Friday, November 9, 2018

No. 295: Watergate and the 1974 Road Map

Blogger's Note: Although this post is outside my usual focus on insurance matters, I think you will find it interesting, especially in view of President Donald Trump's November 7 firing of U.S. Attorney General Jeff Sessions and the related developments. The similarities between Watergate and the current situation continue to proliferate.

The Petition
On September 14, 2018, Benjamin Wittes, Jack Goldsmith, and Stephen Bates filed in federal court a petition for an order directing release of the "Road Map" transmitted by the Watergate Grand Jury to the Judiciary Committee of the House of Representatives in 1974. Attached to the petition is a legal memorandum in support of the petition, and declarations in support of the petition by Wittes, Goldsmith, Bates, Richard Ben-Veniste, John W. Dean III, and Philip Allen Lacovara. (See In Re Petition for Order Directing Release of the "Road Map" Transmitted by the Watergate Grand Jury to the House Judiciary Committee in 1974, U.S. District Court, District of Columbia, Case No 1:18-mc-125.)

The Judge
The case was assigned to Chief Judge Beryl A. Howell of the U.S. District Court for the District of Columbia. President Obama nominated her in July 2010, the Senate confirmed her in December 2010, and she became Chief Judge in March 2016.

On October 11, 2018, Chief Judge Howell issued an order allowing release of the Watergate Road Map. On October 31, the U.S. Department of Justice filed a notice of compliance. It contains a link to a large amount of material, which includes a link to another large amount of material. The latter batch of material includes a link to the Road Map.

The Petition
The petition contains a brief but excellent explanation of the significance of the Road Map. Here are two excerpts, without citations:
The 55-page Road Map identified the evidence relevant to President Nixon's alleged involvement in a criminal conspiracy, without explicit accusation, accompanied by a package of 800 pages of documents and thirteen tape recordings comprising the evidence itself... As Special Prosecutor Jaworski stated, "There were no comments, no interpretations, and not a word or phrase of accusatory nature. The 'road map' was simply that—a series of guideposts if the House Judiciary Committee wished to follow them."
The Road Map is one of the last major elements of the Watergate story that remains under seal, though its contents were publicly disclosed through a variety of sources over the years. And it has particular resonance now, at a time when Special Counsel Robert Mueller is investigating potential unlawful conduct by President Donald Trump and is reportedly considering writing a report on obstruction. This petition seeks the release of the Road Map only, without the underlying grand jury material that accompanied it.
The Road Map
The first two pages of the Road Map contain a "Report and Recommendation" from the foreman of the June 5, 1972 Grand Jury. A handwritten note near the top of the first page reads: "Filed under seal March 1, 1974." At the top of the first page is a printed note about Chief Judge Howell's unsealing of the material on October 11, 2018. Here is the first paragraph of the Report and Recommendation:
The June 5, 1972 Grand Jury has heard evidence that has led it to return the indictment being submitted herewith. It has also heard evidence that it regards as having a material bearing on matters that are within the primary jurisdiction of the House of Representatives Committee on the Judiciary in its present investigation to determine whether sufficient grounds exist for the House of Representatives to exercise its constitutional power to impeach Richard M. Nixon, President of the United States. It is the belief of the Grand Jury that it should presently defer to the House of Representatives and allow the House to determine what action may be warranted at this time by this evidence.
Contents of the Road Map
The Road Map consists of four parts: (1) material bearing on a $75,000 payment to E. Howard Hunt and related events, (2) material bearing on the President's "investigation," (3) material bearing on events up to and including March 17, 1973, and (4) the President's public statements and material before the grand jury related thereto. The first part consists of 13 items (a 14th item remains under seal). Here are the 13 items, without the footnotes identifying the evidence:
  1. On or about March 16, 1973, E. Howard Hunt had a meeting with Paul O'Brien during which Hunt demanded approximately $120,000 and asked O'Brien to tell John Dean that Hunt had done some "seamy things" for the White House and for John Ehrlichman and that, if Hunt were not paid soon, Hunt would have to "review his options."
  2. On or about March 19, 1973, Paul O'Brien had a conversation with John Dean during which O'Brien related Hunt's message to Dean.
  3. On or about March 19, 1973, John Dean had a conversation with John Ehrlichman in which Dean told Ehrlichman of Hunt's message and in which Ehrlichman asked Dean to relay the message to John Mitchell.
  4. On or about March 20, John Dean had a conversation with John Mitchell concerning Hunt's message.
  5. From approximately 10:15 a.m. to approximately noon on March 21, 1973, the President had a meeting with John Dean, the latter part of which was also attended by H. R. Haldeman, during which there was discussion of (a) the involvement and possible involvement of Haldeman, Dean, John Ehrlichman, John Mitchell, Jeb Magruder, Gordon Strachan, Fred LaRue, Herbert Porter, Egil Krogh, Herbert Kalmbach, and others in obstruction of justice and perjury, (b) the fact that E. Howard Hunt was demanding $120,000 and might disclose the "seamy things" Hunt had done for Ehrlichman, as well as other matters, (c) the amount of money that would ultimately be required to keep Hunt and the other Watergate defendants silent, how delivery of such money could be accomplished, and by whom, (d) the fact that Hunt and others expected help with respect to the length of time they would spend in jail, (e) the likelihood that facts respecting the involvement of those listed above and others might become publicly known, (f) whether to pay Hunt in order to "buy time," and (g) possible courses of action that might be taken with respect to all of the above matters.
  6. At or about 12:30 p.m. on March 21, 1973, H. R. Haldeman had a telephone conversation with John Mitchell.
  7. In or about the early afternoon of March 21, 1973, John Mitchell had a telephone conversation with Fred LaRue during which Mitchell authorized LaRue to pay approximately $75,000 to E. Howard Hunt.
  8. At or about 3:45 p.m. on March 21, 1973, H. R. Haldeman met with John Ehrlichman and John Dean, during which meeting there was a discussion of the possible courses of action to be taken with respect to the matters discussed by the President, Haldeman, and Dean that morning.
  9. From approximately 5:20 p.m. to approximately 6:00 p.m. on March 21, 1973, the President met with John Dean, H. R. Haldeman, and John Ehrlichman, at the outset of which meeting several possible courses of action, i.e., testimony before a new Grand Jury or before an independent panel established to investigate all the facts, were rejected and during which meeting there was further discussion of Hunt's demand and of the possible remaining courses of action open that might be taken with respect to the matters discussed that morning by the President, Haldeman, and Dean.
  10. On the late evening of March 21, 1973, Fred LaRue caused $75,000 in cash funds for E. Howard Hunt to be placed in the mailbox at the residence of Hunt's attorney, William O. Bittman.
  11. On the morning of March 22, 1973, John Mitchell attended a meeting with H. R. Haldeman, John D. Ehrlichman, and John Dean, during which Mitchell stated that Hunt was no longer a problem.
  12. On the afternoon of March 22, 1973, the President met with John Mitchell, H. R. Haldeman, John Ehrlichman, and John Dean during which meeting there was discussion of a possible course of action that might be taken with respect to the matters discussed on the morning of March 21, 1973, namely, preparation by Dean of a written "report"—stating that high White House officials were not involved in the Watergate break-in—on which the President could at a later time "rely," if necessary.
  13. On or about the afternoon of March 22, 1973, John Ehrlichman had a conversation with Egil Krogh in which Ehrlichman stated that Krogh should "hang tough" and that Hunt was "more stable" and would not "disclose all."
General Observations
In the midterm elections this week, despite Democratic losses in the Senate, wins in the House of Representatives may allow Democrats to push forward with their legislative and investigative agendas. At this writing (November 7, 2018), it is not known what course of action Special Counsel Mueller, the U.S. Department of Justice, and Congress will take with regard to his ongoing investigation. I believe, however, that the Watergate Road Map provides a course of action that is worthy of serious consideration.

Available Material
I am offering a complimentary 68-page PDF consisting of the petition (5 pages), the notice of compliance (1 page), and the Road Map (62 pages). Email and ask for the November 2018 package about the Watergate Road Map.


Thursday, November 8, 2018

No. 294: Universal Life Policies—a Disaster for Life Insurance Companies and Their Policyholders

I have long been concerned that the development of universal life insurance policies might lead to serious problems for life insurance companies and their policyholders. Recent developments have heightened my concerns. Here I provide historical context and offer suggestions that might prevent universal life from damaging the life insurance business.

Historical Background
My first significant exposure to life insurance occurred in the 1950s, when market interest rates were very low. For example, savings accounts often earned interest rates well below 2 percent. By the 1970s market interest rates had risen significantly, and by the 1980s had reached double-digit levels. In the past decade market interest rates declined sharply and have remained at low levels.

Investment-Year Dividends
In April 1975 I wrote to what is now the New York State Department of Financial Services (NYDFS) asking whether it had ever approved the use of an investment-year method in calculating dividends on individual life insurance policies. (The method had been used earlier in the pension business.) In response, a senior department official said no company had made such a request, and that it would be a "monstrous and costly task even with a new generation computer."

In the January 1, 1976 issue of Probe, the late Halsey Josephson's sprightly newsletter, he said a company had just announced the use of an investment-year method, but he did not identify the company. In response to my inquiry, he said it was The Equitable Life Assurance Society of the United States.

The Insurance Forum, my monthly periodical, began its 40-year run with the January 1974 issue. Based on hindsight, one of my most important early articles appeared in the April 1976 issue and was entitled "Great News—Except for Equitable's Old Policyholders." I said the company's use of an investment-year method meant substantial dividend increases for new and recently issued Equitable policies and no dividend increases for old Equitable policies.

Pursuant to the New York State Freedom of Information Law, I asked the department for its approval file. The department denied my request on trade secret grounds. The denial led to a lengthy legal struggle. In that lawsuit I won a partial victory. I reported in detail on the results of the case in an article entitled "The New York Cover-Up Continues To Unravel" in the October 1978 issue of the Forum.

Operation of Universal Life
When the policyholder pays a premium for a universal life policy, that amount is added to the policy's cash value, which is more commonly called the "account value." Also, interest for the preceding year is added to the account value. Then a mortality charge is deducted from the account value. The mortality charge is calculated by multiplying the net amount at risk in thousands of dollars by the cost-of-insurance (COI) rate. The net amount at risk is the death benefit minus the account value. The policy contains a schedule of maximum COI rates that increase with age, although companies typically use COI rates (called "current" COI rates) that are below the maximum COI rates. Certain expenses are also deducted from the account value. The result of the interest added, the mortality charge deducted, and the expenses deducted determines the new account value.

My first extensive writing on universal life was in the November 1981 and December 1981 issues of the Forum. Those articles are in the package offered at the end of this post.

Detailed discussions of the history and operation of universal life may be found in college-level insurance textbooks. See, for example, pages 70-76 in the 15th edition of Life Insurance, by Kenneth Black Jr., Harold D. Skipper, and Kenneth Black III.

The Transparency Feature
For many years prior to the introduction of universal life, I strongly recommended adoption of a system of rigorous disclosure to consumers of the prices of the protection component and the rates of return on the savings component in traditional cash-value life insurance policies. The protection component is the death benefit minus the cash value. When the death benefit is level, the protection component steadily declines as the savings component steadily increases. An important aspect of my proposed disclosure system required that the policy be divided into its protection and savings components.

Life insurance companies strongly objected to dividing the policy into its protection and savings components. Therefore the companies strongly objected to my proposed disclosure system, and they were successful in preventing its adoption.

One feature of universal life is transparency, because such a policy is divided into its protection and savings components. When universal life burst on the scene in the late 1970s, an official of one of the pioneering companies wrote me and said: "Joe, I hope you're satisfied." Unfortunately, transparency did not lead to adequate disclosure of prices and rates of return, but rather introduced a new family of deceptive sales practices into the life insurance market.

The Flexibility Feature
Another feature of universal life is flexibility, because policyholders, within limits, can change premiums and death benefits. Some universal life policies were called "adjustable life" or "flexible-premium life."

I wrote about universal life and expressed concerns. However, I did not foresee the full extent of the problems that would arise from the transparency and flexibility of universal life. Some life insurance companies foresaw the problems and initially held back from offering universal life. Those companies later ended their opposition.

The Interest Rate Problem
As mentioned, universal life was introduced when market interest rates were rising. It became common for companies and agents to refer to a high interest rate in their marketing of universal life. A classic example, which I wrote about in an article entitled "How Not to Advertise Universal Life," appeared in the May 1984 issue of the Forum. I reproduced in the article a newspaper advertisement headlined "Life Insurance Paying 12% Interest? Unbelievable!" The company was crediting a 12 percent new-money interest rate on universal life. The problem was that, when market interest rates declined, which they inevitably did, the company had to lower the credited interest rates, leaving policyholders feeling they were victims of a "bait and switch" scheme.

The Inadequate Premium Problem
When a person buys a universal life policy, he or she, usually in consultation with an insurance agent, selects the amount of the death benefit and the "initial planned annual premium." The problem with the planned annual premium is that it may be inadequate to keep the policy in force for the desired length of time, whether that is the insured's lifetime or some shorter period. This situation can occur when the selected premium is too low from the outset to sustain the policy for the desired duration. It also can occur when credited interest rates decline, when COI rates increase, or when the policyholder elects to reduce or skip entirely the payment of the planned annual premium.

The Annual Report Problem
Each year the company sends an annual report to the policyholder to keep him or her informed of the status of the policy. Some of the annual reports I have seen are complex, and the policyholder may not examine it. Even if he or she looks at it closely, he or she may not understand it. The agent, who normally receives a copy of the report, may or may not look closely at it, and may or may not review it with the policyholder.

The Problem of Increasing Premiums
Over the years, two major problems have afflicted universal life. First, as credited interest rates declined, it became necessary for policyholders to pay larger and larger premiums to maintain their policies. By "maintain," I refer not only to keeping the life insurance in effect, but also assuring the policy will remain in effect for the desired period.

To compound the problem, universal life policies normally include a guaranteed minimum interest rate that will be credited to the account value. If market interest rates decline below the guaranteed minimum, the company may elect to increase COI rates to maintain the policy, and that would force the policyholder to pay larger and larger premiums to maintain the policy for the desired period.

Universal life policies invariably allow companies to increase their COI rates (up to the maximum COI rates) and many companies have been increasing COI rates to compensate for the interest shortfall. In recent years there have been many lawsuits prompted by large increases in COI rates. The lawsuits usually involve disputes over whether the COI rate increases are allowed under the precise language of the policies.

To my knowledge, no such lawsuit has ever been fully adjudicated. In other words, I believe that no such lawsuit has ever been decided by a judge or jury, and therefore that no such lawsuit has had a chance to survive an appeal. I believe that all such cases have been dropped or settled, that the terms of the settlements in class action lawsuits have been made public, and that the terms of the settlements in individual lawsuits have been kept confidential.

The Administrative Problem
The introduction of universal life made it necessary for companies to develop elaborate systems for administering the policies, especially in light of the flexible premium characteristic of the policies. To compound the problem, companies engaged in a race to develop new versions of universal life in an effort to help their agents in the marketplace. Each new version required the development of a new administrative system. I believe that some companies invested so many resources in development of new policy forms that they failed to develop adequate systems for administering those new policies. Inadequate administrative systems, in turn, led to the companies being unable to service the policies adequately. For example, companies sometimes were not able to respond adequately to policyholder and agent requests for policy information, and companies sometimes were not able to provide meaningful annual reports to policyholders and agents.

Three Suggestions
The first suggestion is that state insurance regulators significantly expand the requirements they impose prior to approval of universal life policies. As examples, companies should be required to submit for approval not only the policy forms but also the annual reports the companies will provide to policyholders and agents explaining the policies, illustrating the policies, and describing the current status of the policies. An important reason for such requirements is to force the companies to show they have developed the systems necessary to administer the policies.

The second suggestion is that state insurance regulators require prior approval of COI increases, just as they require prior approval of increases in the premiums for long-term care insurance policies. I recognize that this suggestion may necessitate formal rule making or even legislation, but I think such a requirement is essential.

The third suggestion, a corollary of the second suggestion, is that state insurance regulators require companies to notify the regulators prior to imposing COI increases. Some states already have adopted such a requirement. See, for example, Regulation 210, which NYDFS adopted on September 5, 2017, and which took effect on March 19, 2018.

Available Material
I am offering a complimentary 25-page PDF consisting of the five Forum articles mentioned in this post (15 pages) and NYDFS Regulation 210 (10 pages). Email and ask for the November 2018 package about universal life.


Thursday, November 1, 2018

No. 293: MetLife and a Tragic Theft of Structured Settlement Annuity Payments

Nicole Herivaux, now 38, was born August 1, 1980 in a hospital operated by New York City. The amended complaint referred to later says: "She suffered a serious physical injury during the birth process, resulting in an Erbs palsy to her arm, rendering same permanently undeveloped and useless." According to the American Academy of Orthopaedic Surgeons:
Erb's palsy is a form of brachial plexus palsy. It is named for one of the doctors who first described the condition, Wilhelm Erb. The brachial plexus is a network of nerves near the neck that give rise to all the nerves of the arm. These nerves provide movement and feeling to the shoulder, arm, hand, and fingers. Palsy means weakness, and brachial plexus birth palsy causes arm weakness and loss of motion. One or two of every 1,000 babies have this condition. It is often caused when an infant's neck is stretched to the side during a difficult delivery.
The Medical Malpractice Lawsuit
Marie Herivaux, Nicole's mother and natural guardian, filed a medical malpractice lawsuit against New York City. The case ended in a settlement on February 25, 1983. It provided that Marie, who was not injured, was to receive a one-time payment of $25,000.

The settlement also provided that Nicole was to receive $50,000 immediately; $2,200 per month for life; $100,000 on August 1, 1998 (her 18th birthday); $200,000 on August 1, 2005 (her 25th birthday); $200,000 on August 1, 2015 (her 35th birthday); and $200,000 on August 1, 2025 (her 45th birthday). The money for Nicole, until she turned 18, was to be paid jointly to Marie, who was Nicole's mother and natural guardian, and a bank officer. The money for Nicole was to be kept for her benefit in certain savings accounts. The money thereafter was to be paid to Nicole.

The Structured Settlement Annuity
To assure that Nicole's benefits would be paid, New York City purchased a structured settlement annuity from Alpine Life Insurance Company. The company made the payments properly until 1995, when Nicole was 15.

Metropolitan Life Insurance Company (MetLife) acquired the structured settlement annuity from Alpine on January 1, 1995 as part of a block of business. MetLife mistakenly made Nicole's benefits payable to "Marie Herivaux" rather than to "Marie Herivaux as guardian of Nicole." Over the years, Marie received checks in her own name and MetLife paid Nicole nothing.

Nicole's Lawsuit against MetLife
On February 13, 2017, when Nicole was 36, she filed a lawsuit against MetLife in state court in New York. She filed an amended complaint on October 9, 2017. (See Nicole Herivaux v. MetLife, Supreme Court of the State of New York, County of New York, Index No. 650783/2017.) How Nicole learned that Marie had been stealing money from her is described in a memorandum of law Nicole's attorneys filed in opposition to MetLife's motion to dismiss her original complaint. The words shown here in brackets were in a footnote.
From time to time Marie would give Nicole some money, advising Nicole that the monies were from her settled case, but Nicole was never provided any details about the settlement, and Nicole relied on what her mother told her. For instance, Marie gave Nicole $100,000 on August 1, 1998, her 18th birthday; another $100,000 on August 1, 2005, her 25th birthday; and a small amount on August 1, 2015, her 35th birthday. [According to the court order, Nicole should have received $100,000 on August 1, 1998; a full $200,000 on August 1, 2005; and a full $200,000 on August 1, 2015.]
More recently, Marie stopped giving plaintiff money altogether, and Nicole, who is now 37 years old, grew curious as to why the payments had stopped. While at her mother's house in Florida, Nicole came across an old check from MetLife showing a payment of $2,200 dated September 1, 2012—when Nicole was already 32 years old and no longer an infant. Nicole noticed that the MetLife check was made out to Marie, without any "for the benefit of" language.
When she discovered the payment, Nicole called MetLife to inquire whether she was owed any money and was told that MetLife had no record of Nicole being the beneficiary of any annuity or funds. Nicole then located Attorney Michael D. Wolin, whom she knew her mother had dealt with. Mr. Wolin advised that he had not been with the Julien Schlesinger & Finz firm for thirty years, that he did not have a file concerning the settlement, nor did he have any specific recollection of the settlement terms, although he remembered the case.
Mr. Wolin further advised that the court order should be on file at the courthouse. Nicole had someone obtain a copy of the order from the courthouse. Nicole then contacted Mr. Wolin, who wrote to MetLife to inquire as to why Nicole was not receiving the proceeds of the settlement she was entitled to. A brazen stonewalling response was received from MetLife stating that it had no record of any annuity for Nicole at all and that she was not listed as an annuitant on its records.
The Factoring Transaction
In the course of Nicole's lawsuit against MetLife, her attorneys learned to their amazement that in 2009 Marie had sold half the $200,000 August 1, 2015 payment to Novation Capital LLC, a factoring company. In her affidavit in connection with the transaction, Marie said this under oath: "I am currently divorced and have one dependent, Emily Seymour, a daughter, born on 6/14/2002." As if the failure to mention Nicole was not enough, Marie also made these brazen lies, also under oath:
I am entitled to the settlement payments set forth in the Transfer Agreement. The structured settlement payments arose as a result of a medical malpractice claim. The cause of action associated with the aforementioned lawsuit has been resolved. Pursuant to a Settlement Agreement, I was entitled to receive certain periodic payments, to wit: a lump sum payment of $200,000 due on 8/1/2015, a lump sum payment of $200,000 due on 8/1/2025, and monthly payments of $2,200 for life, thereby creating a structured settlement.
Nicole's attorneys also learned that the Miami attorney who handled the factoring transaction—Jose M. Camacho, Jr.—was disbarred for forging signatures relating to structured annuities. Several documents relating to the factoring transaction are among the appendixes to Nicole's amended complaint and are in the package offered at the end of this post.

The Consent Order
On September 11, 2018, after the parties (but not Marie) had reached a settlement, the judge issued a consent order. He entered a default judgment against Marie, who had failed to respond to the amended complaint or otherwise appear. MetLife demanded, and Nicole agreed, to assign the default judgment to MetLife. Nicole also agreed not to try to collect on the default judgment. I do not know whether MetLife will attempt to collect on the default judgment.

MetLife agreed to pay Nicole for life the suspended and future monthly payments beginning with the payment that was due April 1, 2017, including 9 percent interest on the suspended payments. MetLife also agreed to pay Nicole the $200,000 due in 2025. The parties agreed to bear their own costs and attorney fees.

The consent order is silent on the $100,000 payment due in 1998, which Nicole received; the $200,000 payment due in 2005, half of which Marie apparently stole; and the $200,000 payment due in 2015, half of which Marie sold to the factoring company in 2009, and the other half of which, except for a "small amount," Marie apparently stole. The judge dismissed the case with prejudice (permanently).

The Article in The Wall Street Journal
On February 21, 2018, The Wall Street Journal carried an article entitled "Lawsuit Alleges MetLife Helped a Woman Keep Settlement Money From Her Daughter." The reporter was Leslie Scism, who interviewed Nicole. Aside from comments that "Nicole lives in a cheap apartment in Detroit, has $30,000 in student debt and sometimes relies on free-food pantries," Nicole said: "I could have done so many different things with my life" had she received the full proceeds, she had sometimes borrowed from her mother, and "The ironic thing was I was paying back myself."

General Observations
I think Nicole's attorneys—Wolin, David Jaroslawicz, and others—did excellent work on the case. The attorneys for MetLife are associated with the firm of Drinker Biddle & Reath LLP. I sympathize with them, because I think they were on the wrong side in this tragic case.

On February 9, 2018, Christina M. White, an attorney for New York City, submitted a statement in opposition to a MetLife motion to dismiss the amended complaint. I was impressed by her statement. She assembled a substantial amount of background information on the case despite the lack of many documents that were not available because of the document retention (document destruction) policy of several of the organizations involved in the case.

This is one of the most shocking cases I have ever seen. It is inconceivable to me that a mother would steal money month after month and year after year from her permanently disabled daughter.

Available Material
I am offering a complimentary 104-page PDF consisting of Nicole's amended complaint (15 pages), exhibits to the amended complaint (40 pages), the memorandum of law in opposition to MetLife's motion to dismiss the amended complaint (26 pages), Christina White's statement (19 pages), and the consent order (4 pages). Email and ask for the November 2018 package about the case of Herivaux v. MetLife.