Monday, April 1, 2019

No. 306: Long-Term Care Insurance and the NAIFA Limited and Extended Care Planning Center

The NAIFA LECP Center
Recently I learned of the Limited and Extended Care Planning (LECP) Center created by the National Association of Insurance and Financial Advisors (NAIFA). Here is the December 2018 announcement that brought the LECP Center to my attention:
With over 10K people turning 65 every day, it's essential to know how to talk to your clients about plans for themselves, their parents and their family members. That's why we partnered with the industry's biggest players to create the Limited and Extended Care Planning (LECP) Center. It's the ultimate resource to help meet all of your clients' long-term planning needs. You will have unlimited access to: techniques you can use immediately to close more business and grow your practice, customized advice and solutions from the top leaders in the LTC space, and promotional materials you can use to easily show your clients the options for funding care whether for a limited, extended or long-term period. [Underlinings in original.]
The insurance company partners in the LECP Center are Genworth, Nationwide, New York Life, and Thrivent. The other partners are Advanced Resources Marketing, Certification in Long-Term Care, Intercompany Long Term Care Insurance Conference Association, LTCI Partners, and Target Insurance Services, Inc.

My Initial Inquiry to NAIFA
On December 20, 2018, I sent an email to Carroll Golden, executive director of the LECP Center at NAIFA headquarters. I said I have written extensively about long-term care (LTC) insurance. For example, I attached an article entitled "Shortcomings of Private Insurance in Financing Long-Term Care," which appeared in the July 2008 issue of The Insurance Forum. I also attached a copy of chapter 18 entitled "Long-Term Care Insurance" from my 2015 book, The Insurance Forum: A Memoir. I asked what the LECP Center recommends that agents say to prospective buyers of LTC insurance with regard to several problems that confront buyers and owners of LTC insurance policies, such as large future premium increases.

The NAIFA Response
Golden responded three hours later. She did not mention my attachments or answer my questions. Here is what she said:
Overall, the Center does not recommend what agents or advisors should say to prospective buyers of LTC insurance, or any insurances or options that are included on the Center. The mission of the Center is to maximize professional and consumer awareness and the distribution of limited and extended care solutions through thought leadership, educational resources, research, networking, and advocacy. Using the power of a virtual, private online community, the Center brings solution and service providers, producers and thought leaders together to deliver trends, training, expert advice, communications, networking, and advocacy. The Center posts information, but does not recommend any one option over another.
Given the various informational categories, Education, Designations, Expert Advice (divided into three areas—Planning in Advance, Products and Services, and Point of Need), Networking and Community, Research and Trends, and Advocacy, the Center serves more as a repository than an advice center. We would like to encourage more people and professionals to include current and future care needs in their planning. We recognize that health care can be costly, not only financially but also emotionally. The Center hopes to provide information that starts more conversations and research into limited and extended care planning needs.
My Follow-Up Questions
Three hours later I sent Golden some follow-up questions. First, I asked whether she had read my July 2008 article and the chapter from my memoir, and if so, what thoughts she had on them. Second, regarding her statement that the Center posts information, I asked whether the Center posts information about the problems alluded to in my previous email. Third, to the extent the Center does not post information about those problems, I asked why the Center refrains from doing so, and whether the Center is saying there is no need for agents and consumers to know anything about those problems. She did not reply. On January 3, 2019, I asked the questions again; she did not reply.

My Survey
On March 12, 2019, I directed similar questions not only to NAIFA but also to the other partners who created the LECP Center. I asked them to acknowledge receipt promptly, and designated March 26 as the final date for a substantive response. The survey, which consisted of a cover memorandum and the July 2008 Forum article, is in the complimentary package offered at the end of this post.

In the cover memorandum I inquired about their objective in helping organize the LECP Center, and about how much they had contributed to help organize the Center. Also, because the Center appears to perform an educational function, I asked for their comments on what the Center will provide concerning seven problems that confront buyers and owners of LTC insurance policies: (1) large future premium increases, (2) future offers of large decreases in benefits, (3) endless correspondence when consumers file claims for benefits, (4) departures of companies from the LTC insurance business, (5) transfers of LTC insurance policies from one insurance company to another, (6) failures of LTC insurance companies, and (7) LTC insurance companies taken over by companies in foreign countries.

Two of the partners to whom I sent the survey acknowledged receipt and implied they would respond substantively. One of those two later said: "The team discussed internally and will decline to participate this time. Thanks again for the outreach." From the other one I received nothing further. A spokesperson for another of the partners said: "Following up on your email to us regarding NAIFA's LECP Center. Thanks for your interest but we're going to pass on this opportunity for now." None of the other partners acknowledged receipt, and I received nothing from them.

General Observations
For many years I have said that the problem of financing the long-term care exposure violates important insurance principles, that the problem therefore cannot be solved through the mechanism of private insurance, and that many who buy LTC insurance will be disappointed. A detailed discussion of the subject is in my article in the July 2008 issue of the Forum.

My conclusion from the unsuccessful survey is that the partners who created the LECP Center have no interest in educating prospective buyers of LTC insurance about the problems they will face if they buy LTC insurance. I think the failure of the partners to confront those important problems and disclose them to prospective buyers will lead to the disappearance of the LTC insurance business.

Available Material
I am offering a 7-page complimentary package consisting of the March 12 memorandum to the partners who founded the LECP Center (2 pages) and the July 2008 Forum article (5 pages). Email jmbelth@gmail.com and ask for the April 2019 package relating to NAIFA's LECP Center.

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Thursday, March 21, 2019

No. 305: William Neil Gallagher Faces State Criminal and Federal Civil Charges of Securities Fraud

William Neil "Doc" Gallagher, a radio personality in Dallas, is in bankruptcy proceedings. He also faces state criminal and federal civil charges of securities fraud. Here I discuss the charges against him.

The Texas Criminal Charges
On March 4, 2019, a grand jury in Dallas County issued a pair of indictments against Gallagher. One indictment identifies 20 victims of Gallagher's scheme. The other indictment contains this sentence:
That William Neil Gallagher, hereinafter called Defendant, on or about and between the 1st day of March, 2014 and the 31st day of January, 2019, in the County of Dallas, State of Texas, did then and there, pursuant to one scheme and continuing course of conduct, knowingly acquire or maintain an interest in, possess, transfer, and transport the proceeds of criminal activity, to wit: Securities Fraud, and the aggregate value of said funds was $300,000 or more.
The two indictments are in the complimentary package offered at the end of this post. (See State of Texas v. Gallagher, Indictment Nos. F1900119 and F1900138.)

The SEC Civil Complaint
On March 7, the Securities and Exchange Commission (SEC) filed, under seal, a civil complaint against Gallagher, Gallagher Financial Group, Inc. (GFG), and W. Neil Gallagher, Ph.D. Agency, Inc. (Gallagher Agency) charging them with violations of federal securities laws. (The complaint says Gallagher holds a Ph.D. degree from Brown University.) The same day, the court assigned the case to Senior Judge A. Joe Fish, who recused himself without giving a reason; the court then reassigned the case to Senior Judge Sam R. Cummings, and the SEC filed a motion for a preliminary injunction, a temporary restraining order, an asset freeze, and the appointment of a receiver.

The next day, the court appointed Cort Thomas, a Dallas attorney, as the receiver. The court also imposed a freeze on the receivership assets. On March 12, the court unsealed the complaint. (See SEC v. Gallagher, U.S. District Court, Northern District of Texas, Case No 3:19-cv-575.)

The first section of the SEC civil complaint is a six-paragraph summary of the case. Here is the first paragraph:
Since at least December 2014, Gallagher, a long-time radio personality in the Dallas/Fort Worth metroplex, who marketed himself as "The Money Doctor," has perpetrated an affinity-fraud investment scheme on investors through two North Texas-based companies he owns and controls, GFG and Gallagher Agency. Despite having no valid securities-industry credentials, Gallagher has offered and sold securities, raising at least $19.6 million from at least approximately 60 investors—ranging in age from 62 to 91—while claiming to be a fully licensed advisor offering investment advice and investment services. He has raised these funds by selling an investment product called a Diversified Growth and Income Strategy Account.
The full SEC complaint is in the complimentary package offered at the end of this post. It is a chilling document.

The SEC Litigation Release
On March 12, the SEC issued a litigation release entitled "SEC Charges Texas Radio Host 'The Money Doctor,' Halts Ponzi Scheme Targeting Elderly Investors." Here is the first sentence:
The Securities and Exchange Commission announced that it has charged Texas resident William Neil "Doc" Gallagher—the self-styled "Money Doctor" featured on three Dallas-area radio stations—in an emergency action to shut down a $19.6 million Ponzi scheme targeting elderly investors' retirement funds.
The TSSB Press Release
On March 13, the Texas State Securities Board (TSSB) issued a press release entitled "Dallas Investment Promoter 'Doc' Gallagher Indicted in $19 Million Fraud." Here is the first sentence:
William Neil "Doc" Gallagher, who promotes his investment business on Christian radio and in books like "Jesus Christ, Money Master," has been arrested to face first-degree state felony charges of securities fraud and money laundering in Dallas County.
The 1999 Disciplinary Order
The current criminal and civil charges against Gallagher are not his first confrontations with securities regulators. For example, on December 23, 1999, the Texas Securities Commissioner directed at Gallagher ("Respondent") a "Disciplinary Order Reprimanding an Agent." Here are three of the ten "Findings of Fact" in the order, which designated them as "fraudulent business practices" in violation of the Texas Securities Act:
3. During the course of an inspection of Respondent's offices by the State Securities Board, the Staff requested that Respondent produce receipt books for all checks received from investors for a defined period.
4. Respondent produced check receipt books to the Staff. Respondent did not disclose to the Staff that certain receipt books produced were, in fact, created at Respondent's direction after the Staff's request was received, and were not copies of receipts given to investors at the time of the receipt of their checks.
5. While registered as an agent of National Securities Corporation, Respondent represented to the public via advertising that he was a registered investment adviser, though he was not registered as an investment adviser.
The order reprimanded Gallagher and assessed an administrative fine of $25,000. He consented to the order "without admitting or denying" nine of the ten "Findings of Fact" in the order. The one "admitted" finding (the first of the ten) is shown in the order, which is in the complimentary package offered at the end of this post. (See "In the Matter of the Agent Registration of William Neil Gallagher," Order No. CAF-1380.)

General Observations
When I hear of an affinity-fraud case such as this one, my first reaction is sadness for the victims of the fraud. They have no knowledge of investments, and the criminals take advantage of the religious faith of the victims. My second reaction is that there are probably not enough people in the law enforcement community to uncover and prosecute all the phony financial schemes perpetrated by large numbers of fraudsters.

Available Material
I am offering a complimentary 26-page PDF consisting of the two indictments (3 pages), the SEC complaint (16 pages), the SEC litigation release (1 page), the TSSB press release (1 page), and the 1999 disciplinary order (5 pages). Email jmbelth@gmail.com and ask for the March 2019 package relating to the Gallagher case.

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Friday, March 15, 2019

No. 304: NAIFA and the John Newton Russell Memorial Award

The National Association of Insurance and Financial Advisors (NAIFA) grants the John Newton Russell (JNR) Memorial Award each year. NAIFA describes the award as "the highest honor that can be bestowed upon an individual in the life insurance and financial planning industry, and recognizes a lifetime of professional excellence, service to the industry and a commitment to ethical conduct."

The Recipients
NAIFA (then the National Association of Life Underwriters) first granted several JNR awards in 1947. They represented the years 1942 through 1947, but were delayed because of World War II. The award for 1942 went to Professor Solomon S. Huebner of the University of Pennsylvania; he is often referred to as the "Father of Insurance Education." According to NAIFA's current list of JNR award recipients, the five oldest living recipients (by year of receiving the award) are Jack E. Bobo (1985), William V. Regan II (1990), Alan Press (1991), Robert W. Verhille (1994), and William B. Wallace (1995).

I was deeply honored to receive the JNR award for 2017. I am the fourth educator to receive the award. The first was Professor Huebner. The second was Davis W. Gregg (1961), who was long-time president of The American College. The third was Kenneth Black, Jr. (1999), who was at Georgia State University and was long-time editor of The CLU Journal.

My Suggestion
My receipt of the award automatically made me a member of the nominating committee for a few years. In that capacity, I informed NAIFA that I had long been troubled that eligibility for the JNR award is limited to living persons. I wrote a letter asking the NAIFA board of directors to consider the possibility of granting the award occasionally to a deceased person. I attached to the letter descriptions of the accomplishments of two towering figures in the history of the life insurance business: Elizur Wright and Charles Evans Hughes. The complimentary package offered at the end of this post contains my entire mailing to the NAIFA board.

In response, NAIFA said the board considered my suggestion. The spokesperson said the decision was made that the JNR award would remain restricted to those who are living.

I would welcome comments from readers on this matter. However, I suggest that anyone interested in commenting should first read my suggestion in its entirety.

Available Material
I am offering a complimentary 16-page PDF consisting of my letter to the NAIFA board (2 pages) and my descriptions of the contributions of Wright and Hughes (14 pages). Send an email to jmbelth@gmail.com and ask for the March 2019 package relating to the JNR award.

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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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