Friday, January 27, 2017

No. 200: NOLHGA and a Coalition of Health Insurance Companies Enter into a Secret Settlement Agreement Relating to Penn Treaty's Long-Term Care Insurance

In November 2016, the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA) entered into a secret settlement agreement with a coalition of health insurance companies relating to the likely liquidation of Penn Treaty, a long-term care (LTC) insurance company. In January 2017, when I learned of the agreement, I asked NOLHGA for a copy of it. A spokesman said the parties to the agreement "have not authorized its publication."

A one-paragraph description of the Penn Treaty situation is on NOLHGA's website. It reads:
Penn Treaty Network America Insurance Company, headquartered in Allentown, Pennsylvania, and its subsidiary, American Network Insurance Company, were placed into rehabilitation by the Pennsylvania insurance commissioner on January 6, 2009. Penn Treaty and American Network provided long-term care insurance to over 126,000 policyholders in all 50 states and the District of Columbia. The Commissioner filed petitions for liquidation on October 2, 2009 and amended petitions for liquidation on October 23, 2009. The court rejected the petitions in an order dated May 3, 2012. On July 27, 2016, petitions were filed by the Receiver [the insurance commissioner] in the Commonwealth Court of Pennsylvania seeking the liquidation of Penn Treaty and American Network.
My first discussion of Penn Treaty was in the August 2012 issue of The Insurance Forum. I focused on the extraordinary May 2012 court order issued by Judge Mary Hannah Leavitt of the Commonwealth Court of Pennsylvania (she is now President Judge of the Commonwealth Court) rejecting the Pennsylvania insurance commissioner's petition to liquidate the company. I also discussed Penn Treaty in several posts on my blog. For example, see No. 191 (posted December 9, 2016).

Areas of Concern
With regard to the likely liquidation of Penn Treaty, there are several areas of concern for other health insurance companies. First, state insurance guaranty associations do not have any money. The funds they receive to cover the shortfall in a liquidated insurance company come from assessments against surviving insurance companies.

Second, the insurance companies assessed after the failure of an LTC insurance company are health insurance companies, irrespective of whether they have ever sold LTC insurance. Most health insurance companies have sold little or no LTC insurance.

Third, there are upper limits on the amounts that can be assessed against a company. Also, an assessed company can recover the assessments over time through state premium tax credits, thus shifting the financial burden of the liquidation to state taxpayers. Nonetheless, it stands to reason that health insurance companies—especially those that have sold little or no LTC insurance—are unhappy about having to pay large assessments in connection with Penn Treaty and other possible LTC insurance company failures in the future.

Fourth, the "hole" at Penn Treaty is very large. The company's assets are about $700 million and the present value of the company's liabilities to policyholders is estimated at up to about $4 billion.

A Comment by UnitedHealth Group
UnitedHealth Group (NYSE:UNH) undoubtedly is one of the health insurance companies in the coalition that entered into the settlement agreement with NOLHGA. On January 17, 2017, UNH held an earnings conference call concerning results for the fourth quarter and full year of 2016. David S. Wichmann, president and chief financial officer of UNH, was one of the company officials who participated in the presentation. According to a transcript of the earnings conference call, he made these comments about the Penn Treaty situation:
We should touch briefly on Penn Treaty, an industry topic we first discussed in 2010 that finally seems to be resolving. Penn Treaty is a financially distressed long-term care insurance company, with no affiliation to us. While we have never sold long-term care policies, under state laws, health insurers will be assessed a share of the guarantee funds needed to protect Penn Treaty's policyholders. We expect to accrue an approximately $350 million operating charge for our portion of the assessment. This charge will be funded over several years and the cash will be largely recovered through premium tax credits over time.
While this outcome is well known, current accounting practice only allows this charge to be recognized when a final court order of liquidation is entered. When that ultimately occurs, we will incorporate the impact on GAAP earnings, while excluding it from adjusted earnings per share.
The Agreement
My efforts to obtain a copy of the settlement agreement have not been successful. What follows here is my understanding of the major components of the agreement.

First, what may be the most important component of the agreement is a national premium increase strategy. Presumably it applies to procedures that state guaranty associations will follow, after they have taken over Penn Treaty, in seeking permission from state insurance regulators to increase LTC premiums paid by Penn Treaty policyholders. The guaranty associations in almost all the states have signed on to this component of the agreement. I do not know whether the agreement says anything about the size of premium increases that can be imposed on Penn Treaty policyholders, or about the frequency of those premium increases.

Second, the agreement provides for state guaranty associations to obtain access to Penn Treaty's assets immediately after the liquidation petition is approved by the court. The petition is in the hands of President Judge Leavitt, and she is expected to rule on it after March 1, 2017.

Third, the agreement provides for governance of Penn Treaty. It also provides for use of a third party administrator to handle day-to-day functions of Penn Treaty, including such matters as collection of premiums and payment of claims. Most of the state guaranty associations are participating in this provision through Penn Treaty, but a few will work through NOLHGA. Most of the state guaranty associations have signed on to this component of the agreement.

Fourth, the agreement provides for use of reinsurance, presumably to cover some of Penn Treaty's reserve liabilities. Most of the state guaranty associations have signed on to this component of the agreement.

The NAIC Involvement
I recently learned that the National Association of Insurance Commissioners (NAIC) has a Receivership Model Law Working Group. The group is looking at issues and implications of LTC insurance company insolvencies for receivership practices and processes, the system of state guaranty associations, and the applicability of certain provisions of the NAIC's Life and Health Insurance Guaranty Association Model Act. The group is co-chaired by regulators in Texas and Washington State. At this time I do not know what progress the group has made.

General Observations
At least some provisions of the settlement agreement between NOLHGA and the health insurance companies may have a significant impact on Penn Treaty's policyholders, especially the provisions of the agreement relating to the national premium increase strategy. For that reason, I think it is inappropriate for NOLHGA, the state guaranty associations, the state insurance regulators, and the health insurance companies to treat the agreement as a confidential document. I cannot conceive of a justification for secrecy.

Available Material
I regret that I cannot make the settlement agreement available. I will prepare a follow-up to this post when and if I obtain the agreement. In the meantime, in addition to the discussions of Penn Treaty on my blog in No. 191 and other posts, I am now offering a complimentary 177-page PDF consisting of the article in the August 2012 issue of The insurance Forum (4 pages) and Judge Leavitt's May 2012 memorandum and order (173 pages). Email and ask for the 2012 material relating to Penn Treaty.


Monday, January 23, 2017

No. 199: Platinum Partners and CNO Financial—An Update

On January 12, 2017, CNO Financial Group, Inc. filed an 8-K (significant event) report with the Securities and Exchange Commission (SEC). The report provides an update on CNO's relationship to Platinum Partners LP, a hedge fund. The U.S. Department of Justice has filed criminal charges against seven individuals associated with Platinum, the SEC has filed civil charges against Platinum and the same seven individuals, and CNO has filed a civil lawsuit against three individuals associated with Platinum. I wrote about these cases in No. 182 (posted October 7, 2016) and in No. 195 (January 3, 2017).

The 8-K Report
A press release, which is an exhibit attached to CNO's recent 8-K report, is entitled "CNO Financial Group Provides Update on Closed Block Long-Term Care Business." It is subtitled "Independent Audit Concluded; Majority of Assets Repositioned." Shown below is the full text of the press release, other than the "About CNO Financial Group" section and the "Cautionary Statement Regarding Forward-Looking Statements" section. Also, a footnote to the $5 million figure in the first paragraph below says it is an estimate that is subject to change.
CNO Financial Group, Inc. (NYSE:CNO) announced today that its subsidiaries, Washington National Insurance Company (WNIC) and Bankers Conseco Life Insurance Company (BCLIC), have concluded the independent audit of the assets recaptured in conjunction with the termination of the reinsurance agreements with Beechwood Re, Ltd. (BRe). In addition, CNO announced that it has successfully repositioned a significant portion of the recaptured assets. CNO expects to recognize pre-tax non-operating net realized losses totaling $5 million in the quarter ended December 31, 2016 related to the transferred investments (including the impacts of the audit findings and repositioning of the assets).
As previously disclosed, certain irregularities discovered regarding the relationship between BRe and Platinum Partners LP (Platinum), and questions concerning the valuation and appropriateness of the collateral deposited in reinsurance trust accounts by BRe, caused CNO to commence an independent audit on two subsets of investments with an estimated value of $125 million as of September 30, 2016. The audit of these investments was completed in the fourth quarter of 2016, and confirmed that the assets included in the initial scope of the audit bore some connection to Platinum or to parties that have had past or present associations with Platinum. The audit also concluded that, based upon information obtained, the assets included in the additional scope of the audit do not appear to have clear connections to Platinum or to parties that have had past or present associations with Platinum.
In addition, CNO and the auditor confirmed that many of the values that had been assigned to these investments by BRe, and summarized in reports by its valuation firm, were inaccurate due to the use of flawed methodologies and procedures. We recognized a $75.4 million pre-tax loss related to the termination of the reinsurance agreements in the quarter ended September 30, 2016 (including adjustments to certain of the values that had been assigned by BRe to the investments transferred to WNIC and BCLIC).
In connection with the termination of the reinsurance agreements, investments made by BRe with an estimated value of $505 million previously held in collateral trust accounts supporting the reinsured block were transferred to WNIC and BCLIC. In the quarter ended December 31, 2016, approximately 75 percent of these investments have been sold or redeemed, with the proceeds invested primarily in investment-grade securities to support the recaptured block of business.
A summary of the preliminary values for the remaining investments that were included in the independent audit as of December 31, 2016 is included in today's Form 8-K.
General Observations
The developments relating to CNO's relationship with Platinum are sufficiently complex that I decided to allow the full text of CNO's press release to speak for itself. A more detailed discussion is in the text of CNO's recent 8-K report.

The results of the civil and criminal charges against Platinum and its officials and former officials remain to be seen. Also, I do not know what impact these developments will have on Senior Health Insurance Company of Pennsylvania (SHIP), a long-term care insurance company in runoff. SHIP is a former subsidiary of Conseco, Inc., which is now CNO. SHIP, which is in fragile financial condition, is immersed in the Platinum situation along with CNO's current subsidiaries. I have written extensively about SHIP. For example, see No. 180 (September 19, 2016).

Available Material
I am offering a complimentary 8-page PDF consisting of CNO's recent 8-K report (5 pages) and the press release attached to the report as an exhibit (3 pages). Email and ask for the January 2017 package relating to CNO and Platinum.


Tuesday, January 17, 2017

No. 198: Torchia and Guess—an Update on Their Connection

In No. 128 (posted November 19, 2015), I discussed a civil complaint in which the Securities and Exchange Commission (SEC) alleges that James A. Torchia, a Georgia resident, engaged in securities fraud. Five other defendants are entities that Torchia controlled. In that post, I quoted a radio promotion by Bobby Eugene ("Bob") Guess, a Texas resident. In No. 184 (October 31, 2016), I posted an update. Here I present another update, and also discuss criminal charges filed against Guess at the behest of the Texas State Securities Board (TSSB).

The Torchia Case
In November 2015, the SEC filed its civil complaint against Torchia and his companies alleging securities fraud, including the operation of a Ponzi scheme. The case involves the marketing of unregistered promissory notes arising from subprime automobile loans, and the marketing of unregistered interests in viatical and life settlements. In December 2015, the defendants filed a motion to dismiss the complaint. The SEC, having already sought an asset freeze and the appointment of a receiver, filed a motion for a preliminary injunction.

In January 2016, the judge held a two-day preliminary injunction hearing. In April 2016, he denied the defendants' motion to dismiss the complaint, granted the SEC's motions for a preliminary injunction and an asset freeze, and appointed a receiver. Discovery was to be completed by December 30, 2016.

On November 23, 2016, Torchia requested a stay of the proceedings. On December 15, the judge denied Torchia's request for a stay and said discovery was to be completed by February 3, 2017. On December 20, Torchia filed an unopposed motion to delay the completion of discovery. The next day the judge granted the motion and said discovery is to be completed by March 31, 2017. A trial date has not been set. (See SEC v. Torchia, U.S. District Court, Northern District of Georgia, Case No. 1:15-cv-3904.)

Torchia's Connection with Guess
In No. 128, I described Torchia's connection with Guess. I reported that, according to the SEC's complaint, Torchia raised tens of millions of dollars from investors who purchased unregistered promissory notes, most of which promised a 9 percent return. The notes were described as "100% asset backed" and "backed by hard assets dollar for dollar." The notes were promoted through newspaper and radio advertisements. Here is one of the radio advertisements:
Attention investors. My name is Bob Guess. I'm with Credit Nation and I'm here to help. Don't get blindsided by the next stock market correction. Remember the correction in 2008; some investors lost 40 to 50 percent of the money that they had in brokerage and retirement accounts. Well, history tends to repeat itself. It's not too late to lock in your gains and take the stock market risk out of your portfolio. If you need income, we have a blended asset investment that'll pay you nine percent annual return. Your investment is backed dollar for dollar with hard assets and is non-correlated to the stock market. For those who don't need additional income but are looking for growth, we have investments that have historically produced double-digit returns that are also non-correlated to the stock market. Give us a call at 1-800-542-9513, that's 1-800-542-9513. Don't gamble with your financial future. Call us today for an appointment. 1-800-542-9513.
In the above advertisement, "Credit Nation" is a Torchia entity. I believe that the investments supposedly providing a 9 percent annual return are promissory notes arising from subprime automobile loans. I believe that the investments supposedly providing double-digit returns are interests in life settlements.

The Criminal Charges against Guess
On August 15, 2016, TSSB issued an emergency cease and desist order directed at Guess and two entities. Guess is founder, president, and chief executive officer of Texas First Financial LLC (TFF) and a member of Mechanical Motion Solutions LLC. According to the order, Guess and TFF were offering unregistered promissory notes through a website and through radio advertisements in Texas. The order also says the respondents were in violation of Texas securities laws.

On December 15, 2016, a grand jury in Collin County (McKinney is the county seat, and a portion of Dallas is in the county) filed a series of indictments charging Guess with theft, securities fraud, and money laundering. The indictments show the names of 27 individuals and 35 couples allegedly victimized, the dates (from November 2014 through August 2016), and the amounts, which total about $5.8 million.

General Observations
As I mentioned in the two previous posts, the SEC's civil charges against Torchia appear serious. The criminal charges against Guess add a significant further dimension to the case. I plan to follow both cases and report further significant developments.

Available Material
The complimentary material I offered in Nos. 128 and 184 about the SEC civil charges against Torchia are still available. Now I am offering a complimentary 17-page PDF consisting of documents relating to the criminal charges against Guess, consisting of the TSSB press release (2 pages), the TSSB emergency cease and desist order (5 pages), and the indictments (10 pages). Email and ask for the January 2017 package relating to Guess.


Friday, January 13, 2017

No. 197: Genworth Financial—A New Class Action Lawsuit Filed by Three Long-Term Care Insurance Policyholders

On December 28, 2016, three long-term care (LTC) insurance policyholders filed a class action complaint against Genworth Financial, Inc. (GFI), two subsidiaries, and four executives. The general nature of the lawsuit may be gleaned from these two paragraphs in the 22-paragraph introductory section of the complaint:
1. This case concerns the financial harm caused to millions of current and former policyholders of Genworth long term care ("LTC") insurance policies, as a direct result of Defendants' deliberate misconduct in wrongfully depleting needed policy reserves—which is the portion of an insurer's revenue held aside to pay future claims.
6. Defendants executed an undisclosed scheme from 2010 until late 2014 to buoy Genworth's stock price and enrich themselves by diverting hundreds of millions of dollars of policyholders' premium payments away from Genworth's reserve funds and into their own pockets and the coffers of GFI and its investors.
The case was assigned to U.S. District Judge John A. Gibney, Jr. President Obama nominated him in April 2010 and the Senate confirmed him in December 2010. (See Leifer v. Genworth, U.S. District Court, Eastern District of Virginia, Case No. 3:16-cv-1008).

The Plaintiffs
Erika Leifer, now 65 and a New York City resident, purchased an LTC insurance policy from Genworth Life Insurance Company of New York (GLICNY) in 2002. She purchased a second LTC insurance policy from GLICNY in 2004. In February 2016, GLICNY informed her by letter that the premiums on both policies would be increasing by 60 percent, and that "it is possible that your premium will increase again in the future."

Saul Jacobs, now 65 and a Pennsylvania resident, purchased an LTC insurance policy from a predecessor of Genworth Life Insurance Company (GLIC) in 2003. In March 2016, GLIC informed him by letter that the premiums on his policy would be increasing by 20 percent, and that "it is possible that your premium will increase again in the future."

Helene Wenzel, now 72 and a San Francisco resident, purchased an LTC insurance policy from a predecessor of GLIC in 2003. In December 2016, GLIC informed her by letter that the premiums on her policy would be increasing by 26 percent in phases over the next three years, and that "it is possible that your premium will increase again in the future."

The Defendants
The corporate defendants are GFI, GLIC, and GLICNY. The individual defendants are Michael D. Frazier, chairman, president, and chief executive officer from May 2004 until May 2012; Thomas J. McInerney, president and chief executive officer since January 2013 and head of the LTC insurance business since July 2014; Patrick B. Kelleher, chief financial officer from 2007 through 2011, and executive vice president from January 2011 through December 2013; and Martin P. Klein, chief financial officer from May 2011 through October 2015, and acting president and acting chief executive officer from May 2012 through December 2012.

The Class
The plaintiffs bring the action on behalf of a class of Genworth LTC insurance policyholders. The class consists of:
All persons residing in the United States who, at any time prior to November 5, 2014 (the "Class Period"), purchased LTC insurance from Genworth Life Insurance Company or Genworth Life Insurance Company of New York.
The "class period" referred to in the above description of the class ends on the day the plaintiffs allege that "the truth became known when Defendants finally admitted that Genworth had not properly accounted for its reserves, and those reserves were now underfunded by more than half a billion dollars." There are three subclasses consisting of New York State policyholders, Pennsylvania policyholders, and California policyholders.

The Allegations
The "factual background" section of the complaint identifies several allegations including these four: (1) Genworth claimed to buck industry trends and set itself apart from the rest of the LTC insurance market, (2) Genworth repeatedly assured its policyholders and potential insureds that its reserves were more than adequate, (3) Genworth's false statements allowed it to divert hundreds of millions of dollars from its reserves and into the coffers of its holding company and the pockets of its senior executives, and (4) Genworth and the individual defendants had various and powerful motives to commit fraud.

The "claims for relief" section of the complaint includes these six counts: (1) breach of the implied covenant of good faith and fair dealing, (2) violation of a section of the New York Insurance Law, (3) violation of a section of the New York General Business Law, (4) violation of several sections of the California Unfair Competition Law, (5) violation of a section of the Pennsylvania Insurance Bad Faith Law, and (6) unjust enrichment. The plaintiffs seek certification as a class action, a declaratory judgment, statutory damages, restitution, injunctive relief, costs, pre- and post-judgment interest, and attorney fees.

I requested from Genworth a brief statement suitable for inclusion in this post. A spokeswoman said the company's policy is not to comment on matters in litigation.

General Observations
This is an important case, but it has a long way to go. If it gets to a jury, it would be necessary for the discovery process to have turned up sufficient evidence to support the allegations under the "preponderance of the evidence" standard that is needed for plaintiffs to prevail in civil lawsuits. Although the allegations in the complaint appear strong, I believe that the case will end with a settlement, assuming it survives the inevitable motion to dismiss the complaint.

In that regard, it is helpful to consider another recent class action lawsuit against Genworth. The complaint was filed in October 2014, around the time that Genworth announced the need to increase reserves significantly. The plaintiffs were shareholders rather than policyholders. The case was filed in the same court as the Leifer case discussed above, and was reassigned to Judge Gibney after originally having been assigned to another judge. The lead plaintiffs were Her Majesty The Queen In Right Of Alberta, Fresno County Employees' Retirement Association, and City of Pontiac General Employees' Retirement System. The defendants were GFI, McInerney, and Klein. It was a hard fought case. A trial was set for May 2016. In March 2016, however, the parties informed Judge Gibney that they had reached a $219 million settlement. They filed it in April 2016, and the judge preliminarily approved it. He held a fairness hearing in July 2016, and gave his final approval in September 2016. The last court document filed in the case was the judge's order awarding the plaintiffs' attorneys about $61 million in legal fees (28 percent of the $219 million settlement fund), and about $3.8 million in reimbursement of litigation expenses. (See In re Genworth Financial, Inc. Securities Litigation, U.S. District Court, Eastern District of Virginia, Case No. 3:14-cv-682.)

Available Material
I am offering a complimentary 66-page PDF containing the Leifer policyholder class action complaint (61 pages) and the last court document filed in the earlier shareholder class action lawsuit (5 pages). Email and ask for the January 2017 package relating to the class action lawsuits against Genworth.


Monday, January 9, 2017

No. 196: New York State's Insurance Regulator Orders Columbian Mutual Life to Pay Certain Death Benefits and a Fine

On December 21, 2016, the New York State Department of Financial Services (DFS) ordered Columbian Mutual Life Insurance Company (Binghamton, NY), a small company, to pay death benefits to the beneficiaries of 257 deceased policyholders, and to pay a fine of $257,000. According to the consent order, Columbian wrongly denied coverage and rescinded policies.

Columbian and Unity
Columbian began operations as a charitable and benevolent association in 1883, became a mutual life insurance company in 1952, and acquired Unity Mutual Life Insurance Company (Syracuse, NY), a small company, in 2011. Columbian is licensed in all states, but the bulk of its business is sold in New York and New Jersey.

The Investigation
After a routine examination, DFS began an investigation of Columbian's and Unity's contestable claims practices from 2006 through 2015. During that period, Columbian, using simplified issue with limited underwriting, sold small face amount policies to low- and middle-income consumers to cover funeral and other final expenses. From 2006 through 2011, Unity sold similar policies with limited underwriting.

DFS found that Columbian and Unity, without proving policyholders had made material misrepresentations in applications, wrongfully denied coverage and unilaterally rescinded policies when policyholders died within the two-year contestability period. Here are the six paragraphs under the heading "New York contestable claims" in the consent order:
23. During the Relevant Period, Unity had 60 contestable claims with a face amount of $361,962 in New York State in which the claims were closed without payment or remained pending because Unity did not receive a death certificate or medical records. In 2010 and 2011, Unity returned $1,872 in premiums to beneficiaries for 6 of these contestable claims.
24. Starting in 2010, Unity also unilaterally rescinded 35 contestable claims with a face amount totaling $300,620 based on alleged material misrepresentations. During the Relevant Period, Unity returned $25,465 in premiums to beneficiaries for these claims.
25. During the Relevant Period, Columbian had 123 contestable claims in New York State with a face value totaling $1,106,642 where Columbian closed claims or unilaterally rescinded policies because it did not receive a death certificate or medical records.
26. Columbian also unilaterally rescinded 39 contestable claims with a face amount of $322,699 based on alleged material misrepresentation.
27. During the Relevant Period, Columbian paid $70,447 in returned premiums to claimants in connection with 123 of the 162 contestable claims that it rescinded.
28. The face amount of Unity's and Columbian's 257 contestable claims is $2,091,923.
Restitution and Fine
Columbian agreed to select an independent third party administrator to oversee the restitution process. Columbian also agreed to pay the face amount, plus interest from the date of death to the date of payment, on each policy that had been closed without payment or had been unilaterally rescinded, unless the administrator determines that the insured made a material misrepresentation in the application. Columbian also agreed to pay a fine of $257,000, or $1,000 for each of 257 policies.

General Observations
This is a strange case. I do not recall having heard of companies brushing off small death claims or rescinding small policies where deaths occurred during the contestability period. Limited underwriting might include one or two general health questions, but I believe that, in many such cases, it would be difficult to mount a successful challenge based on the answers to such questions.

DFS has not yet made public the report of the routine examination that prompted the investigation of contestable claims. It is my understanding that the report may not be made public for some time. When I see the report, and if it contains any further information I consider significant, I will post a follow-up.

Available Material
I am offering a complimentary 21-page PDF containing the DFS press release (2 pages) and the DFS consent order directed at Columbian (19 pages). Email and ask for the January 2017 package relating to Columbian.


Tuesday, January 3, 2017

No. 195: Platinum Partners—Criminal and Civil Charges Filed Against Seven Individuals

On December 14, 2016, U.S. Attorney Robert L. Capers of the Eastern District of New York filed a 49-page indictment charging seven current and former principals of Platinum Partners, a hedge fund, with criminal activity. The indictment was filed under seal. A magistrate judge unsealed the indictment two days later, after the defendants were arrested. The case was assigned to U.S. District Court Chief Judge Dora Lizette Irizarry. President George W. Bush nominated her, and the Senate confirmed her in June 2004. She became Chief Judge in April 2016. (See U.S.A. v. Nordlicht, U.S. District Court, Eastern District of New York, Case No. 1:16-cr-640.)

On December 19, the Securities and Exchange Commission (SEC) filed a 60-page civil complaint against two Platinum units and the same seven individuals. The case was assigned initially to U.S. District Court Judge Kiyo A. Matsumoto. President George W. Bush nominated her, and the Senate confirmed her in July 2008. (See SEC v. Platinum, U.S. District Court, Eastern District of New York, Case No. 1:16-cv-6848.)

The Defendants
The two Platinum units that are defendants in the SEC civil complaint are Platinum Management (NY) LLC and Platinum Credit Management LP. The seven individual defendants in both cases are Mark Nordlicht, one of Platinum's founders and its chief investment officer; David Levy, Platinum's co-chief investment officer; Uri Landesman, former managing partner and president of Platinum; Joseph Sanfilippo, chief financial officer of a Platinum unit; Joseph Mann, a member of Platinum's investor relations and finance departments; Daniel Small, a former managing director and co-portfolio manager of Platinum; and Jeffrey Shulse, former chief executive officer and chief financial officer of a Platinum unit.

The Indictment
The indictment includes eight counts: one count of conspiracy to commit securities fraud and investment adviser fraud, one count of conspiracy to commit securities fraud, three counts of securities fraud, one count of investment adviser fraud, and two counts of conspiracy to commit wire fraud. Nordlicht and Levy are charged with all eight counts; Landesman, Sanfilippo, and Mann with five counts; and Small and Shulse with three counts.

On December 19, six of the seven defendants pleaded not guilty on all counts, and were released on bond. Nordlicht's bond was set at $5 million, Levy's at $2 million, Landesman's at $2 million, Sanfilippo's at $2 million, Mann's at $1 million, and Small's at $600,000. I believe that Shulse will enter a plea soon, and that Small may change his plea.

The SEC Civil Complaint
The SEC civil complaint includes 11 claims for relief: three claims of violations of the Advisers Act, two claims of aiding and abetting violations of the Advisers Act, two claims of violations of the Securities Act, one claim of aiding and abetting violations of the Securities Act, two claims of violations of the Exchange Act, and one claim of aiding and abetting violations of the Exchange Act. Platinum Management is charged with five claims, Platinum Credit with four claims, Nordlicht with seven claims, Landesman and Sanfilippo with five claims, Levy with four claims, Mann and Small with three claims, and Shulse with two claims.

On December 19, Judge Matsumoto held a show cause hearing at which the parties agreed to a temporary restraining order and the appointment of Bart Schwartz as receiver. The purposes of these actions were to prevent violations of securities and other laws, prevent bankruptcy filings, prevent destruction or alteration of documents, and grant expedited discovery in preparation for a preliminary injunction hearing.

On December 22, the case was reassigned to Chief Judge Irizarry. A preliminary injunction hearing is scheduled for January 6, 2017.

The Press Release
On December 19, U.S. Attorney Capers issued a five-page press release, and he announced at a press conference the unsealing of the indictment. Representatives of the Federal Bureau of Investigation and the U.S. Postal Inspection Service accompanied him.

Capers said: "If convicted, each of the defendants faces a maximum sentence of 20 years' imprisonment." He also said:
As alleged, Nordlicht and his cohorts engaged in one of the largest and most brazen investment frauds perpetrated on the investing public, earning Platinum more than $100 million in fees during the charged conspiracy. Platinum Partners purported to be a standard bearer in the hedge fund industry, reporting average annual returns of more than 17 percent since inception in 2003. In reality, their returns were the result of overvaluation of their largest assets, which eventually led to Nordlicht and his co-conspirators operating Platinum like a Ponzi scheme, where they used loans and new investor funds to pay off existing investors. The charges and arrests announced today reflect our steadfast commitment to holding accountable hedge funds on Wall Street who rip off investors for personal gain.
The Expression "Ponzi Scheme"
A dictionary definition of "Ponzi scheme" is "an investment scheme in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks." The scheme perpetrated by swindler Charles Ponzi collapsed in 1920. Ponzi schemes always collapse; the only question is how long they last before they unravel.

Neither the indictment nor the SEC civil complaint used the word "Ponzi." However, Capers used the expression "like a Ponzi scheme" in his press release, as quoted above. One of the news articles about the case was entitled "A 'Ponzi-esque' Scheme That Came Undone." Another news article called the scheme "one of the largest such fraud cases since Bernard L. Madoff's investment firm unraveled in 2008."

It is difficult to resist using the word "Ponzi," given statements in the court filings. For example, on page 18 of the indictment, it says: "Platinum never disclosed to investors and prospective investors that it was using new investments to pay redemptions..." Similarly, on page 2 of the SEC civil complaint, it says: "Internal documents discussing redemptions are replete with references such as 'Hail Mary time,' and of hoping that new subscriptions would prove sufficient to pay current redemptions."

An Earlier Development
In No. 180 (posted September 9, 2016), I discussed an earlier federal criminal action relating to Platinum Partners. Norman Seabrook is a former official of New York City's Correction Officers Benevolent Association (COBA). Murray Huberfeld is one of the founders of Platinum Partners. On July 7, 2016, U.S. Attorney Preet Bharara of the Southern District of New York filed an indictment charging Seabrook and Huberfeld with one count of conspiracy to commit honest services wire fraud and one count of honest services wire fraud. The indictment alleges that a "kickback scheme" deprived COBA members of Seabrook's "honest services" when COBA's annuity fund and COBA's general fund invested in Platinum offerings. A status conference is scheduled for January 6, 2017. (See U.S.A. v. Seabrook, U.S. District Court, Southern District of New York, Case No. 1:16-cr-467.)

Another Earlier Development
In No. 182 (posted October 7, 2016), I discussed an earlier civil lawsuit that two subsidiaries of CNO Financial Group filed on September 29, 2016 against three individuals associated with Platinum. The CNO subsidiaries had transferred their long-term care (LTC) insurance liabilities through reinsurance arrangements with an entity that had close ties to Platinum. The CNO subsidiaries alleged they had been misled when they entered into the reinsurance arrangements. The lawsuit remains pending. (See Bankers Conseco Life v. Feuer, U.S. District Court, Southern District of New York, Case No. 1:16-cv-76436.)

I also discussed demand letters that the CNO subsidiaries received from their state insurance regulators, who had found the reinsurance arrangements unacceptable. The subsidiaries recaptured the reinsurance.

General Observations
Readers may wonder why I am posting this item about the Platinum cases, since they are about investments rather than insurance. The answer is that Platinum is at the center of several criminal and civil lawsuits related to insurance. For example, I mentioned Platinum in earlier posts relating to LTC insurance at CNO (formerly Conseco) and at Senior Health Insurance Company of Pennsylvania, a former Conseco subsidiary. In addition to Nos. 180 and 182 mentioned earlier, see Nos. 174 (August 11, 2016), 175 (August 18, 2016), 183 (October 19, 2016), and 185 (November 4, 2016).

I believe that the criminal and civil charges against the defendants are serious, and that the evidence against the defendants is strong. I plan to report further developments in the two cases.

Available Material
I am offering a complimentary 114-page PDF consisting of the Capers press release (5 pages), the indictment (49 pages), and the SEC civil complaint (60 pages). Email and ask for the January 2017 package relating to the Platinum cases.