company action level RBC, with the quotient expressed as a percentage. At the end of 2015, Primerica Life's total adjusted capital was $576.8 million, company action level RBC was $127.3 million, and the RBC ratio was 453 percent ($576.8 divided by $127.3).

Because Peach Re is a wholly owned subsidiary of Primerica Life, an admitted asset of Peach Re is reflected directly in the admitted assets and total adjusted capital of Primerica Life. The LOC amount at the end of 2015 was $455.7 million. Therefore, if Peach Re was not permitted to treat the LOC as an admitted asset, the total adjusted capital of Primerica Life would have been $121.1 million ($576.8 minus $455.7), and the RBC ratio would have been 95 percent ($121.1 divided by $127.3), or 358 percentage points below the RBC ratio including the LOC amount (453 minus 95).

The impact of the LOC on Primerica Life's RBC data was more severe in 2014, when the LOC amount was $507 million. Primerica Life's total adjusted capital was $515.4 million, company action level RBC was $127.6 million, and the RBC ratio was 404 percent ($515.4 divided by $127.6). Without the $507 million LOC amount, Primerica Life's total adjusted capital would have been only $8.4 million ($515.4 minus $507). Total adjusted capital of $8.4 million would have been far below all the RBC levels, including mandatory control level RBC.

Peach Re's LOC and Primerica's Financial Strength Ratings
Primerica Life has high financial strength ratings: A+ (superior) from A. M. Best, A2 (upper medium grade) from Moody's Investors Service, and AA– (very strong) from Standard & Poor's. All three ratings have a stable outlook. It is not clear to what extent the ratings take into account the questionable nature of the LOC as an admitted asset.

Regulatory Triggers
The 10-K reports mention "minimum statutory capital and surplus" that might "trigger a regulatory action event" at Primerica Life. For example, the 2014 10-K report mentions a trigger of $79.3 million. The 2015 10-K report alludes to the subject, but does not mention a number.

In an effort to understand precisely what "regulatory action event" is referred to in the 10-K reports, I calculated the RBC levels for 2014 from data shown in Primerica Life's statutory statement. For example, regulatory action level RBC was $95.7 million, and authorized control level RBC was $63.8 million. Thus the trigger of $79.3 million mentioned in the 2014 10-K report was about halfway between regulatory action level RBC and authorized control level RBC. When this blog item is posted, I will ask Primerica, Inc. how it calculates the triggers.

Consequences of the Triggers
In its 10-K reports, Primerica, Inc. mentions the significance of the regulatory triggers discussed above. Here are comments in the 2014 10-K report and the less informative comments in the 2015 10-K report:

  • [2014 10-K] As of December 31, 2014, if Peach Re had not been permitted to include the letter of credit as an admitted asset, Primerica Life would have been below the minimum statutory capital and surplus level of approximately $79.3 million that triggers a regulatory action event. However, if Peach Re had not been permitted to include the letter of credit as an admitted asset in its statutory capital and surplus, Primerica Life would not have paid the ordinary dividends to the Parent Company that were paid in 2014.
  • [2015 10-K] As of December 31, 2015, even if Peach Re had not been permitted to include the letter of credit as an admitted asset, Primerica Life would not have been below the minimum statutory capital and surplus level that triggers a regulatory action event. [Blogger's note: This assertion is questionable. As I mentioned earlier, Primerica Life's RBC ratio would have been 95 percent. That figure is between company action level RBC and regulatory action level RBC. The situation would have required the company to file an RBC report with its domiciliary regulator, and possibly take further action to deal with the low RBC ratio.]

The Capital Maintenance Agreement
The 10-K reports mention a "capital maintenance agreement" with Peach Re. It requires Primerica, Inc. to make capital contributions to Peach Re to assure that Peach Re's regulatory account as defined in the reinsurance with Primerica Life will not be less than $20 million. The regulatory account will only be used to satisfy obligations under the reinsurance with Primerica Life after all other assets have been used, including the LOC issued by Deutsche.

My Public Records Request to Vermont
On March 21, 2016, I sent a public records request to Commissioner Susan L. Donegan of the Vermont DFR. I quoted from the 2015 10-K report of Primerica, Inc. and requested copies of four items: the licensing order, the LOC, the capital maintenance agreement, and the 2015 statutory financial statement of Peach Re. I asked, if the request is denied in whole or in part, that DFR cite the statutes or regulations on which the denial is based. On March 22, a DFR staff person said:
By statute the information you have requested is confidential, however, we would be happy to pass along your request to the appropriate management company, who would be more likely to answer your questions. I won't take further action unless you authorize.
I responded by repeating my request for the relevant statutes or regulations. I also said I would prefer to contact the appropriate person at the management company directly, and requested contact information for that person. On March 24, David F. Provost, DFR's deputy commissioner for captive insurance, said:
The information you requested in your letter of March 21, 2016 contains information proprietary to the operations of Primerica and is held confidential pursuant to 8 V.S.A. §§ 6002 and 6007 and is exempt from public records request pursuant to 1 V.S.A. §317(c). Pursuant to 1 V.S.A. §318(a)(2), you have a right to appeal any determination regarding exemptions under 1 V.S.A. §317(c) to Commissioner Donegan.
Deputy Commissioner Provost also gave me contact information for the appropriate person at the management company: Edward F. Precourt, senior vice president of Marsh Management Services, Inc. in Burlington. I wrote to him but have not yet received a reply.

My Public Records Request to Massachusetts
On March 21, 2016, I sent a public records request to the Massachusetts Division of Insurance (MDOI), which is Primerica Life's domiciliary regulator. I mentioned the comment in the 2015 10-K report of Primerica Life's parent that Peach Re's statement is filed with Primerica Life's statement. On March 29, I received from the MDOI an 84-page PDF containing Peach Re's 2015 statutory financial statement. Some information as of December 31, 2015 is shown here. Dollar figures are to the nearest tenth of a million, except where billions are indicated.

The balance sheet shows that total net admitted assets were $582.6, of which the LOC amount was $455.7. Most of the remainder was $44.4 of bonds and $51.2 of funds held by or deposited with reinsured companies. Total liabilities were $506.7, of which $498.9 was aggregate reserve for life contracts. Surplus was $75.9.

The summary of operations shows total income was $107.3, of which $104.7 was premiums and annuity considerations for life and accident and health contracts. Total expenses were $50.9, of which $32.0 were death benefits. Net income was $55.6. Dividends to stockholders were minus $60.4. Surplus adjustment for letter of credit was minus $51.3.

The notes to the financial statements include a discussion of the LOC. Among other comments, the notes say:
The LOC is not included as a risk-based asset in our risk-based capital calculation. As of December 31, 2015, had we not been permitted to include the LOC as an admitted asset, our NAIC risk-based capital would have been below the NAIC mandatory control level.
The notes also indicate that the surplus on the Vermont basis was $75.9, and on the NAIC basis was minus $379.8 ($75.9 minus $455.7). In 2015 Peach Re paid a dividend of $60.4 to Primerica Life with the approval of the Vermont DFR.

The Atlanta office of KPMG LLP conducts the annual audit. Daniel B. Settle, FSA, MAAA, executive vice president and chief actuary of Primerica Life and Peach Re, provides the actuarial opinion.

From the statement I derived RBC data for the end of 2015. Total adjusted capital was $76.1, company action level RBC was $10.5, and the RBC ratio was 725 percent ($76.1 divided by $10.5). The exhibit of reinsurance assumed shows that Peach Re assumed $498.9 of reserve liabilities from Primerica Life on policies whose total amount in force was $11.8 billion.

General Observations
No justification exists for the secrecy surrounding admitted assets that captive reinsurance companies carry on their statutory balance sheets. I refer to LOCs, parental guarantees, contingent notes, variable funding notes, credit linked notes, note guarantees, and other questionable financial instruments. Nor is there justification for the secrecy surrounding licensing orders, capital maintenance agreements, statutory financial statements of captive reinsurance companies, valuation actuary reports, and independent auditor reports. The response by the MDOI to my request for Peach Re's 2015 statutory financial statement clearly demonstrates the lack of justification for secrecy surrounding such statements.

The fact that statutes and regulations shroud such documents in secrecy does not justify the secrecy. Statutes are drafted by those who want documents kept secret, and friendly state legislators enact the statutes without public input. Regulations are drafted by those who want documents kept secret, and friendly state insurance regulators adopt the regulations without public input. In short, at no time during the process of enacting the statutes and adopting the regulations are those desiring secrecy required to provide the public with justification for the secrecy.

I challenge those who favor secrecy in this area to explain why they favor secrecy. I plan to report on the responses to this challenge.

Available Material
I am making available a complimentary 19-page PDF containing selected excerpts from the 2014 and 2015 10-K reports filed with the SEC by Primerica, Inc., RBC data derived from the 2015 statutory financial statement filed with state insurance regulators by Primerica Life, and selected pages from the 2015 statutory financial statement filed with the MDOI by Peach Re. Email and ask for the March 30, 2016 excerpts from Primerica filings.


Friday, March 25, 2016

No. 152: Captive Reinsurers—A Brief Released by the Office of Financial Research in the U.S. Department of the Treasury

In No. 135 (posted December 28, 2015), I discussed the first Financial Stability Report issued by the Office of Financial Research (OFR), an independent bureau within the U.S. Department of the Treasury. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the OFR, which issues periodic reports. The OFR also issues "briefs" on various topics.

Brief No. 16-02
On March 17, 2016, the OFR issued Brief No. 16-02 entitled "Mind the Gaps: What Do New Disclosures Tell Us About Life Insurers' Use of Off-Balance-Sheet Captives?" The authors of the brief are four members of the OFR staff: Jill Cetina, Arthur Fliegelman, Jonathan Glicoes, and Ruth Leung. Here is the abstract of the ten-page brief:
Some U.S. life insurance companies use wholly owned captive reinsurers to transfer risk and reduce regulatory requirements. Since 2002, such transfers have increased rapidly, and they now exceed $200 billion in reserve credit. This brief discusses recent policy measures and the data that insurers began reporting in 2015 about their captive transactions. Publicly available data are insufficient to analyze fully the risks from captives and the impact on insurers' financial condition. Regulators have revised reporting standards to improve the public data, but gaps remain. Because life insurers are a material part of the financial system, these gaps may mask financial stability vulnerabilities.
The authors of the brief explain that the ceding of reserve liabilities to captive reinsurers to reduce the liabilities of the parent ceding companies began about 15 years ago, after state insurance regulators had increased reserve requirements for term life policies and for universal life policies with secondary guarantees (ULSG). The problem is that the captive reinsurers are permitted by some state insurance regulators to treat as admitted assets what the authors of the brief refer to as "nontraditional" items such as letters of credit and parental guarantees, despite the fact that accounting rules adopted by the National Association of Insurance Commissioners do not permit such items to be treated as admitted assets.

Some of the Data
The brief contains a considerable amount of information based on year-end 2014 data. (Year-end 2015 data were not available when the brief was being prepared.) The 2014 data show that the use of captives by U.S. life insurers totaled $213.4 billion in reserve credit. The authors of the brief point out that, because of exemptions, ceding insurers disclosed the quality of the assets for only 55 percent of the assets of term life and ULSG captives. The authors of the brief also point out that, for the 2014 data, there were no requirements for disclosure of the impact of the use of captives on the risk-based capital ratios of the ceding insurers.

General Observations
This is not the first time OFR has expressed concern about captive reinsurers. Earlier expressions of concern were in OFR's 2014 Annual Report and 2015 Financial Stability Report. I think the recent OFR brief should be studied carefully by persons interested in the welfare of life insurance companies and policyholders.

Perhaps the most detailed official expression of concern about captive reinsurers was a 24-page report entitled "Shining a Light on Shadow Insurance." The report was issued in June 2013 by the New York Department of Financial Services (NYDFS) during the tenure of Benjamin M. Lawsky, the former NYDFS superintendent.

Today, almost three years after issuance of the NYDFS report, we still have very little disclosure of the details of captive reinsurance transactions. In my view, the central problem is the secrecy surrounding what the authors of the OFR brief refer to as "nontraditional" admitted assets carried on the balance sheets of captive reinsurers. I think of those assets as "toxic," and I have referred to their use as a "shell game" that would collapse if the details of those assets were clearly disclosed.

Available Material
I am making available two complimentary PDFs. One is the recent ten-page OFR brief. The other is the 24-page NYDFS report released in 2013. Email and ask for the March 2016 OFR brief and/or the June 2013 NYDFS report on shadow insurance.


Friday, March 18, 2016

No. 151: Life Partners—Trustee Moran Files 17 Adversary Proceedings in the Bankruptcy Case

H. Thomas Moran II is the chapter 11 trustee in the Life Partners Holdings Inc. (LPHI) bankruptcy case. On March 5, 2016, as I reported in No. 150 (posted March 16), Moran filed an extensive report describing the results of his investigation of the allegedly fraudulent business conduct that preceded the January 2015 bankruptcy filing. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

Adversary Proceedings
During the period from March 11 to March 13, a week after filing his extensive report, Moran filed 17 adversary proceedings. As I explained in Nos. 117 and 126 (posted September 21 and November 12, 2015), an "adversary proceeding" is a lawsuit filed within a bankruptcy case and assigned its own case number. In the above 2015 posts, I mentioned a pair of adversary proceedings that Moran had filed earlier: one against Brian D. Pardo, former chief executive officer and controlling shareholder of LPHI, and one against former licensees.

The 17 new adversary proceedings include several complaints against former licensees, a complaint against the former outside directors of LPHI, a complaint against former LPHI life expectancy estimator Dr. Donald T. Cassidy, a complaint against former shareholders who received dividends from LPHI, a complaint against former LPHI employees, several complaints against transferees who received funds from LPHI, and several complaints against local and national charities that received donations from Pardo. Here is a list, in numerical order, showing case numbers, abbreviated case names, and types of defendants:
16-04022: Moran v. A. Chris Ostler (Licensees)
16-04024: Moran v. Happy Endings Dog Rescue (Charity)
16-04025: Moran v. Jonathan Brooks (Licensee)
16-04026: Moran v. Argentus Securities LLC (Licensees)
16-04027: Moran v. ESP Communications Inc. (Transferee)
16-04028: Moran v. American Heart Association (Charities)
16-04029: Moran v. Funds for Life Ministries (Charities)
16-04030: Moran v. Andrea Atwell (Employees)
16-04031: Moran v. Blanc & Otus (Transferees)
16-04032: Moran v. Averitt & Associates (Transferees)
16-04033: Moran v. Donald T. Cassidy (Life Expectancy Estimator)
16-04034: Moran v. Robin Rock Ltd. (
16-04035: Moran v. 72 Vest Level Three LLC (Licensees)
16-04036: Moran v. James Alexander (Shareholders)
16-04037: Moran v. Garnet F. Coleman (Transferees)
16-04038: Moran v. A Roger O. Whitley Group Inc. (Licensees)
16-04039: Moran v. Tad Ballantyne (Outside Directors)
Complaint against Ballantyne
As an example of the 17 complaints, I selected the complaint against the outside members of LPHI's board of directors: Tad M. Ballantyne (Racine, WI), Fred Dewald (Woodway, TX), and Harold E. Rafuse (Crawford, TX). The "Factual Background" section describes the procedural history of the bankruptcy case, the overall scheme to defraud, and LPHI's insolvency. That section also includes a 23-page, 19-part description of the involvement of the three outside directors.

The complaint contains 12 counts: one count of breaches of fiduciary duty, three counts of violations of securities laws, two counts of actual fraudulent transfers, two counts of constructive fraudulent transfers, one count of preferences, one count of unjust enrichment and constructive trust, one count of disallowance of defendants' claims, and one count of equitable subordination. The concluding section of the complaint reads:
WHEREFORE, the Plaintiffs request that the Outside Directors each be ordered to return all funds received from Life Partners to the Debtor's Estate as a result of the conduct described herein, and that judgment be entered against them and in favor of Plaintiffs for the total amount transferred to Defendants. Plaintiffs request actual and consequential damages as determined at a trial on the merits, as well as exemplary damages where warranted. In the case that the funds were spent to acquire any real or personal property, Plaintiffs request that a constructive trust be imposed upon the property, and an order that such property must immediately be turned over to Plaintiffs. Plaintiffs ask for pre-judgment and post-judgment interest at the highest rates allowed by law. Further, Plaintiffs request recovery of their attorneys' fees and costs, and that they be granted any other relief, both special and general, to which they may be justly entitled.
General Observations
Through these adversary proceedings, Moran is attempting to claw back as much money as possible for the benefit of those victimized by allegedly fraudulent business conduct over the years, especially for the benefit of investors in fractional interests in life settlements marketed by LPHI. He has cast a wide net; however, to what extent he will succeed in the effort remains to be seen. I plan to continue watching the progress of the case and reporting significant developments.

Available Material
I am making available as a complimentary 46-page PDF the complaint against the three former outside members of LPHI's board of directors. Email and ask for the March 2016 Moran complaint against Ballantyne.


Wednesday, March 16, 2016

No. 150: Life Partners—The Trustee's Report on Allegedly Fraudulent Business Conduct Preceding the Bankruptcy Filing

Life Partners Holdings, Inc. (LPHI), led by controlling shareholder and chief executive officer Brian D. Pardo, participated for many years in the secondary market for life insurance. On January 20, 2015, the Waco, Texas-based company filed for protection under chapter 11 of the federal bankruptcy law. On March 19, 2015, the bankruptcy court judge approved the appointment of H. Thomas Moran II as chapter 11 trustee. On May 20, 2015, Moran reported the preliminary results of his investigation of the allegedly fraudulent business conduct that preceded LPHI's bankruptcy filing. On March 5, 2016, Moran filed a follow-up report on the results of his investigation. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289, Document No. 1584.)

The Recent Moran Report
The text of the recent Moran report consists of 89 pages. The report has ten attachments showing 158 exhibits and covering 2,048 pages. The exhibits include internal emails, deposition transcripts, and other documents that are now in the public domain. Among the transcripts, for example, are excerpts from depositions given by Pardo in April 2011 and May 2015, by longtime LPHI executive R. Scott Peden in April 2011, and by longtime LPHI life expectancy estimator Dr. Donald T. Cassidy in September 2012. The attorneys involved in the preparation of the report were David M. Bennett, Richard Roper, Katharine Battaia Clark, and Jennifer R. Eklund of the Dallas firm of Thompson & Knight LLP. The concluding section of the text of the report reads:
Life Partners, Pardo, and others acting in concert, executed a wide-ranging, long-term scheme to defraud Investors, which (as described in detail above) occurred in a number of ways, including but not limited to the following:
  • Use of unreasonably short LEs [life expectancies] in the sale of its so-called "fractional" investments;
  • Material misrepresentation of the returns Investors could expect;
  • Misrepresentations regarding whether policies had lapsed and resale of lapsed positions;
  • Charging massive, undisclosed fees and commissions, the total amount of which, in many cases, exceeded the purchase price of the policies themselves;
  • Repeated misrepresentation of Life Partners' business practices in order to maneuver around securities regulatory regimes;
  • Egregious and continuous self dealing by insiders and their accomplices;
  • Failure to disclose cash surrender value;
  • Forcing Investors to abandon contract positions, many of which were then resold for personal gain;
  • Systematic financial mismanagement, including improper payment of dividends;
  • Faulty and inconsistent record keeping, including with respect to the escrow companies and purported "trusts";
  • Commingling and unauthorized use of Investor monies;
  • The offer and sale of unregistered securities; and
  • Implying the investment structure was a permissible investment for an IRA [individual retirement account], and failing to disclose the risks if it was not.
In 2004, in an attempt to sell Life Partners and its underwriting compared to others in the business, Brian Pardo stated: "What you have to do is explain that there is never a good defense against fraud." Ironically, Pardo and his company committed the same violations of trust he evidently ascribed to others in the business, misleading his Investors at every turn and seeking to profit himself and his family above all else. As a result of Pardo's fraud, thousands of individual Investors lost hundreds of millions of dollars.
And when the scheme as originally conceived and implemented began to collapse, they simply morphed their conduct and found new ways to reap a profit on the backs of their Investors. One fraud was layered upon another.
The financial devastation as of the bankruptcy petition date to the Investors was massive and continuing to grow. It will be decades before all of the policies in the Life Partners portfolio mature, and tens of millions of dollars in additional premiums will have to be expended in that time to preserve those policies. The Life Partners fraud deserves a place in Texas history as one of the largest and longest-standing fraud schemes ever perpetrated in this State. The scheme has already cost thousands of innocent Investors hundreds of millions of dollars, which in many cases represented a material portion of, or their entire, life savings.
General Observations
Earlier documents filed by the Securities and Exchange Commission (SEC), by the federal district court judge who handled the recent SEC lawsuit against Life Partners, and by Moran also contained criticism of the pre-bankruptcy business conduct of Life Partners, Pardo, and others. The recent Moran report, however, is more powerful. The text is carefully written, the language is strong, and the attachments provide a huge amount of material that had not been easily available. I think the report is devastating for Life Partners and Pardo.

Most of the so-called responses by Pardo and others to the criticism leveled at them have been ad hominem attacks on Moran, on the SEC attorneys, and on the federal district court judge. Stated another way, Pardo and others have criticized those individuals personally rather than addressing the concerns expressed. I think the Moran report undercuts such personal attacks.

Available Material
I am making available a complimentary 96-page PDF. It contains the 89-page text of the Moran report and a 7-page list that briefly identifies the 158 exhibits included in the attachments to the report. Email and ask for the March 2016 Moran report package.


Monday, March 14, 2016

No. 149: Phony Life Insurance Policies Cause Federal Criminal Charges against Five Defendants

On December 16, 2014, the U.S. Attorney in the Northern District of California (San Francisco) filed under seal a grand jury indictment against five individuals in a case involving phony life insurance policies. The indictment was unsealed the next day, after arrest warrants had been executed. The case was assigned to U.S. Senior District Judge Susan Illston, a 1995 Clinton appointee who acquired senior status in 2013. (See U.S. v. Halali, U.S. District Court, Northern District of California, Case No. 3:14-cr-627.)

The Indictment
The defendants are Behnam Halali, Ernesto Magat, Kraig Jilge, Karen Gagarin, and Alomkone (also known as Alex) Soundara. Each defendant was charged with one count of conspiracy to commit wire fraud, 14 counts of wire fraud, and one count of aggravated identity theft. Three of the defendants were also charged with money laundering: three counts against Magat, two counts against Jilge, and one count against Halali. The indictment also mentions unnamed co-conspirators.

The defendants worked for several years as independent contractors selling life insurance for Texas-based American Income Life Insurance Company (AIL). They resigned or were fired in 2012.

The indictment alleges that the defendants and their co-conspirators engaged in wrongdoing that caused AIL to pay more than $2.5 million in commissions and bonuses. The indictment includes a forfeiture allegation that would require the defendants, upon conviction, to forfeit property derived from their wrongdoing. The following list is a paraphrase of the allegations against the defendants and their co-conspirators:
  • Paid recruiters to find individuals willing to take a medical examination in exchange for about $100.
  • Took personal information and submitted applications for life insurance, in many cases without the individual's knowledge.
  • Paid individuals to participate in a fictitious survey of a medical examination company, and then took the personal information and submitted applications for life insurance, in many cases without the individual's knowledge.
  • Solicited family and friends to submit applications for life insurance, and told them they would receive free life insurance for several months, after which the policies would be canceled.
  • In some cases created fraudulent drivers' licenses so they could take medical examinations purporting to be the individuals in the applications.
  • Opened hundreds of bank accounts from which to pay premiums, and typically paid one to four months of premiums before allowing the policies to lapse.
  • Purchased prepaid telephones and Google Voice telephone numbers that were listed on the applications.
  • Returned verification calls to AIL purporting to be the applicants, and confirmed the information in the applications.
  • Listed addresses of gas stations and apartment complexes on many applications in an effort to avoid detection, and fabricated the names of beneficiaries of the policies.
  • Exchanged emails in which they tracked telephone numbers and bank accounts associated with the policies.
Other Developments
The defendants are free on bond. Halali, Magat, Jilge, and Soundara are represented by four different private attorneys. Gagarin is represented by a federal pubic defender.

On December 21, 2015, Magat filed a "motion to dismiss counts of the indictment for insufficiency." On February 18, 2016, Gagarin, Halali, and Jilge filed motions for joinder in Magat's motion.

On February 19, Judge Illston issued an order denying Magat's motion. On February 22, she issued an order scheduling a jury trial for January 30, 2017.

General Observations
Life insurance performs important social functions, not the least of which is providing financial protection for widows and orphans. Yet, as it is often said, life insurance is sold rather than bought. For that reason, it is necessary to pay commissions to agents who perform the many functions associated with the sale of life insurance, including what I have called the antiprocrastination function. It is regrettable when agents, motivated by the lure of those commissions, engage in unacceptable and even allegedly criminal behavior in an effort to enhance their sales results.

I believe that the Halali case will not go to trial, and that the defendants will enter into plea agreements with the federal prosecutors. Nonetheless, I think it is appropriate to discuss the case because of the brazen nature of the defendants' alleged criminal behavior.

Available Material
I am offering a complimentary 27-page PDF containing the indictment and Judge Illston's order denying Magat's motion. Email and ask for the package relating to the Halali case.


Friday, March 11, 2016

No. 148: AIG's War against Coventry First and the Buerger Family Ends with a Confidential Peace Treaty

In No. 67 (posted September 16, 2014), I wrote about a lawsuit that Lavastone Capital, an affiliate of American International Group (AIG), filed on September 5, 2014, against Coventry First, an intermediary in the secondary market for life insurance. The complaint consisted of a 151-page text and an 89-page appendix. Among the defendants were Coventry; several affiliates of Coventry; Alan Buerger, chief executive officer of Coventry; and several members of Buerger's family. I expressed the belief that the lawsuit was an effort to destroy Coventry and the Buerger family. (Lavastone v. Coventry, U.S. District Court, Southern District of New York, Case No. 1:14-cv-7139.)

The Trial
In No. 114 (posted August 31, 2015), I reported that a bench (non-jury) trial began on August 27, 2015 before U.S. District Judge Jed S. Rakoff. The 23-day trial ended on October 26.

The Settlement
On February 29, 2016, before Judge Rakoff handed down his decision, AIG and Coventry jointly filed in court a one-sentence "stipulation of dismissal with prejudice" concerning the settlement. The stipulation, on which Judge Rakoff immediately signed off, reads:
IT IS HEREBY STIPULATED AND AGREED, between and among the undersigned parties to this action, pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii), by and through their respective counsel, that this action, and all claims and counterclaims asserted therein, shall be dismissed with prejudice [permanently] pursuant to the terms of the parties' confidential settlement agreement.
The Joint Statement
On the same day, AIG and Coventry issued a three-sentence joint statement entitled "AIG and Coventry First Settle Dispute." It reads:
Lavastone Capital LLC, an affiliate of American International Group, Inc. (NYSE:AIG), and Coventry First LLC today announced that they have entered into an agreement to resolve their disputes. Among the terms of the confidential agreement, Lavastone will be able to transfer Coventry's servicing of AIG's life settlements portfolio to another party, and Lavastone will be able to freely market or sell policies that were originated by Coventry. Lavastone and Coventry are pleased to have achieved a satisfactory resolution of their dispute.
Media Coverage
On the same day, a 577-word article by reporter Leslie Scism appeared online in The Wall Street Journal, but the article did not appear in the print version of the newspaper. The headline reads: "AIG Says It Settled Legal Dispute Over 'Life Settlements'; End of Coventry First Dispute May Pave Way for Insurer to Sell $3.6 Billion Portfolio." The opening sentence reads: "American International Group Inc. said it has resolved a legal dispute with a firm that helped it amass a large investment portfolio of 'life settlements' in the 2000s."

I found nothing about the settlement in The New York Times. However, Reuters carried short articles, and the settlement was mentioned widely in the insurance trade press.

General Observations
The case had not been going well for Coventry. Judge Rakoff had denied Coventry's motion to dismiss the case. He had also dismissed a few of AIG's charges, but had left many to be resolved at trial. He had also ruled against Coventry on AIG's breach-of-contract charge, but had left the amount of damages to be determined at trial.

I expressed the opinion that the case was one of the most important in the history of the secondary market for life insurance. I think Coventry was under intense pressure to reach a settlement, because the amount it stood to lose could have been staggering and could have forced Coventry into bankruptcy. Because of the confidential nature of the agreement, we may never know the financial dimensions of the settlement.

Available Material
I am not offering any additional material. However, persons interested in details of the case may still obtain the complimentary packages offered in Nos. 67 and 114, which are mentioned at the beginning of this post.


Monday, March 7, 2016

No. 147: Medical Education of Resident Physicians—A Shocking Scandal Relating to a Pair of Clinical Trials

Public Citizen is a public interest organization that Ralph Nader and Dr. Sidney Wolfe founded in 1971. For many years, Dr. Wolfe headed Health Research Group (HRG), a unit of Public Citizen. I have long admired the important service HRG renders to the public.

HRG Press Release
On November 19, 2015, HRG issued a 19-paragraph press release entitled "Unethical Trials Force Hundreds of Resident Doctors Nationwide to Work Dangerously Long Shifts, Placing Them and Their Patients at Risk of Serious Harm," and subtitled "Public Citizen and American Medical Student Association [AMSA] Call on Federal Regulators to Investigate and Immediately Stop Research, Urge Accrediting Body to Reinstate Work-Hour Limits for All Resident Doctors." The fifth paragraph of the press release reads:
The primary goal of the two trials is to determine whether the rates of death and serious complications for the patients unwittingly enrolled in the trials at the hospitals where first-year residents are forced to work significantly longer work shifts (28 or more hours) than permitted under current ACGME [Accreditation Council for Graduate Medical Education] rules (the experimental group) are higher than the rates of death and serious complications in patients enrolled at hospitals where residents' work shifts comply with the ACGME limit of 16 consecutive hours (the control group). The investigators have not obtained the voluntary informed consent of the medical residents or their patients.
On the same day, HRG and AMSA sent a four-page letter to ACGME. They sent copies of the letter to senior officials in the U.S. Department of Health and Human Services (DHHS).  They also sent the DHHS officials lengthy letters elaborating on the concerns. HRG and AMSA strongly urged ACGME "to immediately rescind the organization's waivers of most of its 2011 duty-hour standards for internal medicine and general surgery training programs randomly assigned to the experimental groups" in one ongoing trial and one recently completed trial. The final substantive paragraph of the HRG/AMSA letter reads:
In closing, it is imperative that the ACGME immediately rescind the waivers of most of its 2011 duty-hour standards for the internal medicine and general surgery residency training programs randomly assigned to the experimental groups in the [two trials]. Furthermore, in light of all the concerns highlighted above and in our letters to [DHHS], an independent body needs to investigate the process that allowed these inappropriate waivers to be granted in the first place, in the face of the strong evidence of resident and patient harm that caused ACGME to issue the duty-hour standards in 2011.
On December 7, 2015, ACGME sent a nine-paragraph letter to HRG and AMSA. The first two and last two paragraphs of the letter read:
This letter is in response to your November 19, 2015 correspondence regarding the [two] trials. The [ACGME] is committed to ongoing assessments of our requirements based on the most up-to-date evidence to foster a safe learning environment serving the best interests of patients, residents, and fellows.
The ACGME's support of the two large, multicenter clinical trials to investigate the impact of duty hour standards on patient safety and resident education will be elements of the ACGME's scheduled five-year review of whether the Institutional and Program Requirements are achieving their intended goals to foster a safe learning environment.
The ACGME was not involved in the design and implementation of the [two] trials beyond the waiver requirements, and will not be involved in the interpretation of their results. Nevertheless, the ACGME understands that both duty hour study protocols were reviewed by the Institutional Review Board (IRB) of the institution affiliated with each principal investigator. The ACGME also understands that the [second] trial was funded by the National Institutes of Health (NIH).
The ACGME is committed to the highest quality of patient care and resident/fellow learning. Wherever possible, the ACGME will continue to support and facilitate well designed, IRB-reviewed, multicenter educational trials with aims to scientifically test elements of the educational process that have the potential to enhance the quality and effectiveness of graduate medical education programs, and the safety and quality of care rendered to our patients today, and tomorrow.
HRG/AMSA Follow-up Letter to DHHS
On February 11, 2016, HRG and AMSA sent a ten-page follow-up letter to DHHS. The final substantive paragraph of the letter reads:
Finally, we are troubled by [the DHHS] failure so far to take these requested actions. It has now been 12 weeks since our initial complaint letter was submitted to your office. Resident and unwitting patient subjects continue to be forced to participate in greater-than-minimal-risk research without their voluntary informed consent. Your continued inaction makes [DHHS] a culpable party in this unethical research.
General Observations
A combination of three aspects of the scandal prompted me to write about it. First, it is outrageous that residents and patients included in the trials are not given an opportunity to provide voluntary informed consent to their inclusion in the trials. Carrying out such trials without the voluntary informed consent of the residents and patients violates fundamental rules governing the use of human subjects in research.

Second, what purported to be a response from ACGME was not a response. ACGME merely brushed off the serious concerns expressed by HRG and AMSA.

Third, the absence of major media coverage of the scandal is disappointing. The story warrants prominent coverage by outlets such as The New York Times, The Wall Street Journal, The Washington Post, Bloomberg News, and the major television networks.

Available Material
I am making available a complimentary 20-page PDF consisting of the HRG press release (it contains links providing access to other documents, such as the lengthy HRG/AMSA letters to DHHS officials and the lists of the many hospitals engaged in the trials), the HRG/AMSA letter to ACGME, the ACGME purported response to HRG/AMSA, and the HRG/AMSA follow-up letter to DHHS officials. Email and ask for the HRG/AMSA March 2016 package.

Blogger's Notes
Readers of this blog and my other writings may think this post is outside my areas of interest. They are right. However, I was so outraged by the scandal HRG has exposed that I decided to write about it anyway.

Also, in the interest of full disclosure, I am deeply indebted to Public Citizen Litigation Group (PCLG), another unit of Public Citizen. PCLG represented me on a pro bono basis several times over the years. Three important examples of PCLG's work on my behalf are discussed in chapters 5, 7, and 23 of my 2015 book, The Insurance Forum: A Memoir. The book is available from Amazon. It is also available from us; ordering instructions are on our website at, and I will autograph it upon request.