No. 301: Lost Pensioners—New York Comes Down Hard on Metropolitan Life

Blogger's Note

In a blogger's note in No. 300 (December 17, 2018), I said I was taking a vacation for two or three months. I decided, however, to report now on significant recent developments relating to lost pensioners.

Background

MetLife, Inc. is a major player in the pension risk transfer business, where employers transfer some or all of their employee pension obligations to insurance companies by purchasing group annuity contracts. Prudential Financial, Inc. is another major player in that business.

During 2018 I posted seven items about lost pensioners in general and about lost pensioners at Metropolitan Life Insurance Company, a subsidiary of MetLife, in particular: Nos. 246, 252, 254, 256, 259, 279, and 293. In No. 252 I reported MetLife's disclosure that it had informed the New York Department of Financial Services (DFS), which is Metropolitan Life's primary state regulator, about the company's problems with lost pensioners in the pension risk transfer business.

The New York Press Release

On January 28, 2019, DFS issued a press release announcing that MetLife will pay a $19.75 million fine and provide $189 million in restitution to group annuity contract certificate holders for failures related to the company's pension risk transfer business. The press release and the accompanying consent order are in the complimentary package offered at the end of this post.

The New York Consent Order

DFS performed a market conduct examination of MetLife for the period January 1, 2009 to February 21, 2018, and a supplemental review of the company's pension risk transfer business. DFS plans to issue a report on the examination.

The first section of the consent order is "Findings." It lists several failures by MetLife from 1992 to 2018. Among them, for example, are a failure in certain instances to reserve for outstanding group annuity contracts; a failure to locate, contact, and pay group annuity contract certificate holders; a failure to adequately search for New York group annuity contract certificate holders; and a failure to turn over unclaimed property to the appropriate state. The consent order also lists failures from 2009 to 2018. Among them are a failure to timely search for group annuity contract beneficiaries, a failure to confirm the deaths of group annuity contract holders, and a failure to turn over unclaimed property to the appropriate state.

The second section of the consent order is "Violations." It lists violations of many New York statutes and regulations.

The third section of the consent order is "Agreement." For example, it requires MetLife to maintain full statutory reserves for group annuity contracts, pay retroactive benefits with interest from the normal retirement date, and establish procedures to maintain accurate records of current and future group annuity contract certificate holders.

The Massachusetts Consent Order

In No. 279 I reported that the Enforcement Section of the Massachusetts Securities Division filed, on June 25, 2018, an administrative complaint against MetLife, Inc. relating to lost pensioners in the pension risk transfer business. On December 18, 2018, the Securities Division filed a consent order that is similar in many respects to the New York consent order discussed above. Massachusetts required MetLife to pay an administrative fine of $1 million and enter into undertakings similar but not identical to those in the New York consent order. The Massachusetts consent order is in the complimentary package offered at the end of this post.

General Observations

The New York consent order applies in most respects to group annuity certificate holders everywhere, and in some respects to group annuity contract certificate holders only in New York. The Massachusetts consent order applies only to group annuity certificate holders in Massachusetts. At this time, I am not aware of any regulatory actions taken by other states. However, the undertakings required in the New York consent order will have a significant effect on group annuity contract certificate holders everywhere.

MetLife's Public Filings

In its 10-Q report filed November 8, 2018 with the Securities and Exchange Commission (SEC) for the quarter ended September 30, 2018, MetLife disclosed the then ongoing investigations in New York and Massachusetts. The relevant excerpts from the 10-Q report are in the complimentary package offered at the end of this post.

As of the close of business on February 1, 2018 (four business days after New York issued its consent order), MetLife has not disclosed the consent order in an 8-K (significant event) report filed with the SEC. Nor has MetLife disclosed in an 8-K report the Massachusetts consent order issued December 18, 2018.

The next major report MetLife will file with the SEC is the 10-K report for the year ended December 31, 2018. That report will be filed on or about March 1, 2019, and probably will disclose details of the New York consent order and the Massachusetts consent order.

Available Material

I am offering a 28-page complimentary package consisting of the New York press release (2 pages), the New York consent order (12 pages), the Massachusetts consent order (13 pages), and excerpts from MetLife's 10-Q report for the third quarter of 2018 (1 page). Send an e-mail to jmbelth@gmail.com and ask for the February 2019 package about the New York and Massachusetts consent orders relating to lost pensioners.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 300: Guggenheim and the Dodgers Are Back in the News

Blogger's Note
Long-time readers may recall that I began this blog when I ended my monthly periodical, The Insurance Forum, with the December 2013 issue after 40 continuous years of publication. The first post was on October 7, 2013, and was entitled "Criminal and Civil Charges Against Two Credit Derivatives Employees at JPMorgan Chase." Since then there have been continuous posts at the rate of about five per month. I have now decided to take a vacation for two or three months, after which I plan to resume with No. 301. I would welcome emails during my vacation. Meanwhile, I hope you have happy holidays and a healthy 2019.

A Recent Article
On November 24, 2018, at 7:00 a.m. Eastern time, The Wall Street Journal posted online a 1,366-word article entitled "L.A. Dodgers Are Part of an Unorthodox $20 Billion Plan to Backstop Insurers." It is subtitled "Team Chairman Mark Walter, along with Magic Johnson and other owners, pledged personal holdings to support insurance companies connected with Guggenheim Partners." The reporters are Justin Baer (justin.baer@wsj.com), Margot Patrick (margot.patrick@wsj.com), and Leslie Scism (leslie.scism@wsj.com). The article did not appear in the print editions of the Journal. Here are the first three sentences of the article:

A group of insurance companies associated with Guggenheim Partners LLC provided at least $300 million to help the firm's chief executive and co-investors buy the Los Angeles Dodgers for a record $2.15 billion in 2012—an unusual arrangement that drew scrutiny from regulators before they eventually concluded that nothing was amiss. Now the CEO is going public with an even more unusual arrangement he said is designed to protect policyholders and eliminate any potential conflicts of interest. He said he and a group of business associates have pledged more than $20 billion of their personal net worth to backstop the insurers if they run into financial trouble.

Guggenheim's CEO is Mark Walter. Others are Dodgers co-owners Todd Boehly, Guggenheim's former president; Earvin "Magic" Johnson, the basketball legend; Robert Patton, a Texas businessman; Dan K. Webb, Guggenheim's outside attorney; and individuals not identified. The structure is called "Safe Harbor." The four insurance companies (and their states of domicile) are Delaware Life Insurance Company (DE), EquiTrust Life Insurance Company (IL), Guggenheim Life and Annuity Company (DE), and Security Benefit Life Insurance Company (KS).

The "Opaque" Structure
The Journal article says that the structure of Safe Harbor is "opaque," and that "Guggenheim executives and Mr. Webb won't say when and where it was established or how its assets are valued." Also, a Journal "review of insurance filings found no references to Safe Harbor, and a search of corporate registries was inconclusive."

I sought brief statements for inclusion in this post from Commissioner Trinidad Navarro of Delaware, Director Jennifer Hammer of Illinois, and Commissioner Ken Selzer of Kansas. A spokesperson in Delaware said: "Let me see what I can do. I apologize. I'm just getting back into the office from a conference." I heard nothing further.

A spokesperson in Kansas said: "Regarding your inquiry, the Kansas Insurance Department has no comment." I heard nothing from Illinois.

Webb is co-executive chairman of the Winston & Strawn law firm, and appears to have been a source for some of the information in the Journal article. According to his biography on the firm's website, Guggenheim Partners is one of his corporate clients. I sought a brief statement from him for inclusion in this post. I heard nothing from him.

The Statutory Statements
I reviewed the "Notes to Financial Statements" in the statutory statements of the four insurance companies for the year ended December 31, 2017. I found no mention of Safe Harbor; however, it may have been formed subsequent to the filing of those statements. EquiTrust Life's statement, under "Information Concerning Parent, Subsidiaries, Affiliates, and Other Related Parties," includes this paragraph:

On June 23, 2015, June Bug Insurance Holdings, LLC became the majority controlling shareholder of [EquiTrust Life]. Mr. Earvin Johnson is the sole owner of June Bug Lifetime Trust, which owns 100% of the common membership interests in June Bug Insurance Holdings, LLC. June Bug Insurance Holdings, LLC owns a controlling interest in EquiTrust Investor Holdings, LLC, and is 100% owner of [EquiTrust Life] through wholly-owned subsidiaries. [EquiTrust Life] is no longer an affiliate of Guggenheim Capital, LLC and its subsidiaries.

The Guggenheim Life & Annuity statement refers to reinsurance agreements with many affiliates, former affiliates, and other companies, including Paragon Life of Indiana, Security Benefit Life, EquiTrust Life, and Clear Spring Life Insurance Company. I plan to check the 2018 statutory statements, which are to be filed on March 1, 2019.

The 2014 Lawsuit Against Guggenheim
The Journal article contains a brief mention of an elaborate class action lawsuit filed on February 11, 2014. I wrote about the lawsuit in No. 110 (July 17, 2015). The lead plaintiffs were Clarice Whitmore, an Arkansas resident who bought an annuity in 2013 from Security Benefit Life, and Helga Marie Schulzki, a California resident who bought an annuity in 2013 from EquiTrust Life. The defendants were Guggenheim Partners LLC, Guggenheim Life and Annuity, Security Benefit Life, and EquiTrust Life. Ten attorneys associated with four law firms represented the plaintiffs. I do not know who would have represented the defendants. (See Whitmore v. Guggenheim, U.S. District Court, Northern District of Illinois, Case No. 1:14-cv-948.)

The complaint alleged phony reinsurance transactions with affiliates and violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act. Here are two paragraphs of the 366-paragraph complaint:

11. In addition to saddling the Guggenheim Insurers with the highly illiquid affiliated promissory notes and billions of dollars of highly illiquid mortgage and other risky asset-backed securities, Guggenheim Chief Executive Officer Mark R. Walter, Guggenheim President Todd L. Boehly, and Guggenheim business associate Robert "Bobby" Patton Jr. used the Guggenheim Insurers as a cash machine to buy the most expensive sports franchise in world history, the Los Angeles Dodgers, with over a billion dollars in policyholders' funds.

14. At the center of this scheme was a shell game that Defendants hoped no one could follow, where money and liabilities were continuously shifted between companies with whom the Guggenheim Insurers acknowledged an affiliation (Security Benefit Life, Guggenheim Life, EquiTrust Life, and Paragon Life Insurance Company of Indiana) and with a separate, secretly affiliated company that Defendants acquired and corrupted to facilitate the fraudulent scheme, Heritage Life Insurance Company (AZ).

On the day the complaint was filed, it was assigned by lottery to U.S. District Judge Samuel Der-Yeghiayan. The next day, the plaintiffs' attorneys filed a notice of voluntary dismissal without prejudice (subject to refiling), giving no reason for the dismissal. One day later, the court clerk dismissed the complaint without prejudice. I asked one of the plaintiffs' attorneys why they dismissed the case, but received no reply.

A Possible Explanation
When I wrote about the lawsuit in 2015, I had no idea of the reason for the voluntary and immediate dismissal of the case. When I saw the Journal article, I began thinking further about the matter. President George W. Bush nominated Judge Der-Yeghiayan in March 2003, and the Senate confirmed him in July 2003. He retired in February 2018 at age 66. He was an immigration judge. The plaintiffs' attorneys may have thought it would be difficult for the judge to handle a complex insurance case, and may have decided to dismiss the case without prejudice rather than seek to have the case assigned to another judge. If any readers have other possible explanations for the voluntary dismissal of the lawsuit, I would welcome such explanations.

General Observations
I have no confirmation, other than the Journal article, that the Safe Harbor program exists. As described in this post, I tried without success to obtain short statements from the states of domicile of the four insurance companies and from Webb.

I wanted to provide readers who are not subscribers to the online edition of the Journal with access to the entire article. However, I am not able to do so. First, the article is copyrighted, and I would not have been able to obtain the necessary permission within a reasonable time. Second, any version you find on the internet probably will provide only the beginning of the article and invite you to subscribe to see the entire article.

Available Material
When I posted No. 110, I offered a complimentary 172-page package consisting of the complaint against Guggenheim (105 pages) and the exhibits to the complaint (67 pages). The package remains available. E-mail jmbelth@gmail.com and ask for the February 2014 complaint in the case of Whitmore v. Guggenheim.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 299: Zurich Fights a Workers' Compensation Claim

Joseph E. Leichtnam, a resident of South Dakota, worked for Rommesmo Companies d/b/a Dakota Steel & Supply, Inc. from May 2001 until April 6, 2009. American Zurich Insurance Company, Zurich American Insurance Company, and Zurich North America (collectively, Zurich) provided workers' compensation insurance for the employer.

Leichtnam's Injury

On August 29, 2007, Leichtnam injured his head, neck, and low back when he fell off a forklift and landed on the back of his head, neck, and back. He sought medical care and incurred medical expenses as a result of the injury. He continued to have headaches and neck and back pain. Lumbar and cervical MRIs showed a disk herniation at L5-S1 and marked right-sided facet arthropathy at C3-4, C4-5, and C5-6.

On July 17, 2008, Zurich arranged to have Leichtnam see Dr. Wayne Anderson, an occupational medicine specialist. He opined that the work injury was a major contributing cause of the L5 radicalopathy, the low back pain, the headaches, and the neck pain. He assigned permanent impairments for the neck and low back injuries.

Dr. Richard Farnham

On May 16, 2009, Zurich arranged to have Leichtnam see Dr. Richard Farnham. Here are some comments about him in the February 2015 complaint filed in the Leichtnam lawsuit:

Dr. Farnham is not board certified in occupational medicine, having failed the examination on several occasions, and doesn't treat patients. He is widely known as regularly and routinely providing opinions to insurance companies that reduce the insurer's claim payments.

Comments about Dr. Farnham by a magistrate judge appeared in the case of Gowan v. Mid Century (U.S. District Court, District of South Dakota, Case No. 5:14-cv-5025). This paragraph was in a September 2015 order in response to Gowan's motions to compel:

Mid Century hired Richard Farnham, M.D. to conduct an independent medical exam (IME) on Mr. Gowan. Mid Century had previously hired Dr. Farnham on 11 occasions between 2000 and 2012 to provide it with IMEs on various Mid Century claimants. Mr. Gowan alleges that Mid Century hired Dr. Farnham because he was "notoriously biased in favor of insurance companies." Mr. Gowan alleges it was Mid Century's expectation in hiring Dr. Farnham that he would render an opinion that would support Mid Century denying or limiting medical treatment to Mr. Gowan.

Dr. Farnham provided a report saying Leichtnam's injury did not cause anything other than some "post concussion headaches early on." On June 4, 2009, after Dr. Farnham's report, Zurich discontinued payment for any appointment or medication that resulted from Leichtnam's injury.

In the June 2010 issue of The Insurance Forum, I wrote an article about a physician who specialized in providing reports that insurance companies could use to deny or reduce claims. The article is in the complimentary package offered at the end of this post.

Further Developments

On July 15, 2009, Leichtnam filed a petition for hearing with the South Dakota Department of Labor, in part to restore his right to payment of medical bills and prescriptions by Zurich. On October 28, 2009, Zurich offered to pay $1,500 for a full, final, and complete settlement. Leichtnam declined the offer.

In May 2012 Zurich agreed to pay for a doctor's visit with Dr. Lawlor for treatment of the neck condition, back condition, and headaches. Leichtnam saw Dr. Lawlor on June 20, 2012. Dr. Lawlor prescribed medications, physical therapy, an orthotic, and an inversion table. Zurich for many months refused to pay for the medications, orthotic, and inversion table.

In early June 2013, the parties reached a settlement in which Zurich agreed to retract its denial of medical treatments and pay for future medical expenses for the neck and back condition and headaches. On June 7, 2013, Zurich sent a settlement agreement for Leichtnam to sign, but it was not what the parties had agreed upon. It would have released any claim for attorney fees and bad faith. Zurich agreed to remove the release for attorney fees and bad faith. On June 19, 2013, Zurich agreed to pay for future medical expenses for the neck and back condition and headaches. On June 21, 2013, the South Dakota Department of Labor approved the settlement.

Leichtnam's Lawsuit

On February 27, 2015, Leichtnam filed a lawsuit in federal court against Zurich. He alleged: (1) Zurich repeatedly denied benefits without a reasonable basis and with knowledge of the lack of a reasonable basis; (2) Zurich failed to conduct a reasonable investigation; (3) Zurich's conduct is part of a pattern of conduct designed to reduce compensation to injured workers; (4) Zurich acted with fraud, malice, and oppression, making punitive damages appropriate; (5) he has been harmed by delay in payment of his medical expenses, delay and obstruction in his medical care, loss of use of his benefits, emotional upset, aggravation, annoyance, and embarrassment, and it should have been unnecessary for him to incur attorney fees and expenses; and (6) Zurich has shown a reckless disregard of his interests, making punitive damages appropriate. He sought compensatory damages, punitive damages, pre-judgment interest, attorney fees and costs, and any other relief deemed appropriate. (See Leichtnam v. Zurich, U.S. District Court, District of South Dakota, Case No. 5:15-cv-5012.)

The Judges

The case is in the hands of Chief U.S. District Judge Jeffrey L. Viken. President Obama nominated him in June 2009, and the Senate confirmed him in September 2009. He became Chief Judge in 2013. U.S. Magistrate Judge Daneta Wollmann is also involved in the case.

Progress of the Case

The case is progressing, but slowly. On April 30, 2015, Zurich filed a perfunctory answer to the complaint. On October 7, 2015, Chief Judge Viken signed a protective order. Thereafter both parties obtained court approval of numerous extensions of deadlines.

On December 18, 2017, Leichtnam filed a motion to compel discovery. The same day he filed a sealed document that included many exhibits. The next day he filed a redacted document that included many exhibits. On December 28, 2017, Chief Judge Viken referred the motion to compel discovery to Magistrate Judge Wollmann.

On January 8, 2018, Zurich filed a response to the motion to compel discovery. On September 7 Zurich filed a motion to dismiss the complaint. The motion has been briefed but has not been ruled on.

On September 30 Magistrate Judge Wollmann issued an order granting in part and denying in part Liechtnam's motion to compel discovery. Although that description is technically accurate, the order is a victory for Leichtnam. It compels Zurich to provide virtually everything Leichtnam had requested. The order is in the complimentary package offered at the end of this post.

On November 13, Zurich filed an unopposed motion to extend various deadlines. Discovery is to be completed by March 29, 2019, and other matters are to be completed by April 30, 2019. Chief Judge Vilken has not set a trial date.

General Observations

I think Zurich will never allow this case to reach a jury, the case will be settled, and, because it is an individual case rather than a class action, the terms of the settlement will be confidential. Furthermore, I think Leichtnam will be in a strong bargaining position, and therefore able to obtain a substantial settlement. I plan to follow this case and report significant developments.

Available Material

I am offering a 31-page complimentary package consisting of the complaint (5 pages), Magistrate Judge Wollmann's order (23 pages), and the article in the June 2010 issue of the Forum (3 pages). Email jmbelth@gmail.com and ask for the December 2018 package relating to the case of Leichtnam v. Zurich.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 298: Long-Term Care Insurance—More on General Electric's Massive Legacy Problem

In No. 257 (3/12/18), No. 258 (3/19/18), and No. 261 (4/10/18), I posted items about the massive legacy problem faced by General Electric Company (GE) with regard to long-term care (LTC) insurance. Several class action lawsuits were filed against GE in late 2017 and early 2018. They were later consolidated. The two lead plaintiffs in the current consolidated case are Sjunde AP-Fonden and The Cleveland Bakers and Teamsters Pension Fund. U.S. District Judge Jesse M. Furman is handling the case. (See Sjunde AP-Fonden v. GE, U.S. District Court, Southern District of New York, Case No. 1:17-cv-8457.)

The Consolidated Complaints

When I posted the three items mentioned above in March and April 2018, several related lawsuits already had been consolidated, and I anticipated the filing of a consolidated complaint. In the complimentary package offered in No. 257, I included the original 33-page complaint in one of the cases. When I posted No. 261, I was not aware that, on March 20, the plaintiffs had filed a 289-page amended consolidated complaint. On April 10 they filed a 284-page second amended consolidated complaint. On July 25 they filed a 191-page third amended consolidated complaint. On October 17 they filed a 190-page fourth amended consolidated complaint. Also, in the complimentary package offered at the end of this post, I am including, from the fourth amended consolidated complaint, introductory material, a discussion of GE's alleged LTC insurance fraud, and concluding material.

Nature of the Complaint

The nature of the fourth amended consolidated complaint is described in its first two paragraphs. Here are those paragraphs, which I have edited lightly:

Court-appointed Lead Plaintiff Sjunde-AP Fonden, along with additional plaintiff The Cleveland Bakers and Teamsters Pension Fund, by and through their undersigned counsel, bring this federal securities class action on behalf of themselves and a Class consisting of all persons and entities that purchased or otherwise acquired the common stock of General Electric Company ("GE") from February 27, 2013, through January 23, 2018, inclusive. Plaintiffs assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder, including United States Securities and Exchange Commission ("SEC") Rule 10b-5, against Defendants GE, Jeffrey R. Immelt, Jeffrey S. Bornstein, Jamie S. Miller, Keith S. Sherin, Jan R. Hauser, and Richard A. Laxer.

As set forth herein, Plaintiffs and members of the Class purchased GE common stock at artificially inflated prices created and/or maintained by Defendants' materially false or misleading statements and omissions throughout the Class Period. When the truth concerning the Company was belatedly revealed to the market, Plaintiffs and Class members suffered massive monetary damages. Except as to allegations specifically pertaining to Plaintiffs, all allegations herein are based upon the investigation undertaken by Plaintiffs' counsel, which included, but was not limited to, the review and analysis of: public filings made by GE with the SEC; press releases and other public statements issued by Defendants; research reports purchased from securities and financial analysts; media and news reports related to GE; transcripts of GE's earnings and other investor conference calls; publicly available presentations, press releases, and interviews by GE and its employees; economic analyses of the movement and pricing of GE publicly traded common stock; consultations with relevant consultants and experts; media reports and other publicly available information concerning Defendants; and interviews of former employees of GE, several of whom, on information and belief, are known to GE and have been provided counsel by GE. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

The Alleged LTC Insurance Fraud

A section of the fourth amended consolidated complaint is devoted to a discussion of GE's alleged LTC insurance fraud. The "overview" subsection of that discussion includes this paragraph:

In the years prior to the start of the Class Period, LTC insurers began to learn that the major pricing assumptions that fueled the expansion of the LTC market in the 1970s and 1980s were woefully inaccurate. Specifically, insurers had greatly overestimated lapse rates and interest rates, and had dramatically underestimated the number of policyholders that would file claims and the length of time such claimants would require benefits.

The discussion includes a description of GE's spin-off of some LTC insurance business through the Genworth IPO in 2004. The discussion points out that GE retained the insurance and reinsurance operations of GE Insurance Solutions and its subsidiary, Employers Reassurance Corporation (ERAC). It also points out that ERAC reinsured LTC policies originally issued by Allianz, American United, Berkshire Life, Jackson National Life, John Alden, Lincoln Benefit Life, Massachusetts Mutual, State Life, Transamerica, and others. Also, Union Fidelity Life Insurance Company (UFLIC), another GE subsidiary, reinsured LTC policies originally issued by Travelers and reinsured by Genworth.

Prominent in the discussion are the views of several former GE employees (FE-1, FE-2, and so forth, and "defined using masculine pronouns to protect their anonymity.") The thrust of the comments by the former employees is that GE was aware of the LTC problems long before the public disclosure in January 2018.

The fourth amended consolidated complaint notes that "FE-6 has been removed from the complaint at his request." Here are some comments attributed to FE-6 in the second amended consolidated complaint:

FE-6 was an executive at GE Capital from 2014-2015. According to FE-6, an audit team conducted a simple audit on GE Capital's insurance business during his tenure (in 2014-2015) and the audit team had a risk based audit plan going into 2016. According to FE-6, there were quarterly conference calls led by Ronald Peters and the ERAC executive team with individuals from GE Capital's risk team. FE-6 said that during those quarterly calls ERAC would discuss the review process which included discussion of assumptions such as mortality and morbidity.

According to FE-6, the audit team began with a simple audit of ERAC to get people exposed to doing audits of that business. This was likely in the first four months of 2015. According to FE-6, concerns about assumptions, loss recognition testing, and model validation were not covered in that audit; they "came later" when KPMG delved more into those areas. According to FE-6, audit plans for the 2015 simple audit and the planned deeper dive into ERAC's assumptions, model validation, and other risk factors were submitted to Joseph Pizzuto, GE Capital's Chief Audit Executive, and ultimately, GE's Audit Committee which had the final approval authority for the audit plans.

FE-6 stated that the internal consensus amongst senior management, especially Dan Janki ("Janki"), Treasurer of GE, was that there was risk related to the legacy LTC portfolios. FE-6 explained that policies in the legacy LTC blocks were not being written any longer because of how risky they were.

FE-6 advised that GE held onto certain LTC policies that did not get spun off with Genworth because GE "refused to sell them at such a huge discount." FE-6 recalled that Janki had said that "his one big mistake was not selling off all the insurance policies and taking the hit at that time."

The Motion to Dismiss

On September 12 the defendants filed a motion to dismiss the third amended consolidated complaint and a 43-page memorandum of law in support of the motion. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post.

On October 12 the plaintiffs filed a 63-page memorandum of law in opposition to the motion to dismiss the third amended consolidated complaint. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post. On the same day, Judge Furman ordered the plaintiffs to file a fourth amended consolidated complaint removing the allegations attributed to FE-6.

On October 17 the plaintiffs filed the fourth amended consolidated complaint. On October 29 the defendants filed a 20-page memorandum of law in support of the motion to dismiss the third and fourth amended consolidated complaints. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post. As of December 5 Judge Furman has not acted on the motion to dismiss the third and fourth amended consolidated complaints.

The Counts and the Prayer for Relief

The fourth amended consolidated complaint includes two counts: violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all the defendants, and violation of Section 20(a) of the Exchange Act against the individual defendants. The plaintiffs seek compensatory damages against all the defendants, jointly and severally, for all damages sustained as a result of the defendants' wrongdoing, including interest; extraordinary, equitable, and/or injunctive relief, including, but not limited to, rescission; plaintiffs' costs and expenses, including reasonable counsel and expert fees; and such other relief as may be just and proper.

General Observations

When GE dropped its $15 billion bombshell on January 16, 2018, I thought the company had simply overlooked the unfolding disaster in its legacy LTC insurance business. However, the plaintiffs' amended consolidated complaints, including the views of former employees as described in those complaints, make it appear that company officials had been aware of the problem for years, and had failed to disclose it. In short, I think the amended consolidated complaints are a powerful indictment of GE's failure to keep shareholders and prospective shareholders informed of the company's legacy problem relating to its LTC insurance business.

It remains to be seen whether the fourth amended complaint will survive—in whole or in part—the defendants' motion to dismiss. I plan to follow the case and report major developments.

Available Material

I am offering a 95-page complimentary package consisting of introductory material in the fourth amended consolidated complaint (26 pages), material in that complaint describing GE's alleged LTC insurance fraud (50 pages), concluding material in that complaint (12 pages), and the tables of contents in three legal memoranda (7 pages). Email jmbelth@gmail.com and ask for the December 2018 package relating to GE's LTC insurance.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 297: Jim Baker's Sidelining at the FBI Has Not Worked Out Well for the Trump Administration

Jim Baker is a Visiting Fellow at the Lawfare Institute, a Visiting Fellow in Governance Studies at the Brookings Institution, and a Lecturer on Law at Harvard Law School. He was General Counsel of the Federal Bureau of Investigation (FBI). James Comey, former director of the FBI, identified him as one of those in whom Comey confided after Comey's private meetings with President Donald Trump. The Trump administration later moved Baker to a lesser position, and still later Baker left the Department of Justice.

Lawfare is a highly regarded blog dedicated to national security issues. It is published by the Lawfare Institute in cooperation with the Brookings Institution. It was founded in September 2010, and is based in Washington, DC.

The Baker-Grant Article

Baker and Sarah Grant co-authored an article entitled "What the Watergate 'Road Map' Reveals about Improper Contact between the White House and the Justice Department." Grant is a student at Harvard Law School, and previously spent five years on active duty in the Marine Corps. She holds an MPhil in International Relations from the University of Cambridge and a BS in International Relations from the United States Naval Academy.

The lengthy Baker/Grant article (shown here in full) was posted on the Lawfare blog on November 19, 2018. (I published a blog post about the "Road Map" in No. 295 on November 9, 2018.) Here are the opening sentences of the Baker/Grant article, a section in the middle of the article, and the closing sentences:

In a conversation between the president of the United States and senior Justice Department officials, the officials informed the president that two of his senior White House staff were under investigation. One of the officials later testified: "He said he couldn't believe it. You know, just these are fine outstanding guys. Just couldn't be, you know." He impressed on the president, "We are here to alert you. We think we've got something. We could be wrong, but we are telling you it's time for you to move to protect yourself and the presidency." And he urged the president to "get rid" of the staffers in question; the president responded, "Yeah, and I don't think I should. I've got to think about this and that and a thousand other things." This happened in 1973.

* * * * * * * * * * * * 

[T]he road map's references to President Nixon's interactions with [Henry E.] Petersen [assistant attorney general for the Justice Department's Criminal Division and the official quoted above regarding the interaction with President Nixon]—the person who was heading the investigation—take on a different and more nefarious meaning. Those interactions must be understood within the larger context of the president's knowledge of the facts regarding Watergate at the time that he was in contact with Petersen. In other words, when the president sought information from Petersen, provided his views to Petersen on the various matters that they discussed, and discussed Petersen's future, he was not merely exercising his powers under Article II of the Constitution to supervise the executive branch and trying to get the facts necessary to do so; the president of the United States was also acting as a criminal co-conspirator trying to obstruct lawful investigation activities of the Justice Department.

* * * * * * * * * * * *

How was all of this presidential contact with the Justice Department understood in the context of Watergate? Pretty harshly. For example, Article II, paragraph 5, of the House Judiciary Committee's July 27, 1974, Articles of Impeachment states in part that President Nixon: "In disregard of the rule of law, ... knowingly misused the executive power by interfering with agencies of the executive branch, including the Federal Bureau of Investigation, the Criminal Division, and the Office of Watergate Special Prosecution Force, of the Department of Justice, and the Central Intelligence Agency, in violation of his duty to take care that the laws be faithfully executed." President Nixon resigned on Aug. 9, 1974, and was pardoned by President Gerald Ford on Sept. 8, 1974.

General Observations

The parallels between the Nixon case and the current Trump case, including the appointment of Matthew Whitaker as Acting Attorney General of the United States, are mind-boggling. Those parallels are described in detail in the Baker/Grant article. I think the article, to which a link is provided above, should be read carefully by persons interested in the welfare of our nation.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 296: The Age 100 Problem—My Unproductive Project

For almost 20 years I have written extensively about "the age 100 problem" in life insurance. I wrote articles about the problem in the January 2001 and May 2001 issues of The Insurance Forum. Later, on my blog, I posted six items about the problem: No. 141 (February 1, 2016), No. 226 (July 20, 2017), No. 241 (November 17, 2017), No. 269 (June 6, 2018), No. 277 (July 17, 2018), and No. 289 (October 15, 2018).

In No. 289 I described my personal dilemma concerning the age 100 problem. I said my wife and I, in our 80s, have nine old traditional participating whole life policies issued many years ago by four life insurance companies (A, B, C, and D). Six are on my life and three are on my wife's life. Given the lack of adequate responses to the problem by life insurance companies, I decided as a last resort to write to the policyholder service departments of the four companies about our policies. I hoped the companies would respond thoroughly, but planned to seek assistance from state insurance regulators if the companies did not respond adequately. In No. 289 I described the preliminary results, and here I discuss the final results of the unproductive project.

The Regulators

The policyholder service departments of the four insurance companies did not respond fully. I then sought assistance from regulators in the states where the policies were originally issued. As a result of my requests to regulators, the companies provided additional information, but still did not provide everything I needed.

Company A

Company A has a small paid-up policy on my wife. We inquired about the current cash value and the amount of taxable gain that would be reported on a 1099 if she surrenders the policy in 2019. We also asked for a sample of the letter the company will send as she nears the terminal age of 100 without having surrendered the policy. The company provided the cash value figure and the amount of the taxable gain if she surrenders the policy in 2019, but declined to provide the sample letter.

We still do not know precisely what will happen if my wife survives to the terminal age. Although the taxable gain if she now surrenders the policy would be modest, we have decided not to pay the tax. Instead we have decided to keep the policy in its paid-up status for the time being. The only action we are taking now is to change the dividend option from cash to paid-up insurance to avoid the need to deposit the small dividend check each year.

Company B

Company B has two small policies on my life. The company indicated the cash values that would be paid if I surrender the policies in 2019. However, the company said neither policy meets the company's guidelines for tax reporting to the Internal Revenue Service (IRS), and therefore declined to provide the amounts of taxable gains. Furthermore, the company said it is my responsibility to determine "how, if, and what" to report to the IRS. Because I strive to report accurately to the IRS, because I know the premiums and the current cash values, and because I need dividend information to calculate the amounts of taxable gains, I asked for the historical dividend figures for every policy year. In response the company said:

The [dividend] history provided is for the last five years. Should you need additional historical information, a convenience fee will be charged as follows: for requests beyond five years up to and including ten years a fee of $25.00 is applicable and for requests beyond ten years a fee of $50.00 is applicable.

I have dividend figures for the past 30 years, but I do not have dividend figures going back for a total of about 70 years. I have decided not to spend $50 (or perhaps $100 for the two policies) for the information I need to calculate the amounts of the taxable gains accurately. I have also decided not to surrender the policies at this time, but rather to continue paying premiums for now.

Company C

Company C has three fairly large policies on my life and one small policy on my wife's life. We asked for a sample of the letter that would be sent to us if we should maintain the policies and approach the terminal age. We also asked for the cash values and the amounts of taxable gains if we surrender the policies in 2019. The company indicated the cash values but ignored our request for the sample letter and the amounts of taxable gains.

We asked again for the sample letter and the amounts of taxable gains. The company again provided the cash values, but again ignored our request for the sample letter and the amounts of taxable gains.

We sought assistance from the regulator. The company then provided the amounts of taxable gains. However, instead of providing the sample letter, the company provided copies of the policies and said they "do not have a stated maturity date," "do not mature or terminate at age 100," and "are not affected by the insured reaching age 100."

Although the policies do not have a stated maturity date, they are based on mortality tables with a terminal age of 100. We do not know what will happen if we reach the terminal age; that is, we do not know whether the face amount will grow, whether premiums will continue to be charged, whether the cash values will continue to grow, or whether dividends will continue to be paid. The amounts of life insurance protection (face amounts minus cash values) in the policies are small, and the amounts of taxable gains if we surrender the policies are large. We have decided not to surrender the policies at this time and incur the large taxes, but rather to continue paying premiums for now.

Company D

Company D has one fairly large policy on my life and one fairly large policy on my wife's life. We asked for a sample of the letter the company will send us if we should maintain the policies and approach the terminal age. We also asked for the cash values and the amounts of the taxable gains should we surrender the policies in 2019.

Having received no reply, we sought regulatory assistance. We then received a thorough reply from an officer who is a fellow of the Society of Actuaries. The actuary said the company had mailed responses to our original letter, we must not have received them, and the company was now addressing our questions. Here is the actuary's response:

You asked what will happen when the Insured reaches age 100. Your contracts do not specifically identify a maturity provision when the Insured reaches age 100. You can choose to leave the policies in force until death when the proceeds would be paid to your beneficiaries. Please note that under these contracts you would not receive any dividends beyond age 100 nor would any premiums be due. Alternatively, you could choose to access the cash surrender value via the options stated in your policy. It is not possible to accurately predict what the tax rules will be on your policy anniversary [many years from now]. [We] do not offer tax advice. You may want to consult your personal tax advisor regarding your particular situation.

The actuary indicated the cash values in 2019 and the amounts of taxable gains. For each policy, the amount of the taxable gain would be identical to the cash value. When we inquired about that point, the actuary provided this explanation:

The general rule is that an amount received is included in gross income to the extent it exceeds the investment in the contract calculated as of the date of distribution. For both of your contracts, the dividends you received in total exceeded the total premiums paid (cost basis) into that contract many years ago. As a result, were you to surrender the contracts today, the entire surrender value would become taxable gain. Should you pay additional premiums ... prior to [the policies'] 2019 anniversaries, those payments would then become cost basis, which would be credited against income at surrender. Our projections assumed you would not [pay additional premiums], so that the projected surrender values exactly equaled the estimated taxable gains.

The actuary's explanation reminded me that for many years we have been receiving 1099s from the company for a substantial portion of each dividend paid on the policies. The actuary went on to discuss extended term insurance and reduced paid-up insurance as possible options for us.

We have decided not to surrender the policies and incur the large taxable gains. Instead we have decided to continue paying premiums for now.

The Lebbin Case

In three of the six posts identified in the first paragraph of this post (Nos. 226, 241, and 269), I discussed a lawsuit filed by Gary Lebbin. who is now past the terminal age of 100. The trial is tentatively scheduled to begin on January 22, 2019. However, I think the case will not go to trial. I consider it likely that the parties will reach a settlement and, because it is an individual lawsuit rather than a class action, the settlement terms will be confidential. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558).

General Observations

When we purchased life insurance many years ago, it did not occur to us that we would encounter income tax problems if we were fortunate enough to live long lives. We bought most of the policies after I became intensely interested in life insurance in the late 1950s, and I am embarrassed to admit I did not become aware of the age 100 problem until 2001. I can try to dodge responsibility by observing that neither life insurance companies nor regulators have ever deemed the problem worthy of being disclosed to unsuspecting life insurance buyers. However, I should have detected the problem many years earlier.

We have decided not to surrender or modify any of our policies at the present time. Although they provide us with only a small amount of unneeded life insurance protection, we are not willing to pay the income taxes associated with surrendering the policies issued by companies A, C, and D. As for company B, we are unable to calculate accurately the income taxes associated with surrendering the two policies, we are not willing to pay for the necessary information, and we refuse to evade payment of income taxes that would be payable. In short, we have decided to retain all the policies in their present form for the time being.

I express appreciation to the many readers who commented on No. 289. One even offered to help by contacting the companies on our behalf, but I declined the gracious offer.

Available Material

I offered complimentary packages in four posts mentioned at the beginning of this post: No. 141, No. 226, No. 241, and No. 269. They contain a substantial amount of information about the age 100 problem, and remain available. If you would like any or all of them, send an email to jmbelth@gmail.com and ask for them.

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 295: Watergate and the 1974 Road Map

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

The Petition

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

The Judge

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

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

The Petition

The petition contains a brief but excellent explanation of the significance of the Road Map. Here are two excerpts, without citations:

The 55-page Road Map identified the evidence relevant to President Nixon's alleged involvement in a criminal conspiracy, without explicit accusation, accompanied by a package of 800 pages of documents and thirteen tape recordings comprising the evidence itself... As Special Prosecutor Jaworski stated, "There were no comments, no interpretations, and not a word or phrase of accusatory nature. The 'road map' was simply that—a series of guideposts if the House Judiciary Committee wished to follow them."

The Road Map is one of the last major elements of the Watergate story that remains under seal, though its contents were publicly disclosed through a variety of sources over the years. And it has particular resonance now, at a time when Special Counsel Robert Mueller is investigating potential unlawful conduct by President Donald Trump and is reportedly considering writing a report on obstruction. This petition seeks the release of the Road Map only, without the underlying grand jury material that accompanied it.

The Road Map

The first two pages of the Road Map contain a "Report and Recommendation" from the foreman of the June 5, 1972 Grand Jury. A handwritten note near the top of the first page reads: "Filed under seal March 1, 1974." At the top of the first page is a printed note about Chief Judge Howell's unsealing of the material on October 11, 2018. Here is the first paragraph of the Report and Recommendation:

The June 5, 1972 Grand Jury has heard evidence that has led it to return the indictment being submitted herewith. It has also heard evidence that it regards as having a material bearing on matters that are within the primary jurisdiction of the House of Representatives Committee on the Judiciary in its present investigation to determine whether sufficient grounds exist for the House of Representatives to exercise its constitutional power to impeach Richard M. Nixon, President of the United States. It is the belief of the Grand Jury that it should presently defer to the House of Representatives and allow the House to determine what action may be warranted at this time by this evidence.

Contents of the Road Map

The Road Map consists of four parts: (1) material bearing on a $75,000 payment to E. Howard Hunt and related events, (2) material bearing on the President's "investigation," (3) material bearing on events up to and including March 17, 1973, and (4) the President's public statements and material before the grand jury related thereto. The first part consists of 13 items (a 14th item remains under seal). Here are the 13 items, without the footnotes identifying the evidence:

1. On or about March 16, 1973, E. Howard Hunt had a meeting with Paul O'Brien during which Hunt demanded approximately $120,000 and asked O'Brien to tell John Dean that Hunt had done some "seamy things" for the White House and for John Ehrlichman and that, if Hunt were not paid soon, Hunt would have to "review his options."
2. On or about March 19, 1973, Paul O'Brien had a conversation with John Dean during which O'Brien related Hunt's message to Dean.
3. On or about March 19, 1973, John Dean had a conversation with John Ehrlichman in which Dean told Ehrlichman of Hunt's message and in which Ehrlichman asked Dean to relay the message to John Mitchell.
4. On or about March 20, John Dean had a conversation with John Mitchell concerning Hunt's message.
5. From approximately 10:15 a.m. to approximately noon on March 21, 1973, the President had a meeting with John Dean, the latter part of which was also attended by H. R. Haldeman, during which there was discussion of (a) the involvement and possible involvement of Haldeman, Dean, John Ehrlichman, John Mitchell, Jeb Magruder, Gordon Strachan, Fred LaRue, Herbert Porter, Egil Krogh, Herbert Kalmbach, and others in obstruction of justice and perjury, (b) the fact that E. Howard Hunt was demanding $120,000 and might disclose the "seamy things" Hunt had done for Ehrlichman, as well as other matters, (c) the amount of money that would ultimately be required to keep Hunt and the other Watergate defendants silent, how delivery of such money could be accomplished, and by whom, (d) the fact that Hunt and others expected help with respect to the length of time they would spend in jail, (e) the likelihood that facts respecting the involvement of those listed above and others might become publicly known, (f) whether to pay Hunt in order to "buy time," and (g) possible courses of action that might be taken with respect to all of the above matters.
6. At or about 12:30 p.m. on March 21, 1973, H. R. Haldeman had a telephone conversation with John Mitchell.
7. In or about the early afternoon of March 21, 1973, John Mitchell had a telephone conversation with Fred LaRue during which Mitchell authorized LaRue to pay approximately $75,000 to E. Howard Hunt.
8. At or about 3:45 p.m. on March 21, 1973, H. R. Haldeman met with John Ehrlichman and John Dean, during which meeting there was a discussion of the possible courses of action to be taken with respect to the matters discussed by the President, Haldeman, and Dean that morning.
9. From approximately 5:20 p.m. to approximately 6:00 p.m. on March 21, 1973, the President met with John Dean, H. R. Haldeman, and John Ehrlichman, at the outset of which meeting several possible courses of action, i.e., testimony before a new Grand Jury or before an independent panel established to investigate all the facts, were rejected and during which meeting there was further discussion of Hunt's demand and of the possible remaining courses of action open that might be taken with respect to the matters discussed that morning by the President, Haldeman, and Dean.
10. On the late evening of March 21, 1973, Fred LaRue caused $75,000 in cash funds for E. Howard Hunt to be placed in the mailbox at the residence of Hunt's attorney, William O. Bittman.
11. On the morning of March 22, 1973, John Mitchell attended a meeting with H. R. Haldeman, John D. Ehrlichman, and John Dean, during which Mitchell stated that Hunt was no longer a problem.
12. On the afternoon of March 22, 1973, the President met with John Mitchell, H. R. Haldeman, John Ehrlichman, and John Dean during which meeting there was discussion of a possible course of action that might be taken with respect to the matters discussed on the morning of March 21, 1973, namely, preparation by Dean of a written "report"—stating that high White House officials were not involved in the Watergate break-in—on which the President could at a later time "rely," if necessary.
13. On or about the afternoon of March 22, 1973, John Ehrlichman had a conversation with Egil Krogh in which Ehrlichman stated that Krogh should "hang tough" and that Hunt was "more stable" and would not "disclose all."

General Observations

In the midterm elections this week, despite Democratic losses in the Senate, wins in the House of Representatives may allow Democrats to push forward with their legislative and investigative agendas. At this writing (November 7, 2018), it is not known what course of action Special Counsel Mueller, the U.S. Department of Justice, and Congress will take with regard to his ongoing investigation. I believe, however, that the Watergate Road Map provides a course of action that is worthy of serious consideration.

Available Material

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

===================================

Email: jmbelth@gmail.com

Blog: www.josephmbelth.com