Monday, June 30, 2014

No. 55: Watergate—The Reissue of a Superb Book on the Subject

August 9, 2014 is the 40th anniversary of the resignation of President Richard Nixon in the wake of the Watergate affair. In those days I followed the news closely, and I read several books on the subject. One book I did not read then was by Elizabeth Drew, a regular contributor to The New York Review of Books and the former Washington correspondent of The New Yorker and The Atlantic. She lives in Washington, is the author of several books, and is a gifted writer.

As Drew explains, on the day after Labor Day in 1973, she and William Shawn, editor of The New Yorker, decided she should write a journal of the period we were entering that Fall. In 1974 her resulting journal ran in The New Yorker "as sets of three parts each," and in 1975 it was published as a book entitled Washington Journal: Reporting Watergate and Richard Nixon's Downfall.

Drew's book has been out of print for many years. Recently, with the anniversary approaching, Drew arranged for a new printing of the book. The new book includes an "Afterword" identifying some things learned in the years after the resignation, and describing Nixon's efforts to rehabilitate himself during the 20 years until his death in 1994.

Drew's book, despite the seriousness of the subject, is laced with humor. One example involved John W. Dean, III, counsel to the President, and John D. Erlichman, assistant to the President for domestic affairs:
Dean has said that Erlichman suggested that he shred the sensitive documents, and "deep six" the other material in the Potomac one evening on his way home to Virginia. Erlichman denied later that he had made either suggestion. He said that he had never in his life proposed to anyone that they shred papers. He said his practice was to burn them.
The book has no photographs, but they are not needed. Drew paints vivid pictures with words. For example, here is a small part of her description of Nixon when he announced his resignation on television the evening before it became effective:
It is hard to believe that this is the last speech Richard Nixon will make as President. Yet there he is, sitting in that familiar scene, at the familiar desk, one flag in his lapel, one by his side, holding white sheets of paper.... He looks bad—the face more creased and drawn. He is wearing a dark suit, a dark tie, and a white shirt....
Drew's 450-page book is superb, but I have a warning. For people who were not around at the time, for people who were around but did not follow developments closely, and for people who are not familiar with the Washington scene, it will be difficult to sort out all the individuals, events, and details. In the front of the book is a five-page list of "Figures in the Events of 1973-1974," but even that is only a small fraction of the people mentioned in the book.

On the other hand, for those familiar with the events and the cast of characters, Drew's book is a delight—a beautifully written page turner. It resembles a diary describing day-by-day developments, and it is extremely difficult to put down. It begins with Labor Day 1973, more than a year after the famous June 1972 break-in, and almost a year after Nixon's landslide reelection victory in November 1972. There are many flashbacks to events that occurred before September 1973.

In the Afterword, Drew refers to the Watergate affair as "the second greatest test of the Constitutional system in our nation's history," implying that the greatest test was the Civil War. I recall others making a similar statement, and I agree with them. If you do not agree, reading Drew's book might cause you to reconsider. I strongly recommend the book.

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Monday, June 23, 2014

No. 54: Daniel Carpenter and a Host of Criminal Allegations

Daniel E. Carpenter (Simsbury, CT), attorney and businessman, was scheduled to report to a federal prison on Friday, June 20. His saga involves cases over more than a decade in federal district courts, circuit courts of appeal, and the Supreme Court. Among the federal agencies involved in the cases are the Department of Justice, the Department of Labor, the Department of the Treasury, and the Internal Revenue Service (IRS). Several cases are ongoing despite Carpenter's incarceration.

The Section 1031 Fraud Allegations
Carpenter owned and operated Benistar, Ltd. and its subsidiaries. One Benistar function was to act as an intermediary in Section 1031 property exchanges. That section of the Internal Revenue Code allows the owner of investment property to defer capital gains taxes on the sale of the property by rolling the proceeds of the sale into the purchase of replacement property. However, the tax deferral is lost if the owner (the "exchangor") takes possession of the sale proceeds. Therefore, companies such as Benistar offer to act as an intermediary by holding the proceeds in escrow until the exchangor is ready to close on the replacement property.

Carpenter promoted the services of Benistar by offering to hold the funds safely, pay a small amount of interest, and provide the funds when needed. However, without the knowledge or consent of the exchangors, Carpenter embarked on a highly speculative program of options trading in the hope of generating large gains for himself.

Carpenter at first used an account at Merrill Lynch, which warned him about the dangers of options trading. He then switched to Paine Webber, which also warned him about the dangers. Initially his plan worked well, but early in 2000 he began suffering large trading losses. By late 2000 the losses had mushroomed to about $9 million.

In February 2004, a federal grand jury in Massachusetts returned a 19-count indictment charging Carpenter with 14 counts of wire fraud and five counts of mail fraud. The indictment identified seven exchangors who lost a total of about $9 million. Carpenter pleaded not guilty on all counts. In September 2004, the grand jury returned a superseding 19-count indictment. Carpenter again pleaded not guilty on all counts.

In July 2005, a 13-day jury trial ended with conviction on all counts. In December 2005, the judge granted Carpenter's motion for a new trial on the grounds that the government used inflammatory language in its closing argument. The First Circuit, in a split decision, upheld the district court's ruling. The Supreme Court declined to review the case.

In June 2008, a second 13-day jury trial ended with conviction on all counts. Carpenter again filed a motion for a new trial. After a three-year delay, the judge granted the motion on the grounds that the government erred in various ways in the closing argument. This time, however, the First Circuit reversed the judge's ruling, reinstated the conviction, and remanded the case for immediate sentencing. The Supreme Court again declined to review the case.

In presentencing memoranda, Carpenter asked for probation and the government asked for 60 months' imprisonment. In February 2014, the judge sentenced Carpenter to 36 months in federal prison on each count, with the terms to run concurrently. That is to be followed by 36 months of supervised release, with the terms to run concurrently.

In the presentencing memoranda, Carpenter said there should be no restitution because the victims had won settlements from Merrill Lynch and Paine Webber, and the government asked for about $14 million in restitution. The judge ordered Carpenter to pay restitution of about $310,000, fined him $100,000, and assessed him $1,900. Initially the judge ordered Carpenter to report to prison on April 25, but later changed the reporting date to June 6, and still later to June 20.

On May 23, 2014, the judge denied Carpenter's motion for a stay of imprisonment pending appeal. The judge reasoned that Carpenter's business activities present a danger of "pecuniary or economic harm" to the public. On June 11, Carpenter filed a notice of appeal to the First Circuit. (U.S.A. v. Carpenter, U.S. District Court, District of Massachusetts, Case No. 1:04-cr-10029.)

The Section 419 Angle
Carpenter marketed multi-employer welfare benefit plans. For many years the IRS has been investigating such plans, through which participants may qualify for favorable federal income tax treatment under Section 419 of the Internal Revenue Code. Contributions to Section 419 plans may be deductible for federal income tax purposes. The IRS considers some of the plans to be abusive tax shelters.

Since 2004, the IRS has been trying to obtain from Carpenter detailed information about his Section 419 plans. He provided some documents, but has fought hard against releasing all the requested documents. In 2008, the IRS filed a lawsuit in an effort to obtain the documents. The case is ongoing. (U.S.A. v. Carpenter, U.S. District Court, District of Connecticut, Case No. 3:08-mc-111.)

The STOLI Fraud Allegations
In December 2013, the U.S. Attorney in Connecticut filed a 33-count indictment against Carpenter and his brother-in-law, Wayne Bursey, relating to stranger-originated life insurance (STOLI). There were 23 counts of wire fraud, nine counts of mail fraud, and one count of conspiracy. Another person mentioned in the indictment was Joseph Edward Waesche IV, an insurance agent who worked with Carpenter. Waesche was charged in a separate case described later.

The indictment provides background on life insurance in general and STOLI in particular. It alleges that Carpenter and his associates provided materially false information to life insurance companies ("providers") regarding the purpose of the insurance, the income and net worth of the insured, the presence of premium financing, and the intent of the applicant to sell the policy in the secondary market for life insurance.

The indictment describes how providers are harmed by earlier and greater payout of death benefits, reduced premium income, financial projections rendered unreliable, delayed premium payments, and payment of large commissions. The providers mentioned are American National, AXA Equitable, Jefferson Pilot, Lincoln National, Metropolitan Life, Penn Mutual, Phoenix, Sun Life of Canada, and Transamerica.

Because Lincoln National received funds under the Treasury Department's Troubled Asset Relief Program (TARP), TARP's special inspector general is involved in the case. Also, because of the multi-employer welfare benefit plans, the Department of Labor is involved.

The indictment describes a Section 419 plan in which Bursey was plan sponsor and trustee of the plan and the accompanying trust. The plan purported to provide death benefits to employees of employers who adopted the plan. An adopting employer designated one or more employees ("straw insureds") on whom the trust purchased life insurance policies.

The indictment mentions 12 straw insureds ranging in age from 69 to 78. The straw insureds were promised free life insurance for two years and a share of the proceeds when the policies were sold in the secondary market after two years. The straw insureds were not obligated to pay anything and were told the premiums were being borrowed from a third party, which was a Benistar affiliate. Each straw insured was told the loan would be repaid from the death benefit if the insured died within two years or from the proceeds when the policy was sold in the secondary market after two years. Although the indictment mentions Section 419 plans, there is no mention of whether the income tax advantages of those plans were a factor in promoting the STOLI arrangements.

Carpenter and Bursey pleaded not guilty on all counts and were released on bond. The jury trial was set for March 11, 2014.

On January 30, 2014, Carpenter filed a motion to delay the trial. On February 4, Bursey filed a motion to delay the trial. On March 5, the U.S. Attorney filed a motion to delay the trial. On March 10, the judge granted the motions and reset the trial for March 10, 2015.

On May 14, 2014, the U.S. Attorney filed a 57-count superseding indictment against Carpenter and Bursey. The added counts were one count of conspiracy to commit money laundering, 13 counts of engaging in illegal monetary transactions, and ten counts of money laundering. The superseding indictment also added details about one additional straw insured. On May 17, Carpenter pleaded not guilty on all counts. On June 5, Bursey filed a motion to delay his arraignment because of illness. On June 6, Carpenter filed a motion to dismiss the superseding indictment for lack of federal jurisdiction. (U.S.A. v. Carpenter, U.S. District Court, District of Connecticut, Case No. 3:13-cr-226.)

The Waesche Case
In December 2013, the U.S. Attorney filed an "Information" charging Waesche with one count of conspiracy. Waesche pleaded guilty, was released on bond, and has not yet been sentenced. (U.S.A. v. Waesche, U.S. District Court, District of Connecticut, Case No. 3:13-cr-224.)

The Information describes the false answers Waesche and others gave in a total of five applications submitted to Lincoln National, Phoenix, and Penn Mutual. Here is what Waesche said in his own handwriting in his plea petition:
Beginning in 2006 and continuing until around 2013, I agreed with others with whom I worked in Simsbury, Stamford and Norwalk to take steps to get insurance companies to issue life insurance policies under false pretenses that would be financed by others and sold on the life settlement market. I caused to be submitted to life insurance companies false applications that stated that the policies were not being financed by outside investors, that there were no discussions about the sale of the policies, and that the policies were for legitimate estate planning needs. Specifically, I submitted such an application on July 3, 2008 to Penn Mutual. I knew what I was doing and I knew that it was wrong.
In a June 6 motion to dismiss the superseding indictment in the STOLI case, Carpenter calls Waesche "now an admitted felon" and blames Waesche for the problems. Carpenter denies knowing what was going on and claims to have been a victim of Waesche's activities.

General Observations
The one Massachusetts case and the three Connecticut cases described in this post are not all the ongoing cases relating to Carpenter. For example, documents in those cases refer to cases involving Carpenter in New York and Wisconsin. However, the cases described here provide insight into the scope of the alleged criminal activities in which Carpenter has been engaged for more than a decade.

The 21-page sentencing memorandum filed by Carpenter and the 18-page sentencing memorandum filed by the government in the case concerning the Section 1031 property exchanges provide interesting contrasts about the views of the parties. I offer the two memoranda (without exhibits) as a complimentary 39-page PDF. Send an e-mail to jmbelth@gmail.com and ask for the Carpenter package.
 
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Monday, June 16, 2014

No. 53: Florida's Pasco County School District Rejects a Proposed Life Insurance Plan

In Nos. 43 and 48 posted April 21 and May 12, I discussed a life insurance plan promoted to the Pasco County School District (Land O'Lakes, FL) by Pollock Financial Group (Chagrin Falls, OH). I said this in both posts: "My unsolicited advice to the district is to reject the plan." As reported in No. 48, the Florida Office of Insurance Regulation (FLOIR) initiated an "official inquiry" into the plan. In this follow-up, I discuss the results of the inquiry.

The Miller Letter
On June 12, Belinda Miller, general counsel of FLOIR, sent a five-page letter to Alison Crumbley, chairwoman of the Pasco County School Board. The letter says FLOIR reviewed documents submitted by Pasco in response to the "official inquiry" letter, documents submitted by Pollock Financial Group, and documents relating to similar proposals by Pollock Financial Group to two other governmental units in Floridathe City of Sarasota and the Gulf County School Board (Port St. Joe, FL).

On May 8, FLOIR met with William "Bill" Olive (Clearwater, FL), Mark G. Pollock, Rene Stuifzand, John "Drew" Smith, and attorneys for Pollock Financial Group. The attorneys were Bruce D. Platt and Edward L. Kutter of Akerman LLP (Tallahassee, FL).

Stuifzand was introduced to Pasco by Olive as the "architect of this entire program." According to the Miller letter, Stuifzand "was allegedly a participant in an alleged fraud scheme at InsCap Capital Markets, LLC."

The Miller letter says the earlier versions of the plan proposed to the City of Sarasota and the Gulf County School Board listed William A. "Tinker" Kelly (Nashville, TN) and Derek Siewert (Jacksonville, FL) as team members. The letter mentions consent orders they entered into with the Pennsylvania Insurance Department regarding a "Legacy Life Insurance Program" implemented in Pennsylvania in 2012-2013.

The Miller letter says FLOIR does not have any "finalized documents" relating to the proposed Pasco plan, such as "a finalized life insurance policy form or the name of the Bermuda life insurance company that would issue the policies." The letter mentions these other concerns:
  • Neither Pasco nor its employees would be an owner or beneficiary of the policies. Rather, the policies would be owned by an offshore investment vehicle, and the investment vehicle and an offshore trust would be the beneficiaries. Thus, other than any contractual obligations between the Cayman Islands trust and Pasco's trust, Pasco has no guarantee of receiving any money from the plan.
  • There is significant doubt that Pasco would have any enforceable rights to insurance money in exchange for the effort and expense of administering the plan.
  • Money from the plan may be taxable to the employees' designated beneficiaries.
  • Issuance of insurance may potentially exhaust or limit the employees' ability to purchase life insurance in the future.
  • The plan may violate Florida's insurable interest law.
  • The plan may violate Florida's group life insurance law.
The Miller letter uses strong language to discourage Pasco from entering into the arrangement. The next to last sentence reads:
In sum, as explained more fully above, the Office [FLOIR] has significant concerns relating to this proposal and has significant doubts that such an arrangement would comply with Florida law.
The Lathrop Memorandum
FLOIR conducted a records and background search on individuals involved in making the proposal to Pasco, including Stuifzand, Olive, and Mark Pollock. The results of the searches relating to them are presented in a six-page thoroughly sourced memorandum dated June 11 and sent to Miller by Alyssa S. Lathrop, assistant general counsel of FLOIR.

With regard to Stuifzand, the Lathrop memorandum discusses not only the InsCap matter but also some subsequent litigation. It also mentions a Chapter 7 individual bankruptcy filing in 2012 and says Stuifzand does not currently hold a broker's license.

With regard to Mark Pollock, the Lathrop memorandum says he currently has appointments with Lincoln National, Connecticut General, Berkshire Life of America, Guardian Life, Principal Life, and Great-West Life & Annuity, none of which is featured in the proposal to Pasco. The memorandum also says that he and his wife filed for Chapter 7 individual bankruptcy in 2012, and that Pollock Financial Group is not registered with the Florida Division of Corporations to do business in Florida.

With regard to Olive, the Lathrop memorandum says he holds three life insurance, health insurance, and variable annuity licenses with the Florida Department of Financial Services. The memorandum also says he currently has no active appointments with any insurers licensed in Florida.

The Platt/Kutter Memorandum
On May 14, Platt and Kutter, attorneys for Pollock Financial Group, sent a four-page memorandum and several attachments to Miller responding to several issues that arose at the May 8 meeting. As mentioned earlier, one of Miller's concerns is the possible effect of the program on the ability of an employee to purchase life insurance in the future. The version of the program provided to FLOIR does not indicate the amount of insurance on each life, but in No. 48 I said one version of the program mentioned $250,000 and another mentioned $350,000. Either way, it is a fairly substantial amount for Pasco teachers and other employees.

On that point, Platt and Kutter explain why the program would not affect an employee's ability to buy life insurance in the future. Here is the explanation, which contains the troublesome implication that the employee, in any future application, would be expected to conceal from the life insurance company the existence of the Pasco coverage:
Insurance companies use various formulas and information sources when calculating the total insurance capacity for an individual. The information is heavily weighted toward (a) reason for insurance and (b) net worth. The central database for information on individual insurance policies is maintained by MIB [Medical Information Bureau] Group. MIB is owned by its insurance company members who voluntarily report information on insureds to the central database (www.mib.com). The sole source of information for MIB is information that is self-reported by its members. The potential Bermuda insurance company is not a member of MIB and does not report information to MIB. Additionally, MIB contains information relating solely to individual life insurance policies. Group life insurance policies are not reported to MIB. Additionally, the individual insured is not a beneficiary under a group life insurance policy. As such, the death benefit accruing thereunder would not be counted in an individual's total insurance capacity. In light of the foregoing, the Contract should have no impact on an individual's eligibility for individual life insurance coverage.
General Observations
I requested but have not yet received an official statement from Pasco that it will reject the plan. In answer to my inquiry on June 13, however, a spokesperson made this unofficial statement, which leaves no doubt about what will happen:
At this point, I can say we will not be moving forward with any agreements with Pollock Financial Group, Bill Olive, or any of them. We were waiting on the FLOIR report, and we are grateful for their research and recommendation. From the board members I have spoken with today, they have no interest in continuing discussions about Legacy Life, a Benefit Stabilization Plan, or any other metamorphosis of the product.
On June 14, The Wall Street Journal carried an article about the situation. The article is entitled "'Doubts' Over Insurance Plan" and is under the byline of reporter Leslie Scism.

In No. 48, I offered a "Pasco Package," a complimentary 14-page PDF containing several important documents. In this follow-up, I offer a "Second Pasco Package," a complimentary 15-page PDF containing the Miller letter, the Lathrop memorandum, and the Platt/Kutter memorandum (without attachments). Send an e-mail to jmbelth@gmail.com and ask for the second Pasco package. Also, the first Pasco package is still available.

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Tuesday, June 10, 2014

No. 52: Massachusetts Mutual's Corporate Governance


In June 2005, corporate governance at Massachusetts Mutual Life Insurance Company came to public attention when the board of directors fired Robert J. O'Connell, the company's chairman, president, and chief executive officer. The action led to a protracted dispute over O'Connell's severance package. (See the July 2005, January/February 2007, and March/April 2007 issues of The Insurance Forum.)

In February 2014, MassMutual sent policyholders a proxy statement announcing the annual meeting to be held April 9 at the company's home office in Springfield. The proxy included several bylaw changes to be voted on at the meeting. The changes angered Jessica C. Rule (Natick, MA), a policyholder. She retained Jason B. Adkins of the Boston law firm of Adkins, Kelston & Zavez, P.C. Around the same time, the company received two awards for excellence in corporate governance. In this post I discuss the controversy over the bylaw changes and mention the awards.

The Bylaw Changes
Numerous bylaw changes were proposed. In the order in which the changes appeared in the proxy, here are 12 that deserve comment.
  1. The old bylaws said the annual meeting was to be held at the home office in Springfield. The new bylaws say the meeting will be held as determined by the board "at any location ... either within or outside of the Commonwealth of Massachusetts." Allowing the board to hold the meeting anywhere in the world could cause inconvenience for policyholders who want to attend.
  2. For a special meeting, the new bylaws provide for notification to policyholders through announcements in newspapers. The bylaws should provide for notification to policyholders by mail. 
  3. For an item to be brought to an annual meeting, or to call for a special meeting, the bylaws require the request to be signed by at least half of 1 percent of the policyholders. That requirement creates a huge barrier because policyholders have no means of communicating among themselves. 
  4. The new bylaws provide that policyholders who request a special meeting would be "jointly and severally" responsible for paying the costs of the meeting, including the mailing of proxy statements, unless all the resolutions introduced by those policyholders are adopted. This is a harsh change. 
  5. A bylaw change eliminates a provision that allowed, at the board chair's discretion, a matter raised by a policyholder to be brought before a meeting for a vote or to determine the "sense" of the policyholders, even when the steps taken to raise the matter did not follow the bylaws. That change is regrettable. 
  6. A bylaw change allows the chair to adjourn a meeting for any reason, to another date, time, or place, without notice to policyholders if a new meeting is held within 30 days. This change eliminates notification requirements and gives the chair the power to suspend a meeting at which policyholders are poised to adopt a change that is contrary to the wishes of management. This is a harsh change. 
  7. A bylaw change lowers the minimum board size from 11 to 7, and leaves the maximum at 21. 
  8. A bylaw change eliminates the mandatory retirement age of 70 for directors. 
  9. A bylaw change eliminates the requirement that directors be given 48 hours' notice of a board meeting. 
  10. A bylaw change eliminates the requirement that a quorum for a board meeting has to be at least seven directors, a majority of whom are independent directors. Now the bylaws say a quorum is a majority of the directors in office. 
  11. A new bylaw provision allows approval of a bylaw change or repeal by a two-thirds vote at a policyholders' meeting following board approval of such bylaw change or repeal. This harsh provision allows the change or elimination of a bylaw previously approved by the policyholders. 
  12. A new bylaw provides that the board may remove an officer at any time with or without cause. That may have been added for clarity as a result of the dispute in the O'Connell matter.
The March 20 Adkins Letter
On March 20, on Rule's behalf, Adkins wrote to Mark Roellig, executive vice president and general counsel of MassMutual. Adkins asked for documents relating to the board's deliberations and approval of the bylaw changes. He also expressed concern about some of the changes.

The March 27 Lashway Letter
On March 27, Scott Lashway, vice president and assistant general counsel of MassMutual, replied. He said Rule does not have a right of access to the company's books and records, for two reasons. First, he cited statutes that do not provide for policyholder access. Second, he cited cases on the lack of a common law right of policyholder access. As a "potential" third reason, he mentioned "improper purposes such as facilitating baseless lawsuits." Nonetheless, he offered to provide the minutes of board meetings that included discussions of the bylaw changes, and expressed a willingness to meet with Rule and Adkins.

The March 31 Adkins Letter
On March 31, Adkins replied. He described his review of five sets of redacted minutes of meetings of the board and the board's Corporate Governance Committee (CGC). He said in part:
Based on these board records, it is apparent that the board did not engage in a thorough or independent process before voting to make significant changes to MassMutual's bylaws and seek member approval. It is also apparent that CGC and the full board did not retain independent outside advisors or counsel in this process, which was driven by management on painfully insufficient notice.
On behalf of Rule and all MassMutual policyholders, Adkins requested documents, reports, minutes, and e-mails relating to CGC's and/or the board's deliberative process between December 10, 2013 and January 23, 2014. He also asked that the bylaw changes be tabled pending notice to policyholders about who made the submission, disclosure of the process undertaken by the board in recommending the changes, and recognition of Rule's concerns about the changes and the process.

The Newspaper Article
On April 4, the Boston Business Journal carried an article by Matthew L. Brown entitled "Natick policyholder locks horns with MassMutual over rules changes." Brown identified some controversial bylaw changes. He also said: "Still, despite the feel-good talk about mutual companies being owned by policyholders, Rule and others who try to exert any real influence over corporate governance may find themselves whistling in the wind." Brown referred to a MassMutual statement, which I obtained from the company. Here is the statement:
We believe strong corporate governance is the foundation of a successful organization and we take seriously our obligation to operate in our members' best interest. After careful consideration and research, MassMutual and its Board of Directors proposed revised amendments to the company's bylaws. The proposed changes are good for the company's members, policyowners and the company. Each amendment has a clear rationale and, importantly, they are consistent with best practices at mutual life insurance companies and others that are held in the highest regard with respect to corporate governance. These proposed changes were communicated to members in our proxy mailing, and those who have voted agree overwhelmingly with us.
The April 7 PC/CFA Letter
Public Citizen (PC) seeks to "advance health, safety, and democracy, as well as to promote a just and equitable economy." Consumer Federation of America (CFA) seeks to "advance the consumer interest through research, advocacy, and education." On April 7, PC and CFA sent a joint letter to MassMutual's policyholders and board expressing concerns about some of the bylaw changes and the process by which the changes were developed. The two organizations asked policyholders to vote against the changes, and asked the board to table the changes pending notice to policyholders about the concerns.

When I saw the PC/CFA letter, I asked a MassMutual spokesperson to comment on it. In response, I received a statement similar to the one the company provided to the Boston Business Journal.

The Lawsuit
On April 9, Rule filed a lawsuit in state court against MassMutual. She seeks an order requiring production of the requested books and records. She also seeks attorney fees and costs. The company has not yet responded to the complaint. (Rule v. MassMutual, Middlesex Superior Court, Commonwealth of Massachusetts, Civil Action No. 2014-3762-A.)

The Annual Meeting
On April 9, at the annual meeting, according to Adkins' notes about the meeting, about 40 persons attended. Only twoAdkins as a proxy for Rule, and one other policyholderwere not directors, officers, or employees. The meeting lasted about 20 minutes, almost half of which were used by Adkins to read a prepared statement. He described some bylaw changes he considers objectionable, and expressed concern about the process by which the changes were developed. Requests by the two independent policyholders to table the changes were ignored, and their questions were not answered.

The Voting
Owners of individual life policies have one vote, with one additional vote for each $5,000 of insurance in force. Owners of individual annuities have one vote for each $150 of annual annuity income. Owners of variable life policies, variable annuities, and group annuities have one vote. Owners of accident and health and disability income policies have one vote. No policyholder is entitled to more than 20 votes.

I asked MassMutual for the results of the vote. A spokesperson said there were 882,301 votes for the bylaw changes, 50,326 votes against the changes, and 59,426 abstentions. Thus the changes were adopted.

The Process
In Adkins' statement at the annual meeting, he summarized problems with the process by which the bylaw changes were developed. He said:
  • The changes did not go through the normal committee or board process, but were proposed by two officers. 
  • The CGC did not meet separately to consider the changes. 
  • The board did not retain independent advisors to consider the changes. 
  • The board did not meet separately from management to consider the changes. 
  • The board did not meet in person, but instead held a 15-minute telephone conference call dominated by a one-sided management presentation about the changes.
The Awards
On March 20, the Ethisphere Institute, "an independent center of research promoting best practices in corporate ethics and compliance," announced the names of the 144 companies that received the 2014 "World's Most Ethical Company" designation. One was MassMutual. Among other insurance companies receiving the designation were Aflac, CUNA Mutual, Hartford Financial, ING (U.S.), Knights of Columbus, Swiss Re, and Thrivent Financial. 

On April 10, the National Association of Corporate Directors New England Chapter announced its 2014 "Director of the Year Awards," which recognize independent directors of public, private, and nonprofit boards in New England, as well as entire boards, that have "significantly protected or enhanced stakeholder value." MassMutual received the "Private Company Board of the Year Award" for "demonstrating excellence in corporate governance."

General Observations
In its proxy statement, MassMutual said the changes align the bylaws "with widely accepted corporate governance best practices." The company made a similar comment in its statement to the Boston Business Journal. I think the comment is incorrect because some of the changes are contrary to the interests of policyholders. Also, the 50,326 votes against the changes and the 59,426 abstentions suggest some dissatisfaction among policyholders.

I am offering a complimentary 12-page PDF consisting of the March 20 Adkins letter, the March 27 Lashway letter, the March 31 Adkins letter, and the April 7 PC/CFA letter. Send an e-mail to jmbelth@gmail.com and ask for the MassMutual package.

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Monday, June 2, 2014

No. 51: Swisspartners Companies' Non-Prosecution Agreement with the U.S. Government

On May 8, 2014, four Swisspartners companies entered into a non-prosecution agreement (NPA) with the U.S. Attorney for the Southern District of New York (U.S. Attorney). The NPA was approved by the Tax Division of the U.S. Department of Justice. The Swisspartners companies agreed to pay $4.4 million to the U.S. The U.S. Attorney agreed not to criminally prosecute the companies for participation in a conspiracy to defraud the Internal Revenue Service (IRS) from about 2001 through about 2011. The NPA was based on "voluntary self-reporting, extraordinary cooperation, and voluntary implementation of remedial measures." The only four entities to which the NPA applied were:
  • Swisspartners Investment Network AG, a Swiss-based asset management firm, and three subsidiaries.
  • Swisspartners Wealth Management AG, a Zurich-based trust services provider that established, organized, and managed entities, such as foundations and trusts, on behalf of, among others, U.S. taxpayer-clients.
  • Swisspartners Insurance Company SPC Ltd., a Cayman Islands-based life insurance carrier that offered life insurance and annuity products to, among others, U.S. taxpayer-clients.
  • Swisspartners Versicherung AG, a Liechtenstein-based insurance carrier that offered a variety of insurance and annuity products to, among others, U.S. taxpayer-clients.
On May 9, the U.S. Attorney filed a forfeiture complaint for $3.5 million of fees received by the Swisspartners companies. The other $900,000 paid to the U.S. was restitution to the IRS. The NPA was attached to the complaint as an exhibit. The complaint referred to "insurance policies," and the NPA referred to "life insurance and annuity products." However, neither document indicated the types of life insurance policies and annuity contracts used in the schemes. (U.S.A. v. $3,500,000 in U.S. Currency, U.S. District Court, Southern District of New York, Case No. 14-cv-3385.)

I am offering a complimentary 24-page PDF consisting of the complaint and the NPA. Send an e-mail to jmbelth@gmail.com and ask for the Swisspartners package.

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Tuesday, May 27, 2014

No. 50: Credit Suisse Pleads Guilty to a Federal Criminal Charge

Credit Suisse and the U.S. Attorney for the Eastern District of Virginia (U.S. Attorney) recently reached a Plea Agreement under which Credit Suisse, a major Switzerland-based investment banking firm, pleaded guilty to a criminal charge of conspiracy to defraud the U.S. government. The same day, Credit Suisse entered into a Consent Order with the New York State Department of Financial Services (DFS). In this post I discuss the case.

The SEC Order
On February 21, 2014, the Securities and Exchange Commission (SEC) issued an order instituting administrative and cease-and-desist proceedings against Credit Suisse for violations of U.S. securities laws. The SEC censured the bank and ordered it to cease and desist from violations and future violations of securities laws. The bank disgorged $82.2 million, paid prejudgment interest of $64.4 million, and paid restitution of $50 million to the SEC. (In the Matter of Credit Suisse Group AG, SEC Release No. 71593.)

The Senate Subcommittee Report
On February 26, the Permanent Subcommittee on Investigations of the U.S. Senate Committee on Homeland Security and Governmental Affairs released a 181-page report entitled "Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts." The report focused on widespread misconduct by Switzerland-based banks, and used Credit Suisse as a case study.

The Information
On May 19, the U.S. Attorney filed an Information charging Credit Suisse, including subsidiaries Credit Suisse Fides and Clariden Leu Ltd., with one criminal count of conspiracy "to willfully aid, assist in, procure, counsel, and advise the preparation and presentation of false income tax returns and other documents to the Internal Revenue Service" (IRS). The Information explained how Credit Suisse carried out the conspiracy, and described the cases of two unidentified clients--one a naturalized U.S. citizen living in Charlottesville, Virginia, and the other a U.S. citizen living in Elizabeth, New Jersey. Credit Suisse waived its right to prosecution by indictment and consented to prosecution by information. (U.S.A. v. Credit Suisse AG, U.S. District Court, Eastern District of Virginia, Case. No. 1:14-cr-188.)

The Plea Agreement
Also on May 19, the U.S. Attorney filed a Plea Agreement in which Credit Suisse agreed to plead guilty to the one criminal conspiracy count. The parties agreed on a fine of $1.137 billion and restitution of $666.5 million to the IRS. Incorporated in the Plea Agreement was a Statement of Facts. The parties agreed that, if the matter had gone to trial, the U.S. government would have proven the facts beyond a reasonable doubt. 

The New York Order 
Also on May 19, the DFS issued a Consent Order "In the Matter of Credit Suisse AG." The bank agreed to pay a civil monetary penalty of $715 million to the DFS, engage an independent monitor, and file certain reports. The bank also agreed to terminate the employment of Markus Walder, Susanne Ruegg Meier, and Marco Parenti Adami, who had remained employed by the bank on administrative leave. In addition, the bank agreed to refrain from entering into any direct or indirect business relationship with the above mentioned three persons and six others found by the DFS to have participated in the conduct discussed in the order: Roger Schaerer, Emanuel Agustino, Michele Bergantino, Andreas Bachmann, Joseph Dörig, and Beda Singenberger.

Major Media Coverage
On May 20 and the next few days, major newspapers carried articles about the Credit Suisse case. The New York Times, The Wall Street Journal, and The Washington Post carried front-page stories on May 20.

General Observations
The Credit Suisse criminal guilty plea is reminiscent of Drexel Burnham Lambert in 1989 and Arthur Andersen in 2002. For that reason, there has been speculation about the impact of a criminal guilty plea on Credit Suisse. The regulators are determined to avoid having the criminal plea become a death sentence. For example, the SEC is not terminating securities licenses, the DFS is not terminating banking licenses, and the New York Federal Reserve Bank is not terminating Credit Suisse as a primary dealer in U.S. securities. It remains to be seen whether customers will continue doing business with a bank that pleaded guilty to criminal wrongdoing.

I am offering a complimentary 46-page PDF consisting of the 4-page Information, the 17-page Plea Agreement, the 16-page Statement of Facts, and the 9-page DFS Consent Order. Send an e-mail to jmbelth@gmail.com and ask for the Credit Suisse package.

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Monday, May 19, 2014

No. 49: Imperial Holdings and a Recent Note Offering

Imperial Holdings, Inc. (NYSE:IFT), based in Boca Raton, Florida, was founded in 2006. It became a major source of premium financing for stranger-originated life insurance (STOLI) policies. Recently Imperial took preliminary steps toward a rights offering to shareholders, later completed an offering of notes, and then withdrew the proposed rights offering.

Background
In September 2011, the existence of a criminal investigation became publicly known when federal agents raided Imperial's headquarters. In February 2012, the company disclosed it was also under investigation by the Securities and Exchange Commission (SEC); that investigation remains ongoing. In April 2012, the company and the Office of the U.S. Attorney in New Hampshire (USAO) entered into a non-prosecution agreement under which the company paid an $8 million fine, terminated its life insurance premium finance business, and agreed to other terms. (See the May 2012 and July 2012 issues of The Insurance Forum.)

In February 2013, the USAO entered into plea agreements with three individuals who were associated with Imperial and charged with criminal wrongdoing. Sentencing was scheduled for March 24, 2014, but is now scheduled for December 15, 2014. (See the October 2013 issue of The Insurance Forum.)

The Proposed Rights Offering
On August 30, 2013, Imperial filed with the SEC a preliminary registration statement covering a proposal to offer subscription rights to its shareholders to purchase up to $60 million of senior unsecured notes. In the filing was a preliminary prospectus containing few details about the proposed notes and saying the purpose of the proposed notes was to "raise funds to make selective investments in the life settlement asset class, to pay the premiums on certain life insurance policies that we own and for general corporate purposes, including working capital."

The Notes Offering
On February 11, 2014, in an 8-K (material event) report filed with the SEC, and in a press release, Imperial said it had commenced a private offering of $70 million of five-year senior unsecured convertible notes to be sold to qualified institutional buyers and accredited investors. The company said:
The purpose of this offering is to raise funds to make selective investments in the life settlement asset class including by making senior secured loans collateralized by portfolios of life insurance policies that we believe have attractive underwriting and cash flow characteristics and by strategically acquiring life insurance policies in the secondary and tertiary markets. We also expect to use a portion of the proceeds to pay the premiums on certain life insurance policies that we own and for general corporate purposes, including working capital.
Imperial expressed the belief that "our loans will be used to make premium payments to bridge a period where the investors need a cost effective alternative to fund premium payments on their policies to retain potential future death benefits." The company also said "substantial demand exists in the market for us to make these types of loans," for three reasons. First, many banks and traditional lenders are reluctant to lend to owners of life settlements. Second, many owners of life settlements have struggled with redemptions and "under-funded premium reserves since the onset of the financial crisis." Third, owners of many existing portfolios want to maintain ownership of them while limiting their cash outlay, and borrowing "allows them to retain much of their investment upside while stopping their cash outlays for ongoing premiums."

Private offerings are made through confidential offering memoranda. In this case, Imperial disclosed, in an attachment to the 8-K, excerpts from the preliminary offering memorandum. Among those excerpts are 26 "risks related to our business." The discussion of each risk consists of a boldface title followed by an explanation. These 12 are among the 26 risk titles:
(4) Our success in operating our life finance business is dependent on making accurate assumptions about life expectancies and maintaining adequate cash balances to pay premiums.
(5) Contractions in the market for life insurance policies could make it more difficult for us to opportunistically sell policies that we own and may make it more difficult to borrow under the Revolving Credit Facility.
(7) The life insurance policies that we own may be subject to contest, rescission and/or non-cooperation by the issuing life insurance company, which may have a material adverse effect on our business, financial condition and results of operations.
(8) Premium financed life insurance policies are susceptible to a higher risk of fraud and misrepresentation on life insurance applications, which increases the risk of contest, rescission or non-cooperation by issuing life insurance carriers.
(9) Delays in payment and non-payment of life insurance policy proceeds can occur for many reasons and any such delays may have a material adverse effect on our business, financial condition and results of operations.
(13) The SEC Investigation could materially and adversely affect our business, our financial condition and results of operations.
(14) Negative press and reputational concerns have had and continue to have a material adverse effect on our business, financial condition and results of operations.
(16) The secondary market is highly regulated; changes in regulation, the USAO Investigation and the SEC Investigation could materially affect our ability to conduct our business.
(17) If a regulator or court decides that trusts that were formed to own life insurance policies that once served as collateral for our premium finance loans do not have an insurable interest in the life of the insured, such determination could have a material adverse effect on our business, financial condition and results of operations.
(19) If a life insurance company is able to increase the premiums due on life insurance policies that we own, it will adversely affect our returns on such life insurance policies.
(21) Uncooperative co-trustees may impair our ability to service its life insurance policies.
(22) Changes to statutory, licensing and regulatory regimes governing premium financing or life settlements could have a material adverse effect on our activities and revenues.
Details on the Notes
On February 12, 2014, in an 8-K report and a press release, Imperial provided further details on the note offering. The company said it entered into a purchase agreement with FBR Capital Markets & Co. (FBR), the notes will pay interest semiannually at an annual rate of 8.5 percent, and FBR will have a 30-day option to purchase up to an additional $14 million of notes. The company also described the terms under which note holders can convert the notes into common stock of the company, and the procedure to be followed should the company decide to redeem the notes prior to maturity.

The IRS Investigation
On February 19, 2014, in an 8-K report, Imperial said that, although the offering was scheduled to close on February 19, the offering was postponed. The company said:
The offering of the Notes has been postponed due to the Company's receipt on February 19, 2014 of a summons from the Internal Revenue Service Criminal Investigations division and the Company's determination that this information should be disclosed to investors in the Notes. The summons requires the Company to produce information about the Company and its former structured settlement business from 2010 to the present. Although the Company has confirmed that the investigation relates to the Company, it is not aware of what allegations, if any, the IRS intends to investigate. The Company believes that the investigation is in a preliminary stage and is not aware of when such investigation will be concluded. The Company is unable to predict what action, if any, might be taken in the future by the IRS as a result of the matters that are the subject of the summons or what impact, if any, the cost of responding to the summons might have on the Company's financial position, results of operations, or cash flows.
Subject to reconfirming orders from investors, the Company expects to close the offering no later than February 21, 2014.
The Closing
On February 21, 2014, in an 8-K report, Imperial said it completed the offering. FBR partially exercised its option for $743,000 of additional notes and may exercise the remainder of its option later. The company received net proceeds of about $67 million after FBR's discount, placement fees, and offering expenses. The notes were issued under an indenture dated February 21 between Imperial and U.S. Bank National Association as trustee, registrar, paying agent, and conversion agent. The company attached the indenture to the 8-K as an exhibit.

The Withdrawn Registration
On February 24, 2014, Imperial filed with the SEC a request to withdraw the August 30, 2013 preliminary registration of a proposed rights offering to its shareholders. The company said it does not intend to pursue the proposed rights offering at this time, and asked that all fees paid to the SEC in connection with the filing of the registration of the proposed rights offering "be credited for future use by the Company."

The Latest Financial Statement
On May 8, 2014, Imperial filed with the SEC the 10-Q report for the quarter ended March 31, 2014, filed an 8-K report, and issued a press release. As of March 31, the company owned 601 policies with a total face value of $2.9 billion and a total estimated fair value of $315.5 million. In estimating fair value, the company blended the results of life expectancy reports from AVS Underwriting and 21st Services.

Of the 601 policies, 558 were previously premium financed, and 19 were issued by two companies with below-investment-grade financial strength ratings. Of the $2.9 billion of face value, 20.6 percent was issued by Lincoln National Life, 20.5 percent by Transamerica Occidental Life, and 11.2 percent by AXA Equitable Life. Antony Mitchell is Imperial's chief executive officer. In the May 8 press release, he is quoted as saying: "With the recent capital raise behind us, we are focused on sourcing accretive lending and investment opportunities within the life finance space. Our current pipeline looks encouraging and we expect to deploy capital later this year."

General Observations
Prior to the raid on Imperial's Boca Raton headquarters by federal agents in September 2011, the company was known as a major premium finance lender in the creation of STOLI policies. After the company shut down its premium financing business pursuant to the non-prosecution agreement with the USAO, a question was how the company would expand its business. Now it appears the company wants to increase its activities as a secondary market intermediary through the purchase and sale of existing secondary market portfolios, and through loans against existing secondary market portfolios.

Whether Imperial will be successful in the face of what it calls "contractions" in the secondary market, and in what might be called a "game of musical chairs" in that shrinking market, remains to be seen. Also, developments in the SEC and IRS investigations bear watching.

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