Tuesday, March 6, 2018

No. 256: MetLife's Lost Pensioners—A Third Update

In No. 246 (posted January 2, 2018) I discussed a recent disclosure by MetLife, Inc. (NYSE:MET) concerning about 600,000 lost pensioners. I provided updates in Nos. 252 (February 12) and 254 (February 19). Here I provide a third update.

MetLife's 10-K Report for 2017
In its discussions of the problem of lost pensioners, MetLife said it would discuss the subject in the 10-K report as of December 31, 2017 to be filed with the Securities and Exchange Commission on March 1, 2018. The first reference to the subject is this paragraph on page 87 of the 417-page 10-K (all references to the subject are in the complimentary package offered at the end of this blog post):
On December 15, 2017, the Company announced that it was undertaking a review of practices and procedures used to estimate its reserves related to certain RIS [Retirement Income Solutions] group annuitants who have been unresponsive or missing over time. As a result of this process, the Company increased reserves by $510 million, before income tax, to reinstate reserves previously released, and to reflect accrued interest and other related liabilities. Of the increase of $510 million ($331 million, net of income tax), $138 million ($90 million, net of income tax) was incurred in 2017 and $372 million ($241 million, net of income tax) was considered an error and, recording this amount in the fourth quarter of 2017 financial statements would have had a material effect on the results of operations for 2017. Approximately 25 years ago, companies that are or have been MetLife, Inc. subsidiaries established a practice of releasing the full insurance liability after two attempts at contacting these annuitants, based on the presumption that these annuitants would never respond and had not become entitled to benefits based on certain contractual provisions. The number of impacted annuitants for whom the Company released the full insurance liability was no more than 1,000 in any one year, and over the entire period totaled approximately 13,500 as of December 31, 2017, which is approximately 2% of the total group annuitant population.
The Lenna Retirement
On February 27, 2018, The Wall Street Journal carried an article by reporter Leslie Scism entitled "MetLife Pension-Benefits Executive to Retire." The article cited an internal memorandum indicating that Executive Vice President Robin Lenna will retire as of March 1 after 14 years at the company. According to the article, she headed the company's "Retirement Income Solutions unit, which oversees a 'pension-risk-transfer' business in which the insurer assumes responsibility for some or all payments due participants in private-sector pension plans."

Identify Theft Alerts
In recent months at least four state insurance departments have issued consumer alerts warning the public about the activities of criminals engaged in identity theft. In July 2017 and September 2017 the Nebraska Department of Insurance issued alerts. The first was entitled "Beware of Fraudulent Attempts to Disburse Funds from Annuity Contracts." The second was entitled "Fraudulent Disbursement of Funds from Annuity Contracts." The thieves had annuitants' contract numbers, Social Security numbers, and dates of birth.

In November 2017 the Kansas Insurance Department issued an alert entitled "Identity thieves go after annuities." The thieves had annuitants' account numbers, Social Security numbers, and dates of birth.

On February 6, 2018, the Colorado Division of Insurance issued an alert entitled "Identity thieves target annuities." The division warned annuitants to watch for unauthorized withdrawals.

On February 28, 2018, the South Carolina Department of Insurance issued a media release entitled "South Carolina Department of Insurance Warns of Identity Thieves Targeting Annuities and Annuity Recipients." The thieves had annuitants' account numbers, dates of birth, Social Security numbers, names and addresses of relatives, and other information.

Steven Weisbart's Comments
In my previous posts about lost pensioners, I invited comments from readers, especially from those with direct knowledge of record keeping procedures. I heard from several readers who had no inside information, but recently I received an email from Steven Weisbart. He served on the faculty at Georgia State University, later worked at TIAA-CREF, and is now senior vice president and chief economist at the Insurance Information Institute. I edited his comments lightly, and he approved my editing. Here are his thoughts on the subject of lost pensioners:
I have dealt with the issue of "lost participants" at two points in my career. The first was at TIAA-CREF. The second is at a defined benefit pension plan for insurance-support organizations. Although it is clear that MetLife "dropped the ball," I understand that this is a very difficult problem to overcome, particularly if success is defined as not losing anyone.
There are several problems that should be recognized. First, methods of keeping records have changed dramatically over the last 50 years or so. The older a record, the harder it is to search. This is not just paper-to-computer, but one computer system to another. Companies are replacing "legacy" systems with newer ones that do not necessarily read older data.
Second, a related problem is that record keepers are often changed. When they are, some historical records, which might have been helpful in a search, are likely lost. In my current defined benefit plan, for example, we switched record keepers in 2010, and some useful historical information on current participants might not have been handed over to the new record keeper.
Third, in establishing non-pension records, such as drivers' licenses, people often use different forms of their names, making a match uncertain. For example, I sometimes use my middle initial and sometimes do not. Also, some external data bases, such as the Social Security Master Death File, contain errors that pose a challenge in locating a lost participant accurately.
Fourth, most lost participants have small benefit amounts at stake. Thus they have little incentive to keep the contact information accurate.
Fifth, even when you think you have found a lost participant and want to confirm it by direct contact, the person may not respond because he or she interprets the inquiry as a marketing effort, or worse, a senior citizen scam. That is especially true in a case such as MetLife, where the obligation was originally assumed by a different sponsor. A recipient may never have dealt with MetLife and may think the contact letter is a fake.
I am not trying to excuse MetLife. Rather, I am trying to explain why they may continue to struggle with this issue for a long time.
Available Material
I am offering a complimentary 12-page PDF consisting of excerpts from MetLife's 10-K filed March 1, 2018 (6 pages) and consumer alerts from state insurance departments (6 pages). Email jmbelth@gmail.com and ask for the March 2018 package about MetLife's lost pensioners.

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Wednesday, February 21, 2018

No. 255: Mueller's Grand Jury Hands Up an Indictment Against the Russians—A Major Development in the Investigation

On February 16, 2018, Special Counsel Robert S. Mueller III of the U.S. Department of Justice filed a District of Columbia federal grand jury indictment of three Russian entities and 13 Russian individuals. I think the indictment should be widely read. (See USA v. Internet Research Agency, U.S. District Court, District of Columbia, Case No. 1:18-cr-32.)

The Judge
The case has been assigned to U.S. District Court Judge Dabney L. Friedrich. President Trump nominated her in June 2017, and the Senate confirmed her in November 2017 by a vote of 93 to 4.

The Attorneys
The government attorneys are Jeannie Sclafani Rhee of the special counsel's office, Lawrence Rush Atkinson of the special counsel's office, and Ryan Kao Dickey of the criminal division of the U.S. Department of Justice. The names of the defendants' attorneys are not yet known.

The Charges and the Defendants
The indictment includes eight counts: one count of conspiracy to defraud the United States, one count of conspiracy to commit wire fraud and bank fraud, and six counts of aggravated identity theft. The government makes different numbers of charges against the various defendants, and seeks forfeiture against some of the defendants. The defendants are Internet Research Agency LLC (it has five other names), Concord Management and Consulting LLC, Concord Gathering, and 13 individuals. The names and aliases of the individual defendants are shown in the court docket, which is part of the complimentary package offered at the end of this post. Here is the first paragraph of the indictment:
The United States of America, through its departments and agencies, regulates the activities of foreign individuals and entities in and affecting the United States in order to prevent, disclose, and counteract improper foreign influence on U.S. elections and on the U.S. political system. U.S. law bans foreign nationals from making certain expenditures or financial disbursements for the purpose of influencing federal elections. U.S. law also bars agents of any foreign entity from engaging in political activities within the United States without first registering with the Attorney General. And U.S. law requires certain foreign nationals seeking entry to the United States to obtain a visa by providing truthful and accurate information to the government. Various federal agencies, including the Federal Election Commission, the U.S. Department of Justice, and the U.S. Department of State, are charged with enforcing these laws.
Structure of the Indictment
A major section of the indictment addresses the Count 1 conspiracy charge. The section identifies the defendants, lists the federal regulatory agencies, explains the object of the conspiracy, describes the manner and means of the conspiracy, explains the use of U.S. social media platforms, talks about the use of U.S. computer infrastructure, describes the use of stolen U.S. identities, explains actions targeting the 2016 U.S. presidential election, describes political advertisements (with 13 examples), explains the staging of political rallies in the U.S., describes the destruction of evidence, and lists overt acts.

Another section of the indictment addresses Counts 2 and 3. The section explains the object of the conspiracy, describes the manner and means of the conspiracy, and includes 23 examples of identify theft. The final section of the indictment describes the forfeiture allegation.

General Observations
I think the filing of this indictment is the most important development to date in the investigation. It may be difficult or impossible to bring the alleged wrongdoers into a U.S. courtroom, but the indictment sends a strong message. The alleged wrongdoers may hesitate to travel out of Russia because they may find themselves in countries that have extradition agreements with the U.S. In addition, I think the indictment strengthens the special counsel's political position, making it more difficult to remove him. Deputy Attorney General Rod Rosenstein, not Special Counsel Mueller, conducted the press conference at which the indictment was announced.

Available Material
I am offering a complimentary 47-page PDF consisting of the court docket (10 pages) and the indictment (37 pages). Email jmbelth@gmail.com and ask for the February 2018 package about Special Counsel Mueller's charges against Russian entities and individuals.

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Monday, February 19, 2018

No. 254: MetLife's Lost Pensioners—A Further Update

In No. 246 (posted January 2, 2018) I discussed a recent disclosure by MetLife, Inc. (NYSE:MET) concerning about 600,000 lost pensioners. In No. 252 (February 12, 2018) I provided an update. I am rushing this further update for a reason I will explain.

The January 29 Postponement
On January 29 MetLife postponed its fourth quarter and full year 2017 earnings report and the related earnings conference call by about two weeks. The company provided preliminary results and said management had found a "material weakness in internal control over financial reporting."

The February 13 Announcement
On February 13 MetLife announced the fourth quarter and full year 2017 earnings report. The following statement appears at the bottom of the first page of the news release:
"Although our underlying financial performance remained solid, the reserve charge and its impact on our fourth quarter and full year earnings—as well as the material weakness that led us to delay our earnings announcement—are unacceptable and deeply disappointing," said Steven A. Kandarian, chairman, president and CEO of MetLife, Inc. "We can and will do better. We are rigorously addressing the situation and are committed to significantly improving our operational performance to better serve our customers and strengthen shareholders' confidence in our organization. MetLife is an iconic franchise with strong businesses, and we are working very hard to continue to successfully execute on our strategy and deliver great value to our customers and shareholders."
The Conference Call
MetLife held its earnings conference call on February 14. Here is the first portion of Kandarian's opening remarks:
Most of my comments this morning will focus on the issue within our Retirement and Income Solutions business that caused us to delay earnings and take an after-tax charge of $331 million or $510 million pre-tax. Simply put, this is not our finest hour. We had an operational failure that never should have happened and it is deeply embarrassing. We are undertaking a thorough review of our practices, processes and people to understand where we fell short and how we can reset the bar at the high level people have come to expect from us over our 150-year history. The Board of Directors is fully engaged on this issue as well.
Replay of the Conference Call
According to the February 13 news release, the conference call will be available for replay by telephone for one week—specifically, until Wednesday, February 21, at 11:59 p.m. (EST). To listen to a replay by telephone, dial 800-475-6701 (U.S.) or 320-365-3844 (outside the U.S.). The access code for the replay is 433148. I am rushing this post in case any readers would like to listen to the replay by telephone.

The Advisory Report to the DOL
Shortly after I began writing about MetLife's lost pensioners, a reader brought to my attention a November 2013 advisory report submitted to Thomas E. Perez, then the Secretary of the U.S. Department of Labor (DOL). The report, produced by the Advisory Council on Employee Welfare and Pension Benefit Plans, is entitled "Locating Missing and Lost Participants." Here is the abstract:
The 2013 ERISA Advisory Council ("Council") examined the issues plan sponsors, fiduciaries, service providers, and other parties ("Plan Representatives") face in handling plan benefits payable to participants and beneficiaries who cannot be found or are nonresponsive ("Lost Participants"). The focus of the Council's examination was on both methods of maintaining contact with participants so they do not become Lost Participants and methods of finding participants once they become Lost Participants.
The Council learned from witnesses who testified that locating Lost Participants to pay them their benefits can be an administrative burden. Further, while there is DOL guidance on dealing with Lost Participants, that guidance is (i) focused on terminated defined contribution plans, (ii) presented in multiple sources rather than one central and cohesive resource, or (iii) outdated. Furthermore, there does not appear to be sufficient inter-agency coordination among the DOL, the Pension Benefit Guaranty Corporation, and the Social Security Administration to address overlapping issues surrounding Lost Participants. The Council makes several recommendations in this report regarding how to address each of these findings.
Available Material
I am offering a complimentary 47-page PDF consisting of MetLife's February 13 news release without the unaudited statements (17 pages) and the advisory report to the DOL (30 pages). Email jmbelth@gmail.com and ask for the second February 2018 package about MetLife's lost pensioners.

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Thursday, February 15, 2018

No. 253: Long-Term Care Insurance—Metropolitan Life Suffers a Setback in a Class Action Lawsuit Relating to Premium Increases

On February 6, 2018, a federal appellate court handed Metropolitan Life Insurance Company a setback in a class action lawsuit relating to premium increases on certain long-term care (LTC) insurance policies. A district court judge granted the company's motion to dismiss the complaint, but a three-judge appellate panel unanimously reversed the decision and sent the case back to the district court for further proceedings. Here I discuss this extraordinary case. (See Newman v. Metropolitan, U.S. District Court, Northern District of Illinois, Case No. 1:16-cv-3530, and U.S. Court of Appeals, Seventh Circuit, Case No. 17-1844.)

The Complaint
On March 23, 2016, Margery Newman, an Illinois resident, filed a class action complaint against Metropolitan. The case was assigned to U.S. District Court Judge Thomas M. Durkin. President Obama nominated him in May 2012, and the Senate confirmed him in December 2012.

On June 29, 2016, Newman filed a first amended complaint, on which the discussion here is based. She was aged 56 when she purchased an "LTC Premier" policy that was effective September 1, 2004. The policy included a "reduced-pay at 65 option," which she selected. Metropolitan's marketing brochure described the option as follows:
By paying more than the regular annual premium amount you would pay each year up to the Policy Anniversary on or after your 65th birthday, you pay half the amount of your pre-age 65 premiums thereafter.
Before Newman turned 65, the semiannual premium was $3,813.68. On September 1, 2012, the semiannual premium declined by 50 percent, to $1,906.84. On March 1, 2015, Metropolitan increased the semiannual premium by 102 percent, to $3,851.81.

In her complaint Newman suggested a definition of the "class" for purposes of this case. Here is her suggestion:
All persons age 65 and older in the United States who purchased an individual long-term care insurance policy from MetLife (or a subsidiary or affiliate thereof) and selected the "Reduced-Pay at 65 Option" at any time during the period from June 1, 1986 to the present and have been subjected to a class-wide rate increase that increased their premiums above and beyond the promised 50% of their pre-age 65 premiums.
Newman alleged breach of contract, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, fraud, and fraudulent concealment. She sought class certification, compensatory and punitive damages, statutory and exemplary damages, imposition of a constructive trust, a claims resolution facility, attorney fees, and costs. She attached several exhibits to the complaint, including Metropolitan's marketing brochure and the policy under discussion.

The Dismissal
On July 29, 2016, Metropolitan filed a motion to dismiss the complaint for failure to state a claim. On March 9, 2017, after briefing, Judge Durkin issued a memorandum and order dismissing the complaint without prejudice. Here is the concluding paragraph (persons interested in Judge Durkin's reasoning are invited to read his ruling, which is part of the complimentary package offered at the end of this post):
For the reasons stated above, Plaintiff's complaint is dismissed. The dismissal is without prejudice, however, and Plaintiff may move to amend her complaint within 30 days of the date of this Order. Any such motion should attach a proposed amended complaint and be supported by a brief of no more than five pages describing how the proposed amendments cure the deficiencies in the current complaint. Defendant should not respond to the motion to amend unless ordered to do so by the Court. If after 30 days no motion to amend is filed, this dismissal will be converted into a dismissal with prejudice.
On April 7, 2017, Newman filed a motion for leave to file a second amended complaint, attached the second amended complaint, and submitted a short memorandum in support of the motion. On April 12, at a motion hearing, Judge Durkin denied the motion for reasons he stated orally, and he dismissed the complaint with prejudice.

The Appellate Court Case
On April 21, 2017, Newman filed a notice of appeal to the Seventh Circuit. On June 12 she filed her brief. On July 12 Metropolitan filed its brief. On July 26 Newman filed a reply brief.

The case was assigned to a panel consisting of Chief Judge Diane P. Wood and Circuit Judges Frank H. Easterbrook and Ilana Diamond Rovner. President Clinton nominated Judge Wood in March 1995, the Senate confirmed her in June 1995, and she became Chief Judge in 2013. President Reagan nominated Judge Easterbrook in February 1985, the Senate confirmed him in April 1985, and he served as Chief Judge from 2006 to 2013. President George H. W. Bush nominated Judge Rovner in July 1992, and the Senate confirmed her in August 1992.

On February 6, 2018, the panel filed its unanimous decision, which Chief Judge Wood wrote. The decision reversed the district court's dismissal of the complaint and sent the case back to the district court for further proceedings. Here is the final paragraph of the panel's decision:
Newman asserts that MetLife lured her into a policy by promising a trade of short-term expense for long-term stability. She took the deal and spent nine years investing in a plan, only to have MetLife pull the rug out from under her. Neither MetLife's brochure nor the terms of the policy forecast this possibility. These allegations were enough to entitle her to prevail on the liability phase of her contract claim, and they are enough to permit her to go forward on her other theories. We therefore REVERSE the district court's grant of MetLife's motion to dismiss and REMAND for further proceedings.
On the same day Judge Durkin set a status hearing for the morning of February 16. What will emerge from the hearing and what will happen in the "further proceedings" remain to be seen.

General Observations
At the outset I said this case is extraordinary. It may also be unusual, because I think it is unlikely that many policyholders would have signed up to pay higher premiums initially in order to qualify for lower premiums later. If the complaint survives dismissal, which seems likely now, if Metropolitan does not settle quickly, if a class is certified, and if the parties agree to settle the case rather than go to trial, we may learn about the magnitude of the problem through the terms of the settlement agreement. It is also important to recognize that Metropolitan stopped selling LTC insurance policies several years ago, and is currently engaged in administering and running off its existing block of LTC insurance policies. I plan to follow this case and report further developments.

Available Material
I am offering a complimentary 58-page PDF consisting of the first amended complaint without exhibits (14 pages), Judge Durkin's memorandum and order (28 pages), and the appellate court panel's ruling (16 pages). Email jmbelth@gmail.com and ask for the February 2018 package about Newman v. Metropolitan.

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Monday, February 12, 2018

No. 252: MetLife's Lost Pensioners—An Update

In No. 246 (posted January 2, 2018) I discussed a recent disclosure by MetLife, Inc. (NYSE:MET) concerning about 600,000 lost pensioners. Here I provide an update.

The December 15 8-K Report
On December 15, 2017, MetLife filed an 8-K (significant event) report with the Securities and Exchange Commission (SEC). The company said "we are improving the process used to locate a small subset of our total group annuitant population of approximately 600,000 that have moved jobs, relocated, or otherwise can no longer be reached via the information provided for them." The company said it currently believes that "the portion of the subset that is most impacted is less than 5% of our total group annuitant population and they tend to be smaller size cases with average benefits of less than $150 per month."

The same day MetLife's chief financial officer made similar comments during a "Business Update Call" with analysts. I contacted the company, and a spokesman provided a statement. I showed it in No. 246.

The January 30 8-K Report
On January 30, 2018, Metlife filed an 8-K report with the SEC. The text consisted of two sentences:
On January 29, 2018, MetLife, Inc. issued a news release preannouncing preliminary fourth quarter 2017 earnings and the rescheduling of its related earnings and conference call. A copy of the news release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
The January 29 News Release
The eight-page January 29 news release was entitled "MetLife Preannounces Preliminary Fourth Quarter 2017 Earnings, Reschedules Earnings Release and Conference Call." The news release had two subtitles: "Company Expects to Report Net Income of $2.0 to $2.1 billion and Adjusted Earnings of $650 to $700 million" and "Rescheduling Due to Revision of Prior Year Financials to Reflect Reserve Strengthening." The company had been scheduled to issue its fourth quarter earnings report on January 31, but will now issue the report after the market closes on February 13. The company expects to file its 10-K report for 2017 by March 1.

According to the news release, "Management of the company has determined the prior release of group annuity reserves resulted from a material weakness in internal control over financial reporting." The company "expects to increase reserves in total between $525 million and $575 million pre-tax, to adjust for reserves previously released, as well as accrued interest and other related liabilities." Also, "The total amount expected to impact fourth quarter 2017 net income is between $135 million and $165 million pre-tax," and "the full year 2017 net income impact [is expected] to be between $165 million and $195 million pre-tax."

MetLife said it had previously informed the New York Department of Financial Services (DFS), the company's primary state regulator, about the matter, and is responding to questions from DFS and other state insurance regulators. Also, the enforcement staff of the SEC has made an inquiry and the company is responding. The company said it is not aware of any intentional wrongdoing in the matter.

General Observations
As mentioned in No. 246, I think lost pensioners are a serious problem stemming from the mobility of our population and the administrative challenge of dealing with huge numbers of pensioners. I invited comment from readers—especially from those with direct knowledge of how companies maintain their records. I received very little feedback, and no responses from persons with direct knowledge of record keeping procedures. I plan to prepare another update after February 13 or after March 1, if further significant details emerge.

Available Material
I am offering a complimentary eight-page PDF containing MetLife's January 29 news release. Email jmbelth@gmail.com and ask for the February 2018 package about MetLife's lost pensioners.

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Monday, February 5, 2018

No. 251: Halali and Others in a Federal Criminal Case Involving Phony Life Insurance Policies—A Further Update

In No. 149 (posted March 14, 2016) I discussed a federal criminal case against five defendants involving issuance of phony life insurance policies. In No. 210 (March 27, 2017) I provided an update on the case. Here I provide a further update. (See U.S. v. Halali, U.S. District Court, Northern District of California, Case No. 3:14-cr-627.)

Background
In December 2014 the U.S. Attorney in San Francisco filed the indictment. The defendants were Karen Gagarin, Behnam Halali, Kraig Jilge, Ernesto Magat, and Alomkone Soundara. They worked for several years as independent contractors selling life insurance for American Income Life Insurance Company.

The indictment alleged that the defendants engaged in wrongdoing that caused the company to pay more than $2.5 million in commissions and bonuses. Specifically the indictment alleged that the defendants paid recruiters to find individuals willing to take a medical examination in exchange for about $100, took personal information and submitted applications for life insurance in many cases without the individual's knowledge, in some cases created fraudulent drivers' licenses, opened hundreds of bank accounts from which to pay premiums, typically paid one to four months of premiums before allowing the policies to lapse, returned verification calls to the company purporting to be the applicants, used phony addresses on many applications in an effort to avoid detection, and fabricated the names of policy beneficiaries.

The indictment charged each defendant with one count of conspiracy to commit wire fraud, 14 counts of wire fraud, and one count of aggravated identity theft. The indictment also charged three of the defendants with money laundering: three counts against Magat, two counts against Jilge, and one count against Halali. In February 2016 U.S. Senior District Judge Susan Illston denied a motion to dismiss filed by four of the defendants. She set the case for trial in early 2017.

In December 2016 Soundara pleaded guilty to all 16 counts against him and agreed to testify for the government. In January 2017 Judge Illston set the trial date, said Jilge intended to plead guilty, and said the trial defendants were Halali, Magat, and Gagarin. Jilge pleaded guilty to most of the charges against him but did not plead guilty to the two money laundering charges against him. Judge Illston vacated the trial as to Jilge.

The trial began on February 15, 2017, consisted of 14 trial days, and ended on March 13. The jury found Halali, Magat, and Gagarin guilty on the conspiracy charge, the 14 wire fraud charges, and one money laundering charge. Judge Illston set sentencing for July 21.

Recent Developments
On January 5, 2018, after the filing of post-trial motions, and after the filing of sentencing memoranda, Judge Illston sentenced Halali, Magat, and Gagarin. She filed a judgment against Gagarin on January 9, and judgments against Halali and Magat on January 10. Here is a brief summary of the sentences:
Halali: 60 months in prison followed by three years of supervised release with special conditions, a special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, no forfeiture, and self surrender on March 30, 2018.
Magat: 48 months in prison followed by three years of supervised release with special conditions, a special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, no forfeiture, and self surrender on March 30, 2018.
Gagarin: 36 months in prison followed by three years of supervised release with special conditions, a special assessment of $1,600, restitution of $2,837,791.93 (joint and several with the co-defendants), no fine, no forfeiture, and self surrender on March 30, 2018.
On January 16 Halali waived his right to appeal. On January 22 Gagarin filed a notice of appeal. The next day the appellate court issued an order under which briefing is to be completed by June 13. (See U.S. v. Gagarin, U.S. Court of Appeals, Ninth Circuit, Case No. 18-10026.)

On January 23 Judge Illston set sentencing of Soundara for March 23. On the same day Jilge filed a sentencing memorandum in which he seeks to avoid prison time. The government's reply memorandum is expected soon, and sentencing of Jilge is set for February 16.

The Plea Agreements
Plea agreements often contain important information I share with readers. In this case I have not been able to obtain the Jilge and Soundara plea agreements. They were filed in open court, are listed in the docket, and are not marked as sealed. However, when I sought them from the court file, the message in each instance was: "You do not have permission to view this document." I do not know why the plea agreements are unavailable, but perhaps they will become available eventually.

General Observations
Life insurance performs important social functions, not the least of which is to provide financial protection for the insured's loved ones. Yet, as often said, life insurance is sold, not bought. Thus it is necessary to pay commissions to agents who perform the many functions associated with the sale of life insurance including, most importantly, what I call the "antiprocrastination function." It is disgraceful when agents engage in criminal behavior to increase their commissions.

This case involved atrocious activity by the defendants. The evidence was so overwhelming that I thought the case would not go to trial, and that all five defendants would plead guilty. I was wrong; only two pleaded guilty and the other three went to trial. I was not surprised by the jury findings or by the judgments imposed on the defendants who went to trial. I plan to report on further developments in the case.

Available Material
In Nos. 149 and 210 I offered complimentary PDFs containing important case documents. Those two packages are still available.

Now I am offering a new complimentary 37-page PDF consisting of the judgment against Gagarin (7 pages), the judgment against Magat (8 pages), the judgment against Halali (8 pages), Halali's waiver of appeal (2 pages), Gagarin's notice of appeal (1 page), and Jilge's sentencing memorandum (11 pages). Email jmbelth@gmail.com and ask for the February 2018 package about the Halali case.

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Thursday, January 25, 2018

No. 250: Beneficiary Designations—Another Case Involving the Outrageous Practices of an Insurance Agent

In No. 249 (January 17, 2018) I described a case illustrating how the actions of an insurance agent led to a dispute over who should receive the proceeds of two annuities. While preparing that post, I learned of an earlier case in which an insurance agent used outrageous practices to victimize two elderly widows. Here I discuss the earlier case.

Richard Klinkner
Richard J. Klinkner (Two Rivers, Wisconsin) received his agent's license in 1983. He worked for New York Life Insurance Company (NYL) until 1992, when he became an independent agent. His victims were Mrs. Mildred Kaufman and Mrs. Janet Hlinak (both of Manitowoc, Wisconsin).

Mrs. Mildred Kaufman
Mildred was born in 1914. She and her husband had three children and five grandchildren, and were longtime Klinkner clients. Mildred paid the bills and mostly handled finances when her husband was alive and after he died in 2000. For a number of years Klinkner handled Mildred's investments and financial affairs. He also prepared her tax returns, for which she paid him. In 2003 Mildred appointed her daughter-in-law her power of attorney (POA) for finances. In 2006 Mildred moved into an assisted living facility. She died in 2008 after the hearing in this case.

In 1990 Klinkner sold Mildred a whole life insurance policy issued by NYL. In February 2006 Klinkner hand wrote a beneficiary change letter for the policy. The letter asked that her "friend" Klinkner be named beneficiary. NYL recorded the change effective on the date of the letter. Klinkner later testified that Mildred wanted him to be the beneficiary, that she signed the letter, that he took it to his office to make a copy, that he mailed it back to Mildred to send to NYL, and that he did not know whether NYL received the letter until an attorney representing Wisconsin's Office of the Insurance Commissioner (OIC) contacted him. A few days after the proceedings in this case began, Mildred named her daughter-in-law and grandchildren beneficiaries of the NYL policy.

In 2002 Klinkner sold Mildred, who was aged 88 at the time, a deferred annuity issued by National Western Life Insurance Company (NWL). It was funded by surrendering four annuities issued by Jackson National Life Insurance Company (JNL) and five annuities issued by a Conseco company. Mildred incurred substantial surrender charges.

Mrs. Janet Hlinak
Janet was born in 1923. She and her husband had no children. Her husband handled finances until he died in 1999. Shortly before her husband died, Janet appointed her husband's brother her POA for finances. Janet and her husband were longtime clients of Klinkner. He prepared tax returns for them, and for Janet after her husband died. They paid Klinkner for that work.

Janet has an 8th grade education and has always had difficulty with basic math skills. She does not know what bills to give the cashier to pay for a $15 lunch, and she generally does not understand what things cost or are worth. She does not know how to write checks, and she signs her name after someone writes the checks for her. She takes care of herself and her home, and lives by herself.

After Janet's husband died, Klinkner, at his own suggestion, came to her house each month to write checks to pay her monthly bills. She signed the checks and Klinkner mailed them. Each month she paid Klinkner $100 in cash (or by checks Klinkner wrote) for that work.

Klinkner sold Janet two life insurance policies issued by NYL (and was servicing another), one policy issued by a Conseco company, and three annuities issued by JNL. One of the JNL annuities was paid for by surrendering the Conseco policy. On the JNL application, which Janet signed and Klinkner mailed, Klinkner named himself the beneficiary.

On another JNL annuity, Klinkner typed a letter to JNL from Janet stating that she "would like Mr. Richard J. Klinkner listed as beneficiary on this annuity" and that her "husband before he passed away on April 10, 1999 had asked Mr. Klinkner to act as my caretaker until the day I die." Janet signed the letter and Klinkner sent it to JNL. At various times Klinkner typed letters asking NYL to list her "friend/caretaker" Klinkner beneficiary on the NYL policies.

In October 2000 Janet signed a will making bequests of $4,000, naming Klinkner beneficiary of the rest of her estate, and naming him her personal representative. She later testified she put Klinkner in her will because she thought he would handle her finances but did not want him to have all her money when she died. She later signed a new will.

In January 2001 Janet revoked the appointment of her brother-in-law as her POA for finances. Two weeks later she appointed Klinkner her POA for finances. In 2007, after the proceedings in the case began, she appointed her sister-in-law her POA for finances.

The Complaint
In August 2006 Mildred's daughter-in-law filed a complaint about Klinkner with the OCI. In June 2007 OCI issued a hearing notice alleging that Klinkner violated insurance laws by naming himself beneficiary on multiple life insurance policies he had sold to two different consumers, that he made false or misleading statements to OCI when asked whether he was named beneficiary on any customers' insurance policies, that he made false or misleading statements to consumers, and that he made unsuitable sales of life insurance policies and annuities to two elderly consumers. Klinkner generally denied the allegations.

The ALJ's Proposed Decision
In 2008, after amended hearing notices and pre-hearing conferences, an administrative law judge (ALJ) held a six-day hearing—three days in late May and three days in early July. In April 2009 the ALJ issued a proposed decision to be considered by the Wisconsin insurance commissioner. The ALJ recommended that the insurance commissioner issue an order that would revoke Klinkner's license as an insurance agent, require him to forfeit $7,000 for naming himself beneficiary on life insurance policies and for other violations, require him to pay Janet and her current POA $6,513 as restitution for the net loss on surrender charges she incurred when he replaced her JNL annuities, and require him to pay Mildred $67,000 as restitution for his profit from the sale of the NWL annuity.

Commissioner Dilweg's Final Decision
In August 2009, after he considered the objections filed by Klinkner and by the OCI, then Commissioner Sean Dilweg issued his final decision. He discussed the parties' objections and made numerous findings of fact. He ordered that Klinkner's license be revoked, that Klinkner pay $8,000 to the state of Wisconsin for six violations of insurance laws, that Klinkner pay $10,000 to the state of Wisconsin for repeated violations of another insurance law, that Klinkner pay $27,137 to Janet and her current POA for the surrender charges she incurred when Klinkner replaced her JNL annuities, that Klinkner pay Mildred's estate $17,592 for the surrender charges she incurred when Klinkner replaced her JNL annuities and Conseco annuities, and that Klinkner pay $67,000 to the state of Wisconsin for the profit he made from the sale of the NWL annuity to Janet.

Klinkner's Appeals
Klinkner appealed Commissioner Dilweg's decision to a Wisconsin circuit court. The judge affirmed the commissioner's decision except for reimbursement of the surrender charges Mildred incurred in the surrender of her Conseco annuities. The judge remanded that portion of the decision to the commissioner with the request that the commissioner either remove that requirement or explain further why the replacement was unsuitable.

Klinkner appealed the circuit court judge's ruling to the Wisconsin Court of Appeals. A three-judge panel affirmed the ruling.

Commissioner Nickel's Final Decision on Remand
In July 2011 then Commissioner Ted Nickel issued his final decision on remand. He explained why replacement of the Conseco annuities was unsuitable, and he retained the requirement that Klinkner reimburse Mildred for the surrender charges she incurred when Klinkner replaced her Conseco annuities.

General Observations
I am deeply troubled by the Klinkner case, for two reasons. First, the facts of the case describe outrageous actions by Klinkner. Second, the amount of time and effort expended by numerous regulatory employees, by numerous court employees, and by all the others involved in this case must have been staggering. Cases like this one and the one described in No. 249 cause me to ask how there can ever be enough resources to protect the public adequately against wrongdoing in the insurance business.

Available Material
I am offering a complimentary 19-page PDF consisting of Commissioner Dilweg's August 2009 final decision (10 pages) and Commissioner Nickel's July 2011 final decision on remand (9 pages). E-mail jmbelth@gmail.com and ask for the January 2018 package about the Klinkner case.

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