No. 137: The Consumer Financial Protection Bureau and the Business of Insurance

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provided for the creation of the Consumer Financial Protection Bureau (CFPB). Two years ago, Alan Press and I submitted to CFPB a complaint involving an insurance matter. CFPB immediately brushed off the complaint because it related to insurance. We asked CFPB to show us the statutory basis for its rejection of the complaint, but we received no reply. Recently I explored the massive Dodd-Frank Act in an effort to identify the statutory basis for CFPB's rejection of the complaint.

Our Complaint to the CFPB
Alan Press, CLU, is a retired general agent in New York City for Guardian Life Insurance Company of America, a past president of what is now the National Association of Insurance and Financial Advisors, and the recipient of several prestigious insurance industry awards. Press and I have been good friends for many years.

Press was familiar with the mission statement of Primerica Life Insurance Company. In January 2014, he saw CFPB's mission statement. Here are the two statements:

Primerica: Our mission is to serve middle income families by helping them to make informed financial decisions and providing them with a strategy and means to gain financial independence.... Our clients are generally middle income consumers, which we define as households with $30,000 to $100,000 of annual income.

CFPB: Our mission is to make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products. Above all, this means ... no provider should be able to use unfair, deceptive, or abusive practices.

Press called CFPB's whistleblower number. He asked whether CFPB would be interested in information about a life insurance company that imposes undisclosed charges equivalent to an unfair, deceptive, and abusive annual percentage rate (APR) of 29.7 percent on millions of policyholders who pay premiums monthly (rather than annually) through preauthorized withdrawals from checking accounts. The CFPB person who answered the telephone encouraged Press to file a complaint.

Press was aware of my extensive writings about fractional (modal) premium charges imposed on policyholders who pay premiums more often than once a year, and he contacted me. We assembled a 52-page PDF and submitted the complaint to CFPB by email at 8:45 a.m. on February 12, 2014. The package consisted of a two-page explanatory cover letter, brief biographical sketches of the two of us, an article Press had written, and seven articles I had written. The complaint described the unconscionable 29.7 percent APR Primerica imposed and still imposes on buyers of life insurance who pay premiums monthly with preauthorized checks.

In the cover letter we quoted the mission statements of Primerica and CFPB. Several of my articles in the package described in great detail how state insurance regulators not only have refused to require APR disclosure of fractional premium charges but also have fought to prevent consumer access to such information. At 11:34 a.m. the same day, CFPB rejected the complaint with this email:

Thank you for your information that was sent to Consumer Financial Protection Bureau's whistleblower email address. The Bureau has authority to investigate possible violations of Federal consumer financial laws, and to enforce such statutes. These matters typically involve mortgages, student loans, credit cards, payday loans, and auto finance. The Bureau generally does not have jurisdiction over matters involving life insurance or securities. We therefore are not able to investigate your allegations relating to an insurance matter.

We asked CFPB to send us the statutory language prohibiting CFPB from investigating harmful practices that insurance companies perpetrate against consumers. We also asked CFPB to explain why its mission statement refers to "any number of other consumer financial products" and fails to warn the reader that CFPB is barred from investigating harmful insurance practices. Finally, we asked that CFPB staff members read the complaint and reconsider their rejection of it. We received no further reply.

The Dodd-Frank Act
The version of the Dodd-Frank Act that I examined is an 848-page PDF posted on the website of the Securities and Exchange Commission. The page numbers mentioned later in this blog post are page numbers of that PDF. The Dodd-Frank Act consists of these 16 titles:

I	Financial Stability
II	Orderly Liquidation Authority
III	Transfer of Powers to the Comptroller of the Currency, the [Federal Deposit Insurance] Corporation, and the [Federal Reserve] Board of Governors
IV	Regulation of Advisers to Hedge Funds and Others
V	Insurance
VI	Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions
VII	Wall Street Transparency and Accountability
VIII	Payment, Clearing, and Settlement Supervision
IX	Investor Protections and Improvements to the Regulation of Securities
X	Bureau of Consumer Financial Protection
XI	Federal Reserve System Provisions
XII	Improving Access to Mainstream Financial Institutions
XIII	Pay It Back Act
XIV	Mortgage Reform and Anti-Predatory Lending Act
XV	Miscellaneous Provisions
XVI	Section 1256 Contracts

Title V on insurance deals with such matters as nonadmitted insurance and reinsurance. That title is not relevant to the CFPB matter discussed in this blog post.

Title X
The Dodd-Frank Act's Title X, which begins on page 580, provides for the creation of CFPB. On the same page, "business of insurance" is defined as follows:

The term "business of insurance" means the writing of insurance or the reinsuring of risks by an insurer, including all acts necessary to such writing or reinsuring and the activities relating to the writing of insurance or the reinsuring of risks conducted by persons who act as, or are, officers, directors, agents, or employees of insurers or who are other persons authorized to act on behalf of such persons.

Beginning on page 582, there is a lengthy section in which the term "financial product or service" is defined. The following brief exclusion is on page 585, near the end of that section:

The term "financial product or service" does not include the business of insurance.

General Observations
I have long been impressed by the ability of the insurance industry to lobby successfully for enactment of laws that allow insurance companies to harm consumers with "unfair, deceptive, or abusive practices." One of my early experiences in that regard was the enactment of federal legislation in 1979 prohibiting the Federal Trade Commission from taking action against insurance companies and from even investigating insurance companies without a formal request from a congressional committee. I discussed the matter on pages 78-79 in my new book, The Insurance Forum: A Memoir, where I showed the current language of the relevant federal statute.

Now we have the Dodd-Frank Act prohibiting CFPB from doing anything about insurance. The combination of the definition of "business of insurance" and the exclusion of insurance from the definition of "financial product or service" allows insurance companies to engage in practices harmful to insurance consumers, given the industry's success in preventing state insurance regulators from taking effective action against such practices. As an example, the complaint we submitted to CFPB includes detailed discussions of how state insurance regulators opposed a potential requirement that insurance companies disclose APRs associated with fractional premium charges.

Available Material
I am making available as a complimentary 52-page PDF the complaint Press and I submitted to CFPB. My primary reasons for offering the package are to allow readers to see the discussions of the significance of APR disclosure of fractional premium charges and how state insurance regulators opposed that important form of consumer protection. Email jmbelth@gmail.com and ask for the Press/Belth 2014 complaint to CFPB.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 136: Ben Bernanke's Fascinating Memoir

Ben Bernanke chaired the Federal Reserve from 2006 to 2014, a period that encompassed the Great Recession of 2007-2009. He has written a fascinating book entitled The Courage to Act: A Memoir of a Crisis and Its Aftermath. The book was published October 5, 2015.

The Prologue about AIG
For persons interested in insurance, Bernanke's six-page prologue immediately grabs the reader's attention. He describes the difficult and controversial decision to rescue American International Group (AIG) from bankruptcy. He made the final decision at 9:00 p.m. on Tuesday, September 16, 2008, on the heels of his decision to rescue Bear Stearns and immediately following "Lehman Weekend," which ended with the bankruptcy filing by Lehman Brothers at 1:45 a.m. on Monday.

Maurice ("Hank") Greenberg was AIG's longtime chief executive officer. He retired in 2005 in the midst of an accounting scandal. In November 2011, he filed a pair of lawsuits against the U.S. government alleging the terms of the 2008 rescue were unfair to AIG shareholders. I wrote about the lawsuits in the April 2013 issue of The Insurance Forum and in No. 106 (posted June 24, 2015). In writing the conclusion of the April 2013 article, I considered but decided against using the word "chutzpah" to characterize the lawsuits. Instead, I expressed agreement with observers who viewed the lawsuits as an attempt to rewrite the terms of the rescue. Bernanke, however, in his chapter about AIG, calls the lawsuits "a remarkable demonstration of chutzpah."

Structure of the Book
The 579-page text of Bernanke's memoir is divided into three parts and 23 chapters. Here is the outline:

I Prelude

1 Main Street
2 In the Groves of Academe
3 Governor
4 In the Maestro's Orchestra
5 The Subprime Spark
6 Rookie Season

II The Crisis

7 First Tremors, First Response
8 One Step Forward
9 The End of the Beginning
10 Bear Stearns: Before Asia Opens
11 Fannie and Freddie: A Long, Hot Summer
12 Lehman: the Dam Breaks
13 AIG: "It Makes Me Angry"
14 We Turn to Congress
15 "Fifty Percent Hell No"
16 A Cold Wind
17 Transition
18 From Financial Crisis to Economic Crisis

III Aftermath

19 Quantitative Easing: The End of Orthodoxy
20 Building a New Financial System
21 QE2: False Dawn
22 Headwinds
23 Taper Capers

The book includes an epilogue ("Looking Back, Looking Forward"), acknowledgments, a note on sources, a selected bibliography, and an index. To save space and paper, detailed chapter and page notes are in a 56-page easy-to-read PDF that may be found at couragetoactbook.com and by clicking on "Notes."

General Observations
In the opening chapters, Bernanke describes his early life in the small town of Dillon, South Carolina, and his strong academic career encompassing Harvard, Massachusetts Institute of Technology, Stanford, and Princeton. He describes his work as a member of the Federal Reserve Board, his service on the President's Council of Economic Advisers, his nomination by President George W. Bush to succeed Alan Greenspan as chairman of the Fed, and his renomination to a second four-year term as chairman by President Obama.

The remainder of the book describes the origins of the Great Recession and the actions Bernanke and others took to address the crisis. The chapters on the rescue of Bear Stearns, the failure of Lehman Brothers, the rescue of Fannie Mae and Freddie Mac, and the rescue of AIG are especially interesting.

Bernanke's writing is crisp and easy to read. The book is written to educate people who have a limited grasp of monetary policy, rather than for monetary experts and technicians. Many disagree—in some cases strongly—with Bernanke's views. In the book, however, he goes out of his way to describe in detail the arguments on all sides of the many aspects of monetary policy.

Bernanke's comments on individuals who worked hard with him and against him are fascinating. Especially interesting to me are his comments on central bank leaders around the world, his observations about individual members of Congress, and the manner in which he describes briefly the backgrounds of many of the people he mentions.

I think the Bernanke memoir is well worth reading. It is a gripping account of our nation's—and the world's—worst financial crisis since the Great Depression. I strongly recommend reading every page of the book.

Available Material
I am making available a complimentary four-page PDF containing my article entitled "Hank Greenberg Sues the U.S. Government" in the April 2013 issue of The Insurance Forum. Email jmbelth@gmail.com and ask for the article about Greenberg's lawsuits against the U.S. government.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 135: The Office of Financial Research in the U.S. Department of the Treasury Issues Its First Financial Stability Report

In 2010, in response to the Great Recession of 2007-2009, Congress enacted The Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act established the Office of Financial Research (OFR) as an independent bureau within the U.S. Department of the Treasury. Richard Berner is Director of the OFR. The OFR issued annual reports for 2012, 2013, and 2014, and will issue its annual report for 2015 in January 2016.

The Financial Stability Report
On December 15, 2015, the OFR issued its 142-page first Financial Stability Report, which the OFR describes as supplementing and preceding the annual report for 2015. The Financial Stability Report has an executive summary, a glossary, a bibliography, and five major sections: "Assessing and Monitoring Threats to Financial Stability," "Evaluating Financial Stability Policies," "Data Needs for Financial Stability Analysis," "Research on Financial Stability," and "Agenda Ahead."

Excerpts from the Financial Stability Report
The OFR's Financial Stability Report contains some important references to the insurance industry. Here are a few of those comments, with page numbers shown in brackets at the end of each comment:

[T]here are some indications of rising risks in the insurance sector, but progress on adopting heightened prudential standards for designated U.S. insurers remains slow. The relative lack of transparency about the process for identifying global systematically important insurers [G-SIIs] precludes public evaluation of how the risks they pose are changing over time. [Page 3]

In July 2013, the Financial Stability Board [an international coordinating body that monitors financial system developments on behalf of the G-20 nations] released an initial list of nine G-SIIs that were identified using the International Association of Insurance Supervisors (IAIS) assessment methodology. [Page 51]

The 2015 list of designated G-SIIs included three U.S. companies that FSOC [the Financial Stability Oversight Council, which was created by the Dodd-Frank Act and is chaired by the Secretary of the U.S. Department of the Treasury] has separately designated as companies whose material financial distress could pose a threat to U.S. financial stability and required additional oversight from the Federal Reserve: American International Group, Inc., MetLife Inc., and Prudential Financial Inc. The G-SII list also included six non-U.S. companies: Aegon N.V., Allianz SE, Aviva plc, AXA S.A., Ping An, and Prudential plc. [Page 51]

Broadly, the IAIS G-SII designation identifies insurance firms whose failure or distress could have adverse consequences in financial markets due to their size, market position, and global interconnectedness. At a later date, the IAIS is expected to update its assessment methodology to include reinsurance companies as well as revise its definition of nontraditional and noninsurance activities of G-SIIs. [Page 51]

[M]uch of the data for the IAIS's G-SII assessment methodology are not publicly available. The lack of disclosure of systemic importance data for G-SIIs and insurers just below the G-SII threshold precludes public evaluation of these firms' systemic footprint and how that may be changing over time. [Pages 51-52]

U.S. insurance companies currently are not subject to prudential standards on a consolidated basis to capture risks that they may be taking in noninsurance affiliates that are not subject to state-based supervision. [Page 52]

[T]he risks that some large life insurers pose to financial stability may be rising, according to certain market-based measures. [Page 53]

Financial statements filed with state regulators are the most reliable source of public information for U.S. insurance companies, but permitted deviations make it difficult to compare data across the industry. [Page 89]

Some regulators have expressed concern that too much flexibility by states in the treatment of insurance risks could encourage regulatory arbitrage by companies. [Page 89]

The lack of transparency in the activities of captive reinsurers within the U.S. life insurance industry is an area where more comprehensive access to additional data is needed. [Page 89]

Relatively little information is publicly available about captives' activities, capitalization, asset liability management, types of business reinsured, and the resulting reserve and capital benefits to the parent, or ceding, insurer. [Page 90]

There are also gaps in data available to analyze the risks insurance companies take in derivatives, variable annuities, and securities lending activities. [Page 91]

Related Recent Developments
On December 17, 2015, the FSOC approved a resolution reaffirming the G-SII designation of Prudential Financial Inc. The vote was eight to one; the independent member with insurance expertise opposed the resolution, and the Chair of the Securities and Exchange Commission recused herself.

MetLife Inc. has challenged its G-SII designation in court. The case is currently pending.

General Observations
Many observers of the Great Recession of 2007-2009 have said, based on hindsight, that the crisis took policy makers and the public by surprise. Therefore, one of the significant reforms undertaken in the wake of the crisis grew out of the perceived need for periodic reports not only for the benefit of policy makers but also for the benefit of members of the public about potential problems in our financial system. Dodd-Frank created the OFR for that purpose. The Financial Stability Report should be read not only by policy makers but also by members of the public.

Available Material
I am making available a complimentary 147-page PDF consisting of the OFR's 142-page Financial Stability Report and the FSOC's five-page resolution relating to Prudential Financial Inc. Send an e-mail to jmbelth@gmail.com and ask for the December 2015 OFR/FSOC package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

134: Federal Criminal Charges Result in the Sentencing of an Insurance Executive to 37 Years in Prison

On December 10, 2015, U.S. District Judge William D. Quarles, Jr. sentenced Jeffrey Brian Cohen (Reisterstown, MD) to 37 years in prison on federal criminal charges. On the same day, the U.S. Attorney in Maryland issued a four-page press release entitled "Jeffrey Cohen Sentenced to 37 Years in Prison in Massive Insurance Fraud Scheme." The subtitle is "Defendant Fraudulently Obtained More Than $100 Million in Premiums from Thousands of Insureds for His Personal Benefit; Then He Planned to Kill Attorneys, Judge and Government Official." The U.S. Attorney said: "The evidence demonstrated that Jeffrey Cohen was a chronic con artist who was planning to commit murder to prevent his fraud schemes from coming to light." Assisting the U.S. Attorney in the investigation were the Federal Bureau of Investigation, Homeland Security Investigations, the Internal Revenue Service, and the Postal Inspection Service. (See U.S. v. Cohen, U.S. District Court, District of Maryland, Case No. 1:14-cr-310.)

Background
Cohen, now aged 40, was president and chairman of the board of Indemnity Insurance Corporation RRG (Sparks, MD). He also controlled several other entities. Indemnity was domiciled in Delaware for regulatory purposes. Indemnity sold general liability insurance, liquor liability insurance, and excess liability insurance in several states. In 2012 Indemnity had more than 3,000 policyholders, especially in the entertainment industry, and collected more than $25 million in premiums.

Cohen diverted, to his own personal benefit, premiums intended for Indemnity. To conceal the missing company assets, Cohen submitted fraudulent financial statements and other fraudulent documents to insurance regulators, independent accounting firms, banks, reinsurance companies, a premium finance company, and policyholders. He also provided fraudulent documents to A. M. Best Company, which assigned an A– (Excellent) financial strength rating to Indemnity. Cohen touted Best's rating to customers and others.

Cohen threatened, attempted to intimidate, and even planned to kill attorneys involved in grand jury proceedings and Delaware government officials. He acquired powerful weapons, ammunition, and explosive materials. He created a "Target List" and assembled information about the potential victims' home addresses and family members.

Criminal Charges
On June 24, 2014, the U.S. Attorney filed a five-count indictment against Cohen. A magistrate judge issued a detention order and appointed a public defender. On September 16 the U.S. Attorney filed a 12-count superseding indictment. Cohen pleaded not guilty on all counts. On November 17, after Cohen chose to represent himself, a magistrate appointed a standby attorney for Cohen.

On November 25, 2014, the U.S. Attorney filed a 31-count second superseding indictment. On December 2 the U.S. Attorney filed a 31-count third superseding indictment. The latter included counts of wire fraud, aggravated identity theft, false statements to an insurance regulator, obstruction of justice, and money laundering. On March 30, 2015, Cohen pleaded not guilty on all counts.

Trial and Sentence
On June 1, 2015, a jury trial began before Judge Quarles. It was expected to last four weeks. However, after four days, Cohen pleaded guilty to one count each of wire fraud, aggravated identity theft, false statement to an insurance regulator, and obstruction of justice. The U.S. Attorney dropped the other 27 counts. On August 3 Cohen filed a motion to withdraw his guilty plea. On September 10 the judge denied the motion.

On December 10 Judge Quarles announced verbally in court that he was sentencing Cohen to 37 years in prison, followed by three years of supervised release. On the same day, Cohen filed what purports to be a notice that he will appeal to the U.S. Court of Appeals for the Fourth Circuit despite the fact that the plea agreement says "the defendant knowingly waives all right, pursuant to 28 U.S.C. §1291, or otherwise, to appeal the defendant's conviction and whatever sentence is imposed."

On December 14 Judge Quarles filed a judgment confirming the sentence and requiring Cohen to pay restitution of $137 million. Here are the key provisions relating to the sentence:

The defendant is hereby committed to the custody of the United States Bureau of Prisons to be imprisoned for a period of 240 months as to Count 1 [wire fraud]; 180 months as to count 24 [false statement to a regulator] to run consecutive to Count 1; 240 months as to Count 28 [obstruction of justice] to run concurrent to Counts 1 and 24; and 24 months as to Count 20 [aggravated identity theft] to run consecutive to Counts 1, 24 and 28 for a total of 444 months.

Upon release from imprisonment, the defendant shall be on supervised release for a term of 3 years as to Counts 1, 24, and 28 to run concurrent to each other; and 1 year as to Count 20 to run concurrent to Counts 1, 24, and 28 for a total term of 3 years.

General Observations
There are at least four interesting aspects of this case. First, despite the seriousness of the charges, Cohen chose to represent himself rather than retain an attorney. Initially a magistrate appointed a federal public defender. Cohen soon rejected the public defender and chose to represent himself; a magistrate then appointed a standby attorney. Still later Cohen rejected the standby attorney. Finally, when he submitted what purports to be a notice of appeal, he requested an attorney.

Second, according to the plea agreement, "Cohen re-domiciled to Delaware after difficulties in District of Columbia." I have filed public records requests with the Delaware and District of Columbia insurance departments seeking documents relating to the redomestication process.

Third, the case began with civil charges by the Delaware insurance commissioner. Later the case was referred to federal prosecutors and other federal authorities.

Fourth, the Cohen case was reported in local media outlets, but I believe that the case was not reported in major outlets such as The New York Times and The Wall Street Journal. My first knowledge of the case was a story in A. M. Best's BestDay by Washington correspondent Frank Klimko on December 11, the day after the U.S. Attorney's press release.

Available Material
I am offering a 50-page complimentary PDF consisting of four items: the four-page press release issued by the U.S. Attorney, the 25-page third superseding indictment, the 15-page plea agreement, and the six-page judgment. E-mail jmbelth@gmail.com and ask for the December 2015 package relating to the case of U.S. v. Cohen.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 133: Unclaimed Property—The Battle Heats Up as Three Insurers File a Lawsuit against an Auditing Firm and a State Treasurer

Verus Financial LLC (Waterbury, CT) audits insurance companies on behalf of state treasurers about unclaimed property held by the companies. Michael Frerichs is the Illinois State Treasurer. United Insurance Company of America (Chicago, IL), Reserve National Insurance Company (Oklahoma City, OK), and Reliable Life Insurance Company (St. Louis, MO) are among several companies in the Kemper group and are referred to here as "Kemper."

On October 26, 2015, Kemper filed a lawsuit in an Illinois state court against Frerichs and Verus. The lawsuit is a preemptive action following an October 6 "final notice and demand" and threat of legal action by Frerichs to compel production of data.

On November 2, 2015, Frerichs issued a press release about the lawsuit. He has not yet responded to the lawsuit in court. (See United v. Frerichs, Seventh Judicial Circuit Court, Sangamon County, Illinois, Case No. 2015-MR000998.)

Kemper's Complaint
Kemper's 31-page complaint contains 11 counts. Ten are requests for declaratory judgments and one is a request for injunctive relief. Here are the counts:

1. Kemper has no obligation arising under Illinois law to use the Social Security Death Master File (DMF) to determine whether insureds are deceased and benefits are due and payable.
2. The dormancy period under Illinois law commences with Kemper's receipt of proof of an insured's death or attainment of the mortality limiting age (often age 100), not an insured's date of death.
3. The Frerichs unclaimed property audit of Kemper is unlawful because he has not shown he has reason to believe that Kemper failed to report unclaimed property in Illinois.
4. Frerichs and Verus cannot compel Kemper to provide policy records for comparison against the DMF for the purpose of seeking to create unclaimed property.
5. Frerichs and Verus can only obtain records related to policies which were in force during the five years prior to commencement of the audit.
6. The request by Frerichs and Verus is ultra vires [in excess of legal authority], overbroad, and unduly burdensome, and thus violates Kemper's rights under the Fourth Amendment of the U.S. Constitution.
7. The request by Frerichs and Verus is ultra vires, overbroad, and unduly burdensome, and thus violates Kemper's rights under Article 1, Section 6 of the Illinois Constitution.
8. The request by Frerichs and Verus violates Kemper's due process rights under the Fourteenth Amendment of the U.S. Constitution.
9. The request by Frerichs and Verus violates Kemper's due process rights under Article 1, Section 2 of the Illinois Constitution.
10. Frerichs failed to follow requirements of the Illinois Administrative Procedure Act in promulgating rules.
11. Kemper needs injunctive relief barring Frerichs and Verus from requiring Kemper to produce policy records to enable DMF comparison and requiring Kemper to pay or escheat policy proceeds to the state based on the results of such a comparison.

Exhibits to Kemper's Complaint
Attached to Kemper's complaint are 161 pages showing 14 exhibits that are referred to in the complaint. Here are the exhibits:

1. The original 2008 contract between Frerichs' predecessor and Verus.
2. The current 2015 contract between Frerichs and Verus.
3. A sample policy issued by United.
4. A sample policy issued by Reserve.
5. A sample policy issued by Reliable.
6. The multistate settlement agreement entered into by Verus and the Pacific Life companies several years ago.
7. An August 8, 2011 letter from the Illinois Unclaimed Property Division to Verus authorizing an audit of Kemper.
8. An August 19, 2011 letter from Verus to Kemper notifying Kemper of the audit.
9. A November 7, 2011 letter from Kemper to Verus containing requests relating to the audit.
10. A March 28, 2012 letter from Kemper to Verus containing further requests relating to the audit.
11. A June 29, 2012 letter from Kemper to Verus expressing concerns about the data requested by Verus.
12. A May 3, 2012 memorandum from Verus to Kemper containing details of the data request from Verus. [Note that exhibits 11 and 12 are out of date sequence.]
13. A July 17, 2012 letter from Verus to Kemper in response to the June 29, 2012 letter from Kemper.
14. An October 6, 2015 letter from Frerichs to Kemper containing a "final notice and demand" that Kemper produce the requested data by October 16, 2015, or Frerichs "will take the necessary legal steps to compel production."

The Frerichs Press Release
The Frerichs two-page press release is entitled "Kemper Companies Sue to Block Audit to Confirm Payment of Life Insurance Policies." The subtitle is "Audits of Other Life Insurance Companies Identified More Than $195 Million Owed to Grieving Families."

My reason for mentioning the press release is that Frerichs and Verus have not yet responded to the complaint in court, and the press release provides at least an inkling of Frerichs' views. The press release says Frerichs has asked Illinois Attorney General Lisa Madigan to represent the state's interests in the lawsuit. The press release attributes this statement to Frerichs:

We made a simple request to audit these companies to determine whether they are holding onto unpaid death benefits. I can only guess as to why their lawyers responded with a lawsuit rather than work with us to help those who have suffered a death in their family.

My Articles about Unclaimed Property
I wrote articles about unclaimed property in the October 2010, November 2010, and December 2010 issues of The Insurance Forum. The first article was prompted by a story in Bloomberg Markets magazine alleging that life insurance companies were "secretly profiting from death benefits owed to the survivors of service members and other Americans" through so-called retained asset accounts. The second article reported the results of my survey of 20 large states and 20 large life insurance companies in an effort to learn the magnitude of unclaimed property turned over (escheated) to states by life insurance companies. The third article was a follow-up to my first article about retained asset accounts.

General Observations
I have three comments about unclaimed property in connection with life insurance. First, the insuring agreement in a life insurance policy usually says the company pays the death benefit when the company receives proof of the insured's death. For example, the key sentence in United's sample policy says "Payment will be made after we receive proof of the insured's death, subject to the terms of this policy." Interestingly, there is often no mention of the filing of a death claim, suggesting that the company could obtain the proof of death on its own volition. It should be recognized that it may be unrealistic to require a beneficiary, who may be unaware of the existence of the insurance, to notify the company of the insured's death. I think it is wrong to say the beneficiary's ignorance frees the company from responsibility.

Second, I have long argued that companies should be required to mail a report at least once a year to every policyholder irrespective of whether a premium payment is due. The mailing should be made in such way that the postal service will notify the company of a change of address when it forwards mail to a new address, and will return mail that was undeliverable because no forwarding address is on file. Such information would alert the company in a timely manner each year to policyholders with whom the company has lost contact. It would also alert the company to insureds who might be deceased. To my knowledge, no state insurance law or regulation has ever required life insurance companies to mail annual reports to policyholders.

Third, what brought unclaimed property held by life insurance companies to national attention was the demutualization wave beginning in the early 1990s. To complete a demutualization, a mutual company must contact its policyholders to ask for their approval of the demutualization plan, and later must send them cash and/or stock to which they are entitled. Some demutualizing companies received a deluge of undelivered mail, thus showing they had huge numbers of lost policyholders. It is ironic that the problem initially was ignored by state insurance regulators. Instead, the problem was addressed by state treasurers. They have a vested interest in obtaining unclaimed property, most of which never reaches the rightful owners and therefore remains forever with the states.

Available Material
I am making available a complimentary 206-page PDF consisting of four items: the 31-page complaint by Kemper against Frerichs and Verus, 161 pages of exhibits to the complaint, the two-page press release issued by Frerichs, and 12 pages containing the three 2010 articles in The Insurance Forum about unclaimed property. E-mail jmbelth@gmail.com and ask for the December 2015 unclaimed property package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 132: Stranger-Originated Life Insurance—More on the Wertheim Criminal Case

In No. 131 (December 9, 2015) I discussed an appellate opinion affirming the conviction and sentencing of three stranger-originated life insurance (STOLI) promoters on federal criminal charges in the Binday case. I also briefly mentioned the Wertheim case, which I discussed in detail in the October 2013 issue of The Insurance Forum, and which I discuss further here. I also discussed deterrence, an important issue in both the Binday and Wertheim cases. (See U.S. v. Wertheim, U.S. District Court, District of New Hampshire, No. 1:12-cr-136.)

Background of the Wertheim Case
On September 27, 2011, a federal investigation of Imperial Holdings Inc. (Boca Raton, FL), a firm that was in the life insurance premium financing business, became public when federal agents raided Imperial's headquarters. On April 30, 2012, Imperial and the U.S. Attorney in New Hampshire entered into a non-prosecution agreement under which Imperial terminated its life insurance premium financing business, terminated its employees involved in that business, admitted to and accepted responsibility for certain improper conduct, and paid a monetary penalty of $8 million. Also, Jonathan Neuman, Imperial's president and chief operating officer, resigned.

On October 31, 2012, the U.S. Attorney charged Robert Wertheim with one count of conspiracy to commit mail fraud and wire fraud. On February 20, 2013, the U.S. Attorney charged two brothers—Abraham Kirschenbaum (AK) and Maurice Kirschenbaum (MK)—with one count of conspiracy to commit mail fraud and wire fraud. AK and MK were tax advisers.

On February 26, 2013, Wertheim pleaded guilty and signed a plea agreement. On March 7, 2013, AK and MK pleaded guilty and signed plea agreements. Wertheim said that he had been working with Imperial, that he had recruited AK and MK to identify prospects for the STOLI scheme, and that the scheme had involved lying on life insurance applications. There were long delays in sentencing the defendants.

Recent Developments
On May 22, 2015, the U.S. Attorney, with the assent of MK, filed a motion to dismiss the conspiracy charge against MK. According to the motion, MK had been diagnosed with cancer in March 2014, by March 2015 the condition had become more serious, and currently MK was undergoing aggressive treatment. Further details about MK's medical condition were filed under seal. Attached to the motion was a deferred prosecution agreement under which the government may refile the criminal charge at its discretion within five years, at which time MK would, among other things, plead guilty and waive any defense of double jeopardy. U.S. District Court Judge Paul Barbadoro granted the motion.

On May 27, 2015, Judge Barbadoro held back-to-back sentencing hearings for Wertheim and AK. Each hearing lasted 55 minutes, including sealed discussion of the ongoing investigation in which it was anticipated that Wertheim and AK would cooperate and might even testify. The transcripts became readily available in the public court file on September 24, 2015. I obtained them on December 7, 2015.

The government sought probation and minimal financial penalties for Wertheim and AK. Home confinement was also mentioned as a possibility instead of prison time. Among the arguments for probation and minimal fines were the promptness with which they had pleaded guilty, their remorse, and their willingness to assist the government in prosecuting and testifying against other defendants who might be criminally charged in the ongoing investigation.

Judge Barbadoro, however, felt Wertheim and AK should serve at least some prison time for deterrence purposes. The judge deviated downward from the sentencing guidelines and ordered each of the two defendants to serve 18 months in a minimum-security facility, followed by two years of supervised release. They were each fined $7,500, and AK forfeited $1 million.

Judge Barbadoro agreed to defer for one year the need for Wertheim and AK to begin serving their prison time. The judge left open the possibility that the government and/or the defendants would refile within a year for a further reduction in—or even elimination of—prison time as a result of Wertheim's and AK's further cooperation in the ongoing investigation. Therefore the judge ordered Wertheim and AK to report to prison on May 27, 2016.

General Observations
The transcripts of the sentencing hearings are fascinating. They vividly illustrate how the U.S. Attorney, the defense attorneys, and Judge Barbadoro wrestled with the problem of how to arrive at appropriate sentences. Included in the discussions were references to the need for deterrence, the past and potential future cooperation of the two defendants in the ongoing investigation, and other factors that had to be considered.

As I said in No. 131, I do not understand how deterrence can be effective without broad publicity about the punishment. In that regard, I am aware of no major media coverage of the Wertheim case. Nor am I aware of any coverage of the case in the insurance press beyond my article in The Insurance Forum.

Nowhere in the documents I reviewed was there specific reference to what ongoing investigation might require further cooperation and even testimony from the two defendants. However, because Wertheim and AK had worked with Imperial, it seems likely that the ongoing investigation involves current and/or former officials of Imperial.

Available Material
I strongly urge interested persons to read the 32-page transcript of the Wertheim hearing and the 42-page transcript of the AK hearing. They are in large type, double-spaced, and easy to read. I am making them available in separate complimentary PDFs. E-mail jmbelth@gmail.com and ask for the transcripts of the two May 2015 sentencing hearings in the Wertheim case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 131: Stranger-Originated Life Insurance—A Federal Appellate Court Affirms the Conviction and Sentencing of Three Promoters on Criminal Charges

On October 26, 2015, a three-judge appellate court panel unanimously affirmed the criminal conviction and sentencing of Michael Binday, James Kevin Kergil, and Mark Resnick on federal criminal charges related to a fraudulent stranger-originated life insurance (STOLI) scheme. The panel consisted of Circuit Court Judges Gerard Lynch, José Cabranes, and Robert Sack. Judge Lynch wrote the 97-page opinion. (See U.S. v. Binday, U.S. Court of Appeals, Second Circuit, No. 14-2809-cr.)

Background
In February 2012 the government filed charges and the case was assigned to District Court Judge Colleen McMahon. The government charged each defendant with mail fraud, wire fraud, and conspiracy to commit mail fraud and wire fraud. The government also charged Kergil and Resnick with conspiracy to destroy records and obstruct justice. The government initially charged Binday with obstruction of justice, but Judge McMahon later dismissed that charge. (See U.S. v. Binday, U.S. District Court, Southern District of New York, No. 1:12-cr-152.)

In September and October 2013 Judge McMahon presided over an 11-day trial. The jury found the defendants guilty on all counts.

In July 2014 Judge McMahon sentenced Binday to 12 years, Kergil to nine years, and Resnick to six years, in each instance followed by three years of supervised release. She also ordered the defendants to pay a total of $39.3 million in restitution to eight life insurance companies.

In November 2015, after the appellate ruling, Judge McMahon assigned Binday and Resnick to a minimum-security facility in Pennsylvania, and Kergil to a minimum-security facility in New York. She ordered them to report on January 5, 2016.

I wrote about the case in the May 2012 and April 2013 issues of The Insurance Forum. I also discussed the case in No. 5 (October 30, 2013) and No. 60 (August 6, 2014).

The Appellate Opinion
The introductory section of the appellate opinion includes a summary. It reads in part:

The convictions arise from an insurance fraud scheme whereby defendants, who were insurance brokers, induced insurers to issue life insurance policies that defendants sold to third-party investors, by submitting fraudulent applications indicating that the policies were for the applicants' personal estate planning. Defendants argue primarily that the government did not prove that they contemplated harm to the insurers that is cognizable under the mail and wire fraud statutes. That basic argument takes several forms, including a sufficiency of the evidence challenge, a constructive amendment claim, and a jury instruction challenge. Defendants also contend that their sentences are procedurally unreasonable because the district court used an erroneous loss amount in calculating their Guidelines sentence ranges. Additionally, Resnick and Kergil challenge their obstruction convictions on various grounds.

We conclude that there was sufficient evidence that defendants contemplated a cognizable harm under the mail and wire fraud statutes; that the indictment was not constructively amended because the allegations in the indictment and the government's proof at trial substantially correspond; and that some aspects of the defendants' challenge to the jury instruction are waived, while the remainder fail on the merits. We reject defendants' challenges to their sentences, and Kergil's and Resnick's challenges to their obstruction of justice convictions.

Accordingly, for the reasons given herein, we affirm the judgments of conviction and remand the case for the limited purpose of revising the restitution amount as agreed by the parties.

Structure of the Opinion
The background section of the opinion describes the defendants' scheme, the indictment, the trial, and the sentencing. The discussion section of the opinion examines mail and wire fraud, comments on Resnick's challenges to the obstruction of justice charges, and explores the defendants' challenges to the sentencing.

The opinion notes that, after the district court's judgment had been entered, the parties agreed the total restitution should be reduced from $39.3 million to $37.4 million. That is why the appellate court sent the case back to the district court for the limited purpose of revising the restitution order to reflect the amount agreed upon by the parties.

The Deterrence Issue
Near the end of the discussion section of the opinion is a review of the deterrence issue. Here, with citations omitted, are two paragraphs on this subject from the opinion and an important footnote:

Kergil, alone among the defendants, challenges his sentence as substantively unreasonable. He contends that his sentence is excessive because at the time of defendants' conduct fraudulent STOLI policies were "a matter for civil litigation rather than criminal indictment," and because his sentence of nine years' imprisonment far exceeds what was necessary to deter similar fraud among other brokers. We reject those arguments....

Kergil cannot meet our high bar for vacating a sentence as substantively unreasonable. He took part in a sophisticated, multi-million dollar fraud scheme. And when the FBI began investigating the scheme, he directed co-conspirators to obstruct justice by destroying incriminating documents. Notably, Kergil's sentence fell below his Guidelines range (even when adjusting the loss amount to include only commissions).* Given Kergil's culpability and the district court's reasonable determination that the sentence should serve as a deterrent to other brokers, the 108-month sentence does not shock the conscience. 

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*As evidence that addressing frauds of this sort was previously left to civil litigation, Kergil cites as examples nine civil cases in which insurers sought to rescind STOLI policies based on fraudulent applications. But that STOLI frauds continued despite repeated civil enforcement supports the district court's conclusion that more significant deterrence was appropriate.

General Observations
Kergil is correct about STOLI fraud usually being handled through civil rather than criminal litigation. However, this is not the first criminal case. As examples, see the case of Robert Wertheim and two associates discussed in the October 2013 issue of The Insurance Forum, and the case of Vincent Bazemore discussed in No. 96 (April 29, 2015). There is also the case of Joseph Caramadre discussed most recently in No. 17 (January 2, 2014), although that case dealt with stranger-originated annuities rather than STOLI.

Judge McMahon and the appellate court judges are also correct about the need for strong deterrence to discourage insurance agents and brokers from fleecing insurance companies through brazen STOLI schemes. But deterrence cannot occur when there is no publicity about the criminal cases. For example, there has been no prominent media coverage of the Binday, Wertheim, and Bazemore cases. Indeed, it is inexplicable that there has been virtually nothing about those cases even in the insurance press. I would be interested in hearing from readers about the extent to which insurance companies inform their agents and brokers about STOLI criminal litigation, or even about STOLI civil litigation.

Available Material
Anyone interested in the Binday case should read the opinion from the Second Circuit. I am making it available as a complimentary 97-page PDF. E-mail jmbelth@gmail.com and ask for the October 2015 appellate opinion in the Binday case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com