Wednesday, March 13, 2019

No. 303: Genworth's 10-K Report for 2018 and Another Recent Development at the Company

On February 27, 2019, Genworth Financial, Inc. (GNW), based in Richmond, Virginia, filed its 390-page 10-K annual report for 2018 with the Securities and Exchange Commission. The report begins with an update on the status of GNW's agreement and merger with China Oceanwide; the agreement was entered into on October 21, 2016 and remains pending. The 10-K also lists the current financial strength ratings of GNW's insurance subsidiaries. In addition, after the 10-K, there was a development involving the distribution of certain GNW offerings.

China Oceanwide
In June 2018, the Committee on Foreign Investment in the United States completed its review of the agreement, and GNW and China Oceanwide agreed to implement a data security risk mitigation program. In October 2018, the National Development and Reform Commission in China accepted China Oceanwide's filing in connection with the agreement. In December 2018 and February 2019, GNW and China Oceanwide received the remaining approvals from U.S. state insurance regulators, subject to certain conditions. Closing remains subject to other conditions, such as regulatory approval in Canada and approval by the Financial Industry Regulatory Authority (FINRA), although closing may occur prior to FINRA approval. The complimentary package offered at the end of this post includes GNW's full discussion of the situation.

Financial Strength Ratings
The last time I wrote about the financial strength ratings of GNW's life insurance subsidiaries was in No. 144 (February 16, 2016), and I felt it is time for an update. The recent 10-K shows financial strength ratings as of February 14, 2019. The rating firms are Standard & Poor's (S&P), Moody's Investors Service, and A. M. Best Company. Here are the current ratings of GNW's principal life insurance subsidiaries:
Genworth Life Insurance Company
S&P B– (Weak)
Moody's B3 (Poor)
Best B– (Fair)
Genworth Life and Annuity Insurance Company
S&P B– (Weak)
Moody's Ba3 (Questionable)
Best B+ (Good)
Genworth Life Insurance Company of New York
S&P B– (Weak)
Moody's B3 (Poor)
Best B– (Fair)
The complimentary package offered at the end of this post includes GNW's complete list of ratings and GNW's discussion of the implications of those ratings. In that discussion, "PMIERs" stands for private mortgage insurer eligibility requirements. "GSEs" stands for government-sponsored enterprises such as Federal National Home Mortgage Association ("Fannie Mae)" and Federal Home Loan Mortgage Corporation ("Freddie Mac").

A Recent Bulletin
On March 7, 2019, GNW issued a bulletin entitled "Suspension of All Individual Long Term Care Insurance and Income Assurance Annuity Sales Through the BGA Channel Effective March 11, 2019." I learned of the bulletin from one of my readers. I am not providing it to my readers because it is marked: "For Producer/Agent Use Only. Not to Be Reproduced or Shown to the Public." Instead, I sought comment from a GNW spokesperson, who provided this statement:
Today we announced we are temporarily suspending sales of individual long-term care (LTC) insurance and Income Assurance Annuity products through brokerage general agencies (BGAs). Instead, we will be distributing these products directly to consumers through affinity and association programs and other distribution channels. We will continue to sell group LTC insurance through our traditional channels. Our commitment to helping Americans address the financial challenges of aging remains as strong as ever, and we look forward to bringing new products and services to market that will enable people who need care as they age live their lives as they wish, and how and where they prefer to receive that care.
Available Material
I am offering a complimentary 9-page PDF consisting of GNW's discussions of the status of the China Oceanwide agreement, the financial strength ratings of GNW's life insurance subsidiaries, and the implications of those ratings. E-mail jmbelth@gmail.com and ask for the March 2019 package relating to Genworth.

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Friday, March 1, 2019

No. 302: Universal Life—Transamerica Settles a Class Action Lawsuit Relating to Cost-of-Insurance Increases

In No. 239 (October 23, 2017) and No. 290 (October 18, 2018), I discussed a class action lawsuit filed against Transamerica Life Insurance Company in 2016 by California resident Gordon Feller and others. The case related to large cost-of-insurance (COI) increases imposed on owners of universal life insurance policies. In No. 290, I said the parties had filed a proposed settlement of the case. (See Feller v. Transamerica, U.S. District Court, Central District of California, Case No. 2:16-cv-1378.)

Recent Developments
On October 5, 2018, Senior U.S. District Judge Christina A. Snyder granted preliminary approval of a proposed settlement to resolve the Feller case and related cases that had been consolidated with Feller. On January 20, 2019, she conducted a fairness hearing. On February 6, 2019, she issued an order granting final approval of the settlement, finding that it represents a fair and complete resolution of all claims asserted.

The Settlement
The settlement class consists of more than 69,000 policies. Transamerica agreed to create a settlement fund of $195 million. The fund was reduced to reflect those class members who opted out of the settlement. There were 575 opt outs; those policy numbers are listed in an exhibit attached to the order. Payments from the fund to class members are based on the difference between the COI charges imposed during the class period (August 1, 2015 through February 6, 2019) and the COI charges that would have been imposed without the increases, subject to a minimum allocation of $100. Owners of in-force policies are paid their shares as increases in their policies' accumulation values. Owners of discontinued policies are paid their shares by check.

Transamerica agreed not to impose further COI increases on any class policy within the next five years, unless ordered to do so by a state regulatory body. However, the company will maintain the COI increases previously implemented. The company agreed to certain conditions relating to future COI increases in class policies, and also agreed not to seek rescission of the coverage in class policies.

In addition to creating the fund, Transamerica agreed to pay all settlement expenses, and also to pay the first $10 million of court-approved fees and expenses of the plaintiffs' attorneys. Judge Snyder approved payment, from the fund, of attorney fees of about $27.7 million and legal expenses of about $1 million, less the first $10 million that Transamerica agreed to pay. She also approved payment, from the fund, of service awards of $10,000 to each of eight named class representatives.

General Observations
Attorneys representing the plaintiffs and attorneys representing Transamerica negotiated extensively, and they utilized the services of a mediator. Yet, neither I nor any other outsider can be in a position to determine the adequacy or fairness of the settlement. In this regard, Judge Snyder quoted this famous 2014 statement by the Ninth Circuit:
Of course it is possible, as many of the objectors' affidavits imply, that the settlement could have been better. But this possibility does not mean the settlement presented was not fair, reasonable or adequate. Settlement is the offspring of compromise; the question we address is not whether the final product could be prettier, smarter or snazzier, but whether it is fair, adequate and free from collusion.
I have seen many class action lawsuits relating to COI increases. As far as I know, every one that survived early dismissal and won class certification was settled. I do not anticipate hearing of a case that goes to trial, reaches a verdict by a judge or jury, and completes the appellate process.

Available Material
I am offering a complimentary 32-page PDF showing Judge Snyder's final order approving the settlement. Email jmbelth@gmail.com and ask for the February 2019 package relating to Feller v. Transamerica.

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Monday, February 4, 2019

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.

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Monday, December 17, 2018

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.

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Friday, December 14, 2018

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.

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Monday, December 10, 2018

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.

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Monday, December 3, 2018

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.
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[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.
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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.

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