No. 17: Caramadre Sentenced to Six Years in Prison

Chief Judge William E. Smith of the U.S. District Court in Rhode Island recently sentenced Joseph A. Caramadre to six years in prison in a bizarre case about which I have written in The Insurance Forum. Judge Smith also sentenced Raymour Radhakrishnan, an employee of Caramadre's firm, to one year and a day in prison. Edward Maggiacomo and Edward Hanrahan were unindicted co-conspirators. They worked with Caramadre, cooperated with the government, and were not charged. Radhakrishnan placed his faith in Caramadre, did not cooperate with the government, and was charged. (U.S.A. v. Caramadre and Radhakrishnan, U.S. District Court, District of Rhode Island, Case No. 1:11-cr-186.)

Background
In the June 2009 issue of The Insurance Forum, I wrote in general terms about stranger-originated annuities as a vehicle for money laundering. In the April 2010 issue, I discussed civil lawsuits filed by Transamerica and Western Reserve against Caramadre, Radhakrishnan, Maggiacomo, and Caramadre's firm. The complaints alleged that the defendants, using deceptive newspaper advertisements, located terminally ill persons, gave them small cash payments characterized as charitable donations, tricked them and their families into allowing investors to purchase large variable annuities on the lives of the ill persons, arranged for the annuities to provide guaranteed minimum death benefits and other features favorable to the investors, arranged for the investors to pay the premiums and be the beneficiaries, and allowed the investors to profit significantly from the deaths of the ill persons without risk of loss.

In November 2011, the U.S. Attorney in Rhode Island charged Caramadre and Radhakrishnan with 65 counts of wire fraud, mail fraud, conspiracy, identity fraud, aggravated identity theft, and money laundering. Caramadre was also charged with one count of witness tampering. The indictment described not only the variable annuity scheme but also a "death-put bond" scheme. In the latter scheme, a corporate bond was purchased jointly by an investor and a terminally ill person, with right of survivorship. The bond was purchased at a price well below face value. At the death of the ill person, the investor redeemed the bond at full face value.

In November 2012, the trial began. It was expected to last four months. On the first four days, the government presented 14 witnesses, whose testimony was devastating to the defendants.

At the beginning of the fifth day of the trial (a Monday), in a stunning development, the defendants pleaded guilty to one count of wire fraud and one count of conspiracy. Judge Smith closely questioned the defendants about the plea agreements that had been hammered out over the weekend, accepted the pleas, ruled the defendants guilty, set a sentencing date, and terminated the trial. The government agreed to recommend prison terms of not more than ten years and move for dismissal of the other charges at the time of sentencing. The defendants stipulated to a host of facts outlining the scope of their wrongdoing.

In January 2013, although Caramadre had sworn under oath at the plea hearing that he was satisfied with his legal representation, he fired his attorneys and retained new counsel. Then, in another stunning development, he filed a motion to stay all proceedings to permit the defendants to file a motion to withdraw the guilty pleas. Caramadre's public relations firm released this statement from him:

When I pled guilty in November, I did so relying on the advice of my lawyers, and because as a husband and a father I hoped the immediate end of the trial would alleviate the serious health issues that several members of my family were experiencing as a result of the trial.

However, to enter a guilty plea to something that I did not do, simply to relieve the pressure of a 3 1/2 year criminal process, was wrong. I am innocent of the allegations leveled by the federal government against me. In the coming days, I will be asking the Court to allow me to withdraw my plea, and for the opportunity to get my day in court, wherein I can actually defend the false and misguided accusations against me.

Judge Smith denied the motion to withdraw the guilty pleas. He called the effort "bizarre, without merit, and a cynical attempt to manipulate the judicial process." He ordered Caramadre jailed immediately because of flight risk, and delayed sentencing.

Caramadre filed a motion to reconsider the detention order; Judge Smith denied the motion. Caramadre appealed the denial; the U.S. Court of Appeals for the First Circuit affirmed the denial.

Sentencing Memoranda
In its sentencing memorandum, the government asked that Caramadre be imprisoned for ten years, the maximum under the plea agreement. Caramadre asked for two years in prison followed by two years of home confinement and 3,000 hours of community service during the home confinement.

The government asked that Radhakrishnan be imprisoned for eight years. Radhakrishnan asked for one day of prison, one year of home confinement, and 2,000 hours of community service.

Letters to Judge Smith
According to press reports at the time of sentencing, Judge Smith received 89 letters requesting leniency for Caramadre. The letters were not in the electronic court file, and could be viewed by the public only at the court clerk's office in Providence. Some of the letters reportedly were from prominent persons: Thomas J. Tobin, Catholic bishop of Providence; Raymond L. Flynn, former mayor of Boston; and Robert G. Flanders, former associate justice of the Rhode Island Supreme Court.

Caramadre's attorney filed a motion for sentence variation. Attached was a list of charities to which Caramadre contributed. The list did not show dates or amounts. Also attached to the motion was evidence of a contribution of at least $100,000 to United Way, a 1987 award from the Catholic Foundation of Rhode Island, an award from the Diocese of Providence, and an award from Big Brothers of Rhode Island.

Sentencing
On December 16, 2013, Judge Smith sentenced Caramadre to 72 months in prison on one of the counts in the plea agreement and 60 months on the other count, with the terms to run concurrently, three years of supervised release, a $200 special assessment, and no fine. Judge Smith granted the government's motion to dismiss the 64 other counts and the forfeiture allegation, and recommended to the Bureau of Prisons that Caramadre be placed in a facility "as close to Rhode Island as possible." Judge Smith denied Caramadre's motion to be released during the Christmas break, gave him credit for the time he served after being jailed as a flight risk, ordered him to participate in a program of mental health treatment, ordered him to perform 1,000 hours of community service per year for a total of 3,000 hours, and said the "service shall be devoted to the terminally ill elderly in hospice or palliative care or other service for the elderly like Meals on Wheels."

The judge sentenced Radhakrishnan to "12 months and 1 day" on each of the two counts in the plea agreement, with the terms to run concurrently, three years of supervised release, a $200 special assessment, and no fine. Judge Smith granted the government's motion to dismiss the 63 other counts and the forfeiture allegation, recommended to the Bureau of Prisons that Radhakrishnan be placed in the medium-security Federal Correctional Institution (Berlin, NH) "to maintain contact with his family," and ordered him to surrender on January 13, 2014. Judge Smith ordered Radhakrishnan to spend the first six months of supervised release on home detention, perform 1,000 hours of community service per year for a total of 3,000 hours, and said the "service shall be devoted to the terminally ill elderly in hospice or palliative care or other service for the elderly like Meals on Wheels."

Restitution
U.S. Magistrate Judge Patricia A. Sullivan filed a report about restitution. She said total losses from the scheme were $46.3 million. Losses to insurance companies from 195 annuity transactions were $33.9 million. Insurance companies that suffered losses exceeding $1 million were Nationwide ($11.4), Genworth ($4.0), Security Benefit ($3.0), ING ($2.8), Jefferson National ($2.5), Midland ($1.9), MetLife ($1.7), Hartford Life ($1.5), Pacific Life ($1.3), and Western Reserve ($1.1). Losses to bond issuers from 54 brokerage accounts were $12.4 million. Bond issuers that suffered losses exceeding $1 million were General Motors Acceptance ($4.7), Countrywide Financial ($2.7), and CIT Group ($2.3). Judge Smith delayed ruling on restitution.

Scope of Wrongdoing
To my knowledge, the Caramadre case is the only criminal case thus far relating to stranger-originated annuities. Judge Sullivan, in her report on restitution, and relying on stipulations in Caramadre's plea agreement, described the scope of the wrongdoing as follows:

The Plea Agreement's Statement of Facts lays out the basics of the scheme: Caramadre concocted an insurance annuity investment scheme beginning in 1995 and a death-put bond scheme in 2006; he was joined by Radhakrishnan in July 2007 and they continued until August 2010. The purpose of the scheme was to defraud financial institutions by purchasing variable annuities and death-put bonds with a guaranteed profit by surreptitiously including terminally-ill individuals with no relationship to the real investor as a "measuring life" for the transaction. The object was to fraudulently obtain significant sums of money from insurance companies and bond issuers by making material misrepresentations and omissions. To execute the scheme, the Plea Agreement describes how they fraudulently obtained the identity information and procured signatures from terminally-ill individuals by misrepresenting the true purpose of investment documents and concealing from the terminally-ill individuals and their family members that their identities would be used on annuities and bonds to be purchased by Caramadre and his co-conspirators, clients, and their families, as well as by taking steps to prevent the terminally-ill individuals from understanding the documents they were signing....

Another essential indicia of the scheme, according to the Plea Agreement, was repeated deception of insurance companies, bond issuers, broker-dealers and brokerage houses to prevent them from uncovering the true nature of the transactions. Caramadre, sometimes assisted by or acting through Radhakrishnan or the unindicted co-conspirators, lied to and manipulated his victims: telling insurance companies, broker-dealers and representatives from brokerage houses that some of the annuity owners were friends, clients or acquaintances of the terminally-ill individuals; opening annuities with small deposits that would not attract scrutiny; delaying the filing of death claims to avoid attention; opening brokerage accounts in Radhakrishnan's name although the funds actually belonged to Caramadre; lying about Radhakrishnan's assets and income to qualify him as an account owner; misrepresenting the purpose of the co-owner bond accounts; and falsely stating that some of the funds for the accounts came from the terminally ill....

Notice of Appeal
On December 27, 2013, Caramadre's attorney filed a notice of appeal. It reads:

Now comes the Defendant, Joseph Caramadre, through counsel, and hereby gives notice of appeal to the United States Court of Appeals for the First Circuit of the conviction, sentence, and orders in the above-referenced matter.

The minute entry about the December 16 sentencing hearing states: "Court verifies that the deft [defendant] has waived his right to appeal, pursuant to the plea agreement." The November 19 plea agreement states:

Defendant hereby waives Defendant's right to appeal the convictions and sentences imposed by the Court, if the sentences imposed by the Court are at or below the government's maximum recommended sentence.

It remains to be seen whether Caramadre will actually file an appeal and, if so, what he appeals. No longer does anything about this bizarre case surprise me.

Articles about the Case
In addition to the previously mentioned June 2009 and April 2010 issues of The Insurance Forum, I wrote about the Caramadre case in the March 2012, February 2013, April 2013, and October 2013 issues. The Providence Journal and ProPublica reported often about the case. When the defendants were sentenced, The New York Times and the Associated Press reported on the case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 16: A STOLI Civil Case in Federal Court in Utah

On December 3, 2013, U.S. District Judge Robert J. Shelby issued a 19-page Memorandum Decision and Order (Order) in a stranger-originated life insurance (STOLI) civil lawsuit. The plaintiff was PHL Variable Insurance Company, a unit of Phoenix Companies, Inc. The defendants were the Sheldon Hathaway Family Insurance Trust and Windsor Securities, LLC. The Order was issued five days after the Minnesota order discussed in my posting No. 13. (PHL v. Sheldon Hathaway Trust et al., U.S. District Court, District of Utah, Case No. 2:10-cv-67.)

The Sale
The lawsuit arose out of a $4 million life insurance policy issued by PHL on the life of Sheldon Hathaway, a retired heavy equipment operator and welder. PHL issued the policy on January 31, 2008. The beneficiary was a family insurance trust of which Hathaway's son David was trustee.

Hathaway lives on 15 acres of rural property in Payson, Utah. He owns a residence and a non-commercial farm. The residence is worth about $380,000. The farmland was valued at $530,000 in 2008, but by 2012 it had decreased in value to $340,000. He owns other minor assets, including farm equipment, an old Jeep, and a Ford truck. He receives annual income of about $30,000 from Social Security and company pensions.

Jay Sullivan, Hathaway's neighbor, showed Hathaway a brochure about investor-financed life insurance that supposedly carried no liability for the insured. Sullivan said the policy would cost nothing and Hathaway would receive $300,000 when the policy was sold after two years.

The Misrepresentations
Sullivan initially estimated Hathaway's net worth as $4 million. Hathaway later testified he questioned Sullivan's estimate, but Sullivan assured Hathaway the property was worth more than Hathaway thought. On the final application, Sullivan listed Hathaway's net worth as $6,250,000 and annual income as $484,500. Also, the application said that premiums would not be financed, and that neither Hathaway nor the trust intended to transfer an interest in the policy to a third party. Hathaway signed the application.

Brock Diediker, an insurance intermediary working with Sullivan, passed the application to Gabriel Giordano, a licensed insurance producer, and Giordano's company, PRG Financial Resources, Inc. Giordano submitted the application to PHL. Giordano also submitted a producer's report on December 10, 2007, saying he had met Hathaway. However, neither Diediker nor Giordano ever met Hathaway.

The Infolink Report
PHL sought confirmation of Hathaway's net worth from Infolink, which submitted an inspection report dated December 5, 2007. The report said the information in the application appeared accurate based on a conversation with Hathaway. PHL later learned that Infolink never contacted Hathaway or otherwise confirmed his net worth.

The Money Trail
Sullivan and other intermediaries worked with David to transfer to the trust's bank account enough money to pay the $200,000 initial policy premium. The source of the money was the San Diego law firm of Sadr & Barrera APLC (S&B), which was active in the secondary market for life insurance. On March 7, 2008, the day before the initial premium was due, S&B transferred $200,000 to the trust's bank account. The money stayed there about one day before it was sent to PHL. David saw Sullivan perform the transfers telephonically during a bank visit.

When the policy was issued, PHL paid a commission to Giordano. PHL also paid a commission to Crump Life Insurance Services, Inc., a PHL broker. Crump had an agreement under which Giordano received a portion of Crump's commission under certain conditions. Giordano paid a portion of his commission to Diediker and New Concepts Financial Corporation, with which Sullivan was affiliated. Through PRG, Giordano also paid Windsor $40,000. Windsor paid $200,000 to S&B. PHL contended the latter payment was to refund the money S&B provided to pay the initial premium. Windsor said it had no knowledge of S&B's involvement and believed the payment was a reimbursement to the trust.

The Investigations
On December 18, 2008, the Utah Department of Insurance wrote to PHL requesting information about Giordano. Alerted to the department's investigation, PHL undertook its own investigation of five policies connected to Giordano, including the Hathaway policy. When PHL was unable to confirm certain information, PHL began legal action to rescind the policies.

The PHL Lawsuit
On January 28, 2010, PHL filed a civil lawsuit against the trust. On April 13, 2011, Judge Shelby granted Windsor's motion to intervene. On September 17, 2012, PHL filed a motion for summary judgment and Windsor filed a cross motion for summary judgment. On December 3, 2013, Judge Shelby's Order granted PHL's motion for summary judgment and denied Windsor's cross motion for summary judgment. The Order instructed the court clerk to enter judgment rescinding the Hathaway policy, allowing PHL to retain the initial policy premium, and permanently dismissing Windsor's claims.

Conclusion
This is another of many STOLI civil lawsuits involving gross misrepresentations in policy applications. Here is a sentence in Judge Shelby's Order:

The court finds that there are no genuine issues of disputed fact and that the false statements in the policy application were material misrepresentations upon which PHL Variable relied.

I am offering the Order as a complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for Judge Shelby's Order.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 15: A Legal Victory for Life Partners

On May 18, 2011, Sean Turnbow and others filed a six-count complaint in federal court against four defendants: Life Partners, Inc. (LPI), an intermediary in the secondary market for life insurance; Life Partners Holdings, Inc. (NASDAQ:LPHI), the parent of LPI; Brian D. Pardo, chief executive officer of LPHI, and R. Scott Peden, general counsel and secretary of LPHI. On August 25, 2011, the plaintiffs filed a significantly amended four-count complaint alleging breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, and violation of the California Unfair Competition Law (UCL). (Turnbow v. Life Partners, U.S. District Court, Northern District of Texas, Case No. 3:11-cv-1030.)

On September 15, 2011, the defendants moved to dismiss the case. On March 12, 2012, the plaintiffs moved for class certification. On September 28, 2012, U.S. District Judge Barbara M. G. Lynn denied the motion to dismiss, except that she dismissed the UCL count subject to repleading within 21 days. On October 25, 2012, the defendants answered the amended complaint. On January 8, 2013, the judge set the jury trial to begin December 9, 2013. On July 9, 2013, she denied the plaintiffs' motion for class certification. On December 2, 2013, the plaintiffs moved for voluntary dismissal of the case, and the judge granted the motion.

The 8-K Report
On December 4, 2013, LPHI filed an 8-K (material event) report with the Securities and Exchange Commission. Here is the full text:

On December 3, 2013, Life Partners Holdings, Inc. issued a press release announcing that the plaintiffs in the case styled Turnbow v. Life Partners, Inc. (Case No. 3:11-cv-1030-M, 2013 U.S. Dist. Ct., N.D. Tex., Dallas Div.) have voluntarily dismissed their lawsuit. The dismissal follows the court's denial of a motion for class certification in the lawsuit.

The Press Release
LPHI attached to the 8-K an eight-paragraph press release entitled "Plaintiffs Dismiss Lawsuit Against Life Partners," the fourth paragraph of which contains three sentences from Judge Lynn's July 9 order denying the plaintiffs' motion for class certification. Here are the third, fourth, and fifth paragraphs of the press release:

While the plaintiffs in the case could have appealed the denial of the class action or continued to pursue the case as individuals, they elected instead to voluntarily dismiss the case against the Life Partners defendants. A key allegation was that Life Partners' medical consultant used an unreasonable method of estimating life expectancies. However, this allegation was criticized by the Court as part of its 34-page order denying certification as a class action:

"Proof only of results does not address these factors. Nor could an after-the-fact analysis of the insured's deaths, in the aggregate, establish that LPI was unreasonable in using Dr. Cassidy when and how it did.... The Court is highly skeptical that an analysis of results alone could lead a reasonable juror to determine that Dr. Cassidy's methods were flawed."

Life Partners CEO Brian Pardo commented, "This is yet another example of attorney-driven litigation which damages the entire economy, not to mention the companies that are the targets of such litigation. We are very pleased that the plaintiffs decided to walk away from this case and we hope to see other similar cases end the same way."

General Observations
The sentences LPHI quoted are from page 11 of Judge Lynn's 34-page memorandum opinion and order. The first sentence quoted was the final sentence of a nine-sentence paragraph. The second sentence quoted was the first sentence of the next paragraph, which was a four-sentence paragraph. The third sentence quoted was the third sentence of that four-sentence paragraph. I think LPHI selected the three sentences to serve its purposes.

Moreover, I think it is inappropriate for a public company to use a press release about the results of a court case as a vehicle for expressing the chief executive officer's personal opinions about the court system. It is also ironic when the chief executive is known as litigious.

I think readers must examine for themselves the extent to which the three sentences quoted were judiciously selected. For that reason, I am making the 34-page memorandum opinion and order available as a complimentary PDF. Send an e-mail request to jmbelth@gmail.com for Judge Lynn's order.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 14: New York Slams Markel for Overcharging on Student Health Insurance

On December 3, 2013, the Office of the New York State Attorney General (OAG) announced a $3.75 million Assurance of Discontinuance (AOD) with Markel Insurance Company for overcharging on college student health insurance plans. The AOD resolves an investigation by OAG and the New York State Department of Financial Services (DFS) revealing that the company's student health plans, college accident plans, and sports accident plans failed to meet legal requirements for minimum loss ratios.

Markel overcharged about 22,000 students at 34 New York colleges, some of which are units of the State University of New York (SUNY). Under the AOD, the company will pay about $2.75 million in restitution to students and colleges, and a combined penalty of $990,000 equally divided between OAG and DFS. The colleges at which the estimated number of students receiving refunds exceeded 500 are Albany College of Pharmacy & Health Science (1,000), Bard College (5,800), Clarkson University (750), Colgate University (1,400), Nyack College (1,850), St. Bonaventure University (1,000), St. Lawrence University (1,150), SUNY Binghamton (2,250), SUNY Oneonta (1,497), SUNY Potsdam (600), and Wells College (1,200).

The AOD also requires Markel to end an improper commission practice. Here is one paragraph of the AOD:

In addition, Markel paid bonuses or override commissions to at least one agent, based on factors such as the loss ratio. Markel entered into broker compensation agreements that provided that it would only pay the agent a bonus if the loss ratio was kept below 60%, which is below the 65% minimum loss ratio required by 11 NYCRR 52.45(f). Such agreements create conflicts of interest for the agent because they provide financial incentives for the agent to keep loss ratios low in violation of the law and contrary to the best interest of the schools' students. As a result of such agreements, Markel has paid hundreds of thousands of dollars in improper bonuses and commissions.

Also, pursuant to the Patient Protection and Affordable Care Act of 2010 (PPACA), the federal Department of Health and Human Services (HHS) issued a regulation in March 2012 covering the applicability of PPACA to student health insurance policies. HHS regulations, effective for policy years beginning July 1, 2012, require a minimum loss ratio of 80% for student health insurance policies.

OAG alleged that Markel violated three New York statutes and regulations: a statute that "prohibits persons or business entities from engaging in repeated fraudulent or illegal acts or otherwise demonstrating persistent fraud or illegality in the carrying on, conducting or transaction of business," a statute that "prohibits deceptive acts or practices," and a regulation that "requires that group and blanket health insurance achieve a 65% minimum loss ratio." The company neither admitted nor denied the allegations.

Markel said it exited the domestic student health insurance business nationwide and did not issue any blanket student health insurance plans for the 2012-2013 policy year. The company also said it will exit the blanket student accident insurance business and the blanket student intercollegiate sports accident insurance business in New York at the end of the 2012-2013 policy year.

I have combined the OAG press release and the AOD itself into a 17-page complimentary PDF. Send me an e-mail request at jmbelth@gmail.com for the OAG/Markel package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 13: A STOLI Case in Federal Court in Minnesota

On November 27, 2013, U.S. District Judge Ann D. Montgomery issued a Memorandum Opinion and Order (Order) in a stranger-originated life insurance (STOLI) lawsuit. The plaintiff is PHL Variable Insurance Company, a unit of Phoenix Companies, Inc. The defendant is Bank of Utah. The case is not yet fully resolved. (PHL v. Bank of Utah, U.S. District Court, District of Minnesota, Case No. 12-cv-1256.)

The Sale

The lawsuit arose out of a $5 million life insurance policy issued by PHL on the life of William Close, then a retiree aged 74. The policy was issued on September 11, 2007. Close died of lung cancer on November 18, 2011.

In May 2006, Harold Pomper, a broker for Lextor Insurance LLC, approached Close. Pomper said premiums would be paid by a loan, said Close's beneficiary would collect a death benefit if he died during the two-year contestability period, and submitted a preliminary application to PHL.

On August 11, 2007, Pomper and Brad Friedman, a Lextor representative, met with Close and his wife Kathleen. Pomper and Friedman later testified they completed an application at the meeting, but Kathleen did not recall paperwork there. The application listed Close as the proposed insured and the William Close 2007 Irrevocable Trust as the proposed owner of the policy. Friedman testified he and Close went through the questions on the application and Friedman hand wrote the answers provided by Close. Friedman did not request documentation to verify Close's answers. Friedman and Pomper testified they had no reason to doubt the accuracy of Close's answers.

The Misrepresentations

The application said Close had a net worth of $6,675,000, had an annual income of $350,000, had never applied for life insurance and been declined, and had never been convicted of a felony. Actual net worth was less than one-tenth the amount represented. Tax returns for 2006 and 2007 showed adjusted gross income below $20,000 each year. Close had applied for life insurance with another company and had been declined; Friedman's signature as a witness had been on the rejected application. Close had been convicted of a felony in 2002 for receiving illicit kickbacks while serving as a trustee for labor union pension funds.

The application included a client intent form. It asked whether the insured or owner would be borrowing to pay the premiums and, if so, the name of the financing program; the answer was checked "yes" and "CFC of Deleware [sic]" was indicated. The form asked whether the policy was being purchased in connection with any program under which the insured or owner may have been advised of the opportunity to transfer the policy to a third party within five years of issuance; the answer was checked "no." The form asked if the insured or owner had an understanding or agreement providing for a party other than the owner to obtain a legal interest in the policy or entity owning the policy; the answer was checked "no." The form was signed by Close, Friedman, and the trustee.

Kathleen testified they were told "right up front that [the policy] was going to be sold." She recalled Pomper and Friedman saying they would look for an investor to buy the policy within two years, and the Closes would receive $500,000 after the policy was sold. When asked whether there was any discussion about who would pay the premiums, she said: "Well, it definitely wasn't us... we didn't have that kind of income to support the policy."

Friedman and Pomper testified they told Close he could sell the policy after two years and it would be worth a percentage of the death benefit, but testified they did not promise Close $500,000. Friedman testified he informed Close of the option to repay the loan and keep the policy, and it was not his understanding Close obtained the policy to sell it.

The Infolink Report

On receiving the application, PHL obtained an "Infolink Advanced Amplified Life Report" to verify Close's financial and medical representations. The report, dated August 16, 2007, is under seal in the court file pursuant to a protective order. Infolink reports have turned up in other PHL STOLI cases, suggesting the company used them routinely.

The Infolink report was completed using answers given by Close in a telephone interview. The section about financial information was incomplete and inconsistent. Nearly all spaces for breakdowns of income and net worth were blank. The report showed annual income of $375,000 entirely from dividends, and net worth of $6.7 million. The report said the information provided by Close was confirmed by an unnamed personal reference who had known Close for five years. The PHL underwriter who underwrote the policy, when asked about the report, testified he would have wanted to obtain further verification of the information.

The application showed a planned annual premium of $272,025, amounting to 77 percent of Close's claimed income of $350,000. The underwriter and PHL's chief underwriter testified the ratio was unusually high and was something an underwriter would question. The underwriting file lacks evidence showing PHL sought or obtained further information about Close's finances before issuing the policy.

The Trust

The trust was established to own the policy and perform the obligations under a financing agreement with CFC of Delaware LLC. Kathleen was beneficiary of the trust, and BNC National Bank was trustee. Ryan K. Crayne was trust protector. He testified he served as trust protector for "at least a hundred trusts" associated with CFC.

The Premium Finance Loan

To pay the premium and meet other costs, Close applied for a loan from CFC, which made loans to irrevocable life insurance trusts under a program financed by New Stream Insurance LLC. The loan application provided Close would not pledge any assets, but would personally guarantee 25 percent of the loan if the trust defaulted. The record includes no evidence of attempts by CFC to verify Close's financial information.

CFC approved the loan and entered into an agreement with the trust on September 18, 2007. CFC agreed to lend the trust $330,225, consisting of $272,025 of premium, closing fees of $16,000, an origination fee of $11,200, and $1,000 to terminate the trust. The term of the loan was two years. The trust granted CFC a security interest in the policy. BNC, the trustee, executed a collateral assignment of the policy to CFC and submitted it to PHL, which recorded the assignment on or about October 1, 2007. There is no evidence that CFC performed any underwriting about the trust's ability to repay the loan. The funds were provided by New Stream, a hedge fund that invested in life insurance products; it later entered bankruptcy proceedings.

The Policy Surrender

In July 2009, CFC wrote to the Closes and Crayne, the trust protector, saying the loan to the trust would mature in December 2009. CFC said the four options to repay the loan were (1) refinance with CFC, (2) refinance elsewhere, (3) repay the loan with personal funds, or (4) sell the policy and use the proceeds to repay the loan.

Close spoke with Friedman about selling the policy. Close sent his medical records to Friedman on October 8, 2009. The records showed a mass in his left lung and possible metastatic lesions in both lungs, said Close was under the care of an oncologist, and noted Close's "possible cancer."

Friedman testified he tried to sell the policy but did not recall to or through whom he made the attempt. He further testified the "policy wasn't worth a lot of money at the time" because Close "was relatively healthy, I think." The policy was not sold.

On January 7, 2010, Crayne, the trust protector, without speaking with Close about Close's intent concerning the policy, and without knowledge of Close's medical diagnosis, sent a letter instructing BNC, the trustee, to deliver forms to PHL to change the owner and beneficiary of the policy to New Stream. Crayne directed BNC to wait to receive signed documents from Close and Kathleen. When asked if surrender of the policy was the best option available to Close, Crayne testified he would have expected Close to "scramble to find refinancing" and keep the policy if he was ill.

A week later, Close and BNC executed documents surrendering the policy to CFC in full satisfaction of the trust's obligations to CFC. CFC designated New Stream as assignee of the policy in full satisfaction of CFC's obligations to New Stream relating to the policy. Kathleen executed a document acknowledging the trust's surrender of the policy to New Stream. New Stream submitted change of ownership and change of beneficiary forms to PHL, which recorded the changes.

New Stream transferred the policy to Bank of Utah as securities intermediary. PHL was informed and recorded the transfer. On June 2, 2011, New Stream sold its interest in the policy to Limited Life Assets Services Limited (LLAS) in connection with the liquidation of New Stream's assets in bankruptcy. Bank of Utah became securities administrator for LLAS. In January 2012, after Close's death, Bank of Utah submitted a claim to PHL for the $5 million death benefit.

The PHL Lawsuit

On May 24, 2012, PHL filed a lawsuit against Bank of Utah seeking a declaratory judgment that the policy was null and void ab initio (from the beginning) due to a lack of insurable interest when the policy was issued, and that PHL may retain the premiums. On July 3, 2012, Bank of Utah answered the complaint and filed a counterclaim for breach of contract and unjust enrichment based on PHL's refusal to pay the death claim and retaining the premiums. On August 1, 2013, PHL and Bank of Utah each filed motions for summary judgment, and each filed motions to exclude expert testimony.

The Order

In her Order, Judge Montgomery granted in part and denied in part PHL's motion for summary judgment. She ruled the Close policy was void ab initio, but denied PHL's request to retain the premiums pending resolution of Bank of Utah's counterclaim for unjust enrichment. She denied Bank of Utah's motion for summary judgment on its counterclaim for unjust enrichment, thereby leaving the matter to be resolved at trial. She dismissed Bank of Utah's motion for summary judgment on its counterclaim for breach of contract. She denied motions by both PHL and Bank of Utah to exclude expert testimony.

General Observations

This is one of many STOLI lawsuits involving gross misrepresentations in the application and grossly deficient underwriting by the insurance company. Here are a few excerpts from Judge Montgomery's Order illustrating these characteristics:

There is no dispute the completed Application included gross misrepresentations.

When viewed in totality, the transactions demonstrate that the loan and Trust arrangements among Close, CFC, and New Stream were, in practice, hollow formalities designed to circumvent the insurable interest requirement. The transactions' form will not be allowed to prevail over their substance.

...the record shows PHL had some knowledge of facts that would have put it on notice that the Policy was being procured as a cover for a wager, and that PHL did not investigate those facts.

It remains to be seen whether there will be appeals, and whether Bank of Utah's counterclaim for unjust enrichment will go to trial. Meanwhile, I am offering the 34-page Order as a complimentary PDF. Send me an e-mail request at jmbelth@gmail.com for Judge Montgomery's Order.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 12: The Expanded and Improved Medicare For All Act of 2013

On February 13, 2013, U.S. Representative John Conyers (D-MI) introduced H.R. 676, the "Expanded and Improved Medicare For All Act." The bill has 53 cosponsors (all Democrats) in the House of Representatives. On February 22, the bill was referred to the Subcommittee on Indian and Alaska Native Affairs of the Committee on Natural Resources. There has not been any other action on the bill. Here is the bill summary prepared by the Congressional Research Service:

Establishes the Medicare for All Program to provide all individuals residing in the United States and U.S. territories with free health care that includes all medically necessary care, such as primary care and prevention, dietary and nutritional therapies, prescription drugs, emergency care, long-term care, mental health services, dental services, and vision care.

Prohibits an institution from participating unless it is a public or nonprofit institution. Allows nonprofit health maintenance organizations (HMOs) that deliver care in their own facilities to participate.

Gives patients the freedom to choose from participating physicians and institutions.

Prohibits a private health insurer from selling health insurance coverage that duplicates the benefits provided under this Act. Allows such insurers to sell benefits that are not medically necessary, such as cosmetic surgery benefits.

Sets forth methods to pay institutional providers of care and health professionals for services. Prohibits financial incentives between HMOs and physicians based on utilization.

Establishes the Medicare for All Trust Fund to finance the Program with amounts deposited: (1) from existing sources of government revenues for health care, (2) by increasing personal income taxes on the top 5% income earners, (3) by instituting a modest and progressive excise tax on payroll and self-employment income, (4) by instituting a modest tax on unearned income, and (5) by instituting a small tax on stock and bond transactions. Transfers and appropriates to carry out this Act amounts that would have been appropriated for federal public health care programs, including Medicare, Medicaid, and the Children's Health Insurance Program (CHIP).

Requires the Medicare for All Program to give first priority in retraining and job placement and employment transition benefits to individuals whose jobs are eliminated due to reduced administration.

Requires creation of a confidential electronic patient record system.

Establishes a National Board of Universal Quality and Access to provide advice on quality, access, and affordability.

Requires the eventual integration of the Indian Health Service into the Program, and an evaluation of the continued independence of Department of Veterans Affairs (VA) health programs.

A Few Thoughts

During the 40 years of The Insurance Forum, I rarely wrote about the tragic situation of those in our great nation who have no insurance covering the cost of health care and those who have inadequate coverage. A few exceptions were articles contributed by Alan Press in our March 2008, June 2008, October 2009, and December 2009 issues, and my article in the June 2010 issue about the then recently enacted Patient Protection and Affordable Care Act (PPACA).

I have said on occasion that I support the concept of a single-payer system of universal health care. I have not embraced the PPACA, because I think it is a complex compromise that will not solve the problems we face. Also, I am pessimistic about the likelihood of enactment of a single-payer system, such as H.R. 676. Whenever anyone asks me why we do not have universal health care of the type found in every other advanced society in the world, my one-word answer is "Politics."

In my opinion, the enactment of Social Security in 1935 and Medicare in 1965 were the two greatest political achievements of the past century. Each occurred as the result of an extraordinary combination of events. I think it will require a similar combination of events for the U.S. to enact a system of universal health care, which thus far has eluded Presidents Theodore Roosevelt, Harry Truman, and Barack Obama.

No. 11: More on the Dilemma for Consumers When an Insurance Company Is Sold

In the December 2013 issue of The Insurance Forum, published November 7, I wrote about the dilemma faced by policyholders when an insurance company is sold by its parent company in such a way as to cause a downgrade in the insurance company's financial ratings. In the article I cited the recent divestitures of Aviva Life & Annuity Company by Aviva plc and Lincoln Benefit Life Company by Allstate Life Insurance Company. I suggested that the problem would be alleviated if rating firms assign stand-alone ratings to the subsidiary unless the parent company provides an unlimited, permanent, and unconditional parental guarantee to the subsidiary.

Moody's Special Comment

On November 20, Moody's Investors Service, a major rating firm, issued a six-page "Special Comment" entitled "US Life Insurance: Recent Divestitures Raise Questions about Parental Commitment." Moody's cited five recent divestitures in addition to the two I cited: Sun Life Assurance Company of Canada US by Sun Life Financial, MONY Life Insurance Company and MONY Life Insurance Company of America by AXA Financial, and Commonwealth Annuity & Life Insurance Company and First Allmerica Life Insurance Company by Goldman Sachs Group. Here is the opening paragraph of the special comment:

Insurance subsidiaries' creditworthiness often benefits from implied support stemming from a unit's strategic importance to a stronger parent and/or group of other operating subsidiaries that are managed as a tightly integrated group. This implied support has been validated in practice over time and is typically reflected in higher ratings for those subsidiaries than they would merit on their own. However, recent subsidiary dispositions, most prominently in the US life insurance sector, raise new questions about the reliability of this implied support over time as parent strategies change.

An Interesting Table

The special comment includes an interesting table listing eleven U.S. life insurance companies that receive "rating uplift" from their parent companies. Here are the companies, with the number of "notches of rating uplift" in parentheses: Allianz Life Insurance Company of North America (1), Allstate Life Insurance Company (2), AXA Equitable Life Insurance Company (2), Combined Insurance Company of America (1), Great-West Life & Annuity Insurance Company (1), Hartford Life Insurance Company (1), HCC Life Insurance Company (1), Jackson National Life Insurance Company (1), John Hancock Life Insurance Company USA (1), USAA Life Insurance Company (1), and Zurich American Life Insurance Company (2).

Conclusion

In the concluding section of the special comment, Moody's says "implicit support may lack permanence" and "shifts in strategic importance of subsidiaries can result in rating transitions." However, Moody's does not mention the possibility of a subsidiary obtaining an unlimited, permanent, and unconditional guarantee from its parent. I will provide the special comment in the form of a complimentary PDF. Just send me an e-mail request for Moody's special comment on recent divestitures.