Friday, March 13, 2020

No. 359: Pittsenbargar, Shapiro, and a $1.3 Billion Ponzi Scheme

On February 20, 2020, the Texas State Securities Board (TSSB) issued a press release entitled "Austin Insurance Agent Indicted for Alleged $9 Million Fraud on Elderly." The agent was Brett Pittsenbargar. When I explored the matter, I learned about the involvement of California resident Robert H. Shapiro, a massive Ponzi scheme, the involvement of the U.S. Department of Justice, and the involvement of the Securities and Exchange Commission (SEC). Here I discuss the case.

The Texas Indictment of Pittsenbargar
On February 4, 2020, a grand jury in Travis County (Austin) indicted Pittsenbargar for alleged violations of Texas securities laws. He was arrested on February 19, and was booked into the Travis County jail.

Pittsenbargar was not licensed to offer or sell securities. The indictment alleges he sold or offered securities, and did so without disclosing important information. The indictment, which lists many victims by name and shows dates and amounts, is in the complimentary package offered at the end of this post.

On March 3, 2020, in the morning, I visited the Texas Department of Insurance (TDI) website to learn about Pittsenbargar's agent license. The license type was "life agent individual," the license number was 1530748, the original issue date was October 14, 2008, the "status" was "active," the effective date was October 14, 2008, and the expiration date was January 31, 2021. He had "active" appointments with ten life insurance companies: American National Insurance Company, Americo Financial Life and Annuity Insurance Company, Fidelity Security Life Insurance Company, Genworth Life Insurance Company, Government Personnel Mutual Life Insurance Company, Guggenheim Life and Annuity Company, Life Insurance Company of the Southwest, North American Company for Life and Health Insurance, PHL Variable Insurance Company, and Sentinel Security Life Insurance Company.

On March 5, I checked the TDI website again. The "status" of Pittsenbargar's license was "inactive." The "effective date" was March 3, 2020. The "status" of his appointment with each of the ten companies was "inactive." The "termination date" was March 3, 2020.

On March 6, I filed with TDI a public records request. I asked for a copy of the letter to Pittsenbargar notifying him that his agent's license had been revoked, and a sample copy of the letter sent to each of the companies notifying them that his appointments with them had been terminated.

On March 11, TDI sent me three one-page documents. The first, dated March 3, is a "Voluntary Surrender of Insurance Licenses" signed by Pittsenbargar. The second, dated March 9, is a letter from a TDI investigator informing Pittsenbargar he is prohibited from performing the acts of an insurance agent. The third, dated March 11, is a "Texas Appointment Action Notice" informing American National Insurance Company of six new appointments and ten terminated appointments, including the March 3 termination of Pittsenbargar's appointment. The three documents are in the complimentary package offered at the end of this post. (See State of Texas v. Pittsenbargar, 147th Judicial District Court, Travis County, Texas, No. DPS 2699012.)

 The Florida Indictment of Shapiro
Shapiro, a resident of Sherman Oaks, California, was owner, president, and chief executive officer of various Woodbridge companies. On April 5, 2019, a federal grand jury in Florida indicted Shapiro and two other individuals. The indictment included ten counts: one count of conspiracy to commit mail fraud and wire fraud, five counts of mail fraud, two counts of wire fraud, one count of conspiracy to commit money laundering, and one count of evasion of payment of federal income taxes. The indictment also sought restitution relating to a massive Ponzi scheme. Here is how the indictment described such a scheme:
19. A "Ponzi" or "Ponzi scheme" is an investment fraud scheme that involves the payment of claimed returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the participants focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business. Ponzi schemes require a consistent flow of money from new investors to continue and tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask for their money back.
On August 7, 2019, Shapiro pled guilty to the first and tenth counts of the indictment. On October 16, the judge sentenced Shapiro to imprisonment for 300 months, consisting of 240 months as to the first count, and 60 months as to the tenth count, to run consecutively, followed by supervised release for three years as to each of the first and tenth counts, with the terms to run concurrently. The other eight counts were dismissed. The indictment is in the complimentary package offered at the end of this post.

On August 8, the U.S. Attorney in South Florida issued a press release entitled "Mastermind of $1.3 Billion Investment Fraud (Ponzi) Scheme—One of the Largest Ever—Sentenced to Twenty-Five Years in Prison on Conspiracy and Tax Evasion Charges." The press release is in the complimentary package offered at the end of this post.

On November 4, the judge added restitution of about $479 million. With regard to the two other defendants, proceedings are ongoing. (See U.S.A. v. Shapiro, U.S. District Court, Southern District of Florida, Case No. 1:19-cr-20178.)

The SEC Complaint Against Pittsenbargar
On November 25, 2019, the SEC filed a civil complaint against Pittsenbargar and a firm he owned. Here are three paragraphs of the complaint:
4. The Woodbridge Group of Companies LLC and its affiliates ("Woodbridge") was headquartered and ran its operations in the Central District of California, specifically Sherman Oaks, California. The defendants transacted business in the Central District of California while participating in the offer and sale of Woodbridge's securities over the course of more than 4 years. Among other things, the Defendants regularly communicated via telephone, email, text message and mail with Woodbridge employees who were located in Sherman Oaks, California. Additionally, Pittsenbargar met with Woodbridge executives in the District and from September until December 2017, Pittsenbargar was an employee of Woodbridge.
10. Unbeknownst to the Defendants' clients, many of whom were elderly and had invested their retirement savings as a result of the Defendants' marketing techniques, Woodbridge was actually operating a massive Ponzi scheme, raising more than $1.2 billion before collapsing in December 2017 and filing a petition for bankruptcy. Once Woodbridge filed for bankruptcy, investors stopped receiving their monthly interest payments, and have not received a return of their investment principal.
15. Robert H. Shapiro ("Shapiro") was a resident of Sherman Oaks, California at all material times. He was Woodbridge's owner, President and CEO and, until the company's bankruptcy filing, maintained sole operational control over the company. In August 2019 Shapiro pled guilty to conspiracy to commit mail and wire fraud in connection with the Woodbridge Ponzi scheme, as well as tax evasion, and was subsequently sentenced to 25 years imprisonment. He is currently in federal custody. Shapiro is not, and has never been, registered with the Commission, FINRA, or any state securities regulator.
The complaint alleges two counts of violations of federal securities laws. The SEC requests, among other things, a finding that the defendants violated federal securities laws, a permanent injunction, disgorgement of all ill-gotten gains with prejudgment interest, and civil penalties.

The complaint is in the complimentary package offered at the end of this post. (See SEC v. Pittsenbargar, U.S. District Court, Central District of California, Case No. 2:19-cv-10059.)

General Observations
Pittsenbargar, an agent with a valid Texas license to sell life insurance, started selling securities without a securities license. He also became involved with a national firm headed by Shapiro, an individual in California, who also was not licensed to sell securities, and who in addition was operating a massive Ponzi scheme. What will happen to Pittsenbargar in the Texas criminal case remains to be seen. It is a sad story.

Available Material
I am offering a complimentary 59-page package consisting of the Texas indictment against Pittsenbargar (7 pages), the documents received from TDI relating to Pittsenbargar (3 pages), the federal indictment against Shapiro (29 pages), the press release issued by the U.S. Attorney in Florida (3 pages), and the SEC civil complaint against Pittsenbargar (17 pages). Send an email to jmbelth@gmail.com and ask for the March 2020 package about Pittsenbargar and Shapiro.

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Monday, March 2, 2020

No. 358: William Barr—Top Enabler of the Donald Trump Autocracy—Must Resign

The Statement by Former DOJ Employees
On February 16, 2020, former employees of the U.S. Department of Justice (DOJ) issued a "DOJ Alumni Statement on the Events Surrounding the Sentencing of Roger Stone." February 26 was the deadline for DOJ alumni to sign on to the statement, and 2,688 have done so. Here are the first, fifth, and seventh paragraphs of the statement:
We, the undersigned, are alumni of the United States Department of Justice (DOJ) who have collectively served both Republican and Democratic administrations. Each of us strongly condemns President Trump's and Attorney General Barr's interference in the fair administration of justice.
Such behavior is a grave threat to the fair administration of justice. In this nation, we are all equal before the law. A person should not be given special treatment in a criminal prosecution because they are a close political ally of the President. Governments that use the enormous power of law enforcement to punish their enemies and reward their allies are not constitutional republics; they are autocracies.
For these reasons, we support and commend the four career prosecutors who upheld their oaths and stood up for the Department's independence by withdrawing from the Stone case and/or resigning from the Department. Our simple message to them is that we—and millions of other Americans—stand with them. And we call on every DOJ employee to follow their heroic example and be prepared to report future abuses to the Inspector General, the Office of Professional Responsibility, and Congress; to refuse to carry out directives that are inconsistent with their oaths of office; to withdraw from cases that involve such directives or other misconduct; and, if necessary—to resign and report publicly—in a manner consistent with professional ethics—to the American people the reasons for their resignation. We likewise call on the other branches of government to protect from retaliation those employees who uphold their oaths in the face of unlawful directives. The rule of law and the survival of our Republic demand nothing less.
The June 2018 Memorandum by William Barr
In No. 326 (August 12, 2019), I wrote about Special Counsel Robert S. Mueller III, Donald J. Trump, and William P. Barr, among others. I said that on June 8, 2018, Barr—then a private citizen—sent a 19-page, single-spaced, unsolicited memorandum to Deputy Attorney General Rod Rosenstein and Assistant Attorney General Steve Engel. (Many observers at the time and later viewed the Barr memorandum as a job application.) In that post, I quoted the following three paragraphs from the beginning of the memorandum (the full memorandum is in the complimentary package offered in No. 326):
I am writing as a former official deeply concerned with the institutions of the Presidency and the Department of Justice. I realize that I am in the dark about many facts, but I hope my views may be useful.
It appears Mueller's team is investigating a possible case of "obstruction" by the President predicated substantially on his expression of hope that the [sic] Comey could eventually "let ... go" of its [the FBI's?] investigation of Flynn and his action in firing Comey. In pursuit of this obstruction theory, it appears that Mueller's team is demanding that the President submit to interrogation about these incidents, using the threat of subpoenas to coerce his submission.
Mueller should not be permitted to demand that the President submit to interrogation about alleged obstruction. Apart from whether Mueller [has?] a strong enough factual basis for doing so, Mueller's obstruction theory is fatally misconceived. As I understand it, his theory is premised on a novel and legally insupportable reading of the law. Moreover, in my view, if credited by the [Justice?] Department, it would have grave consequences far beyond the immediate confines of this case and would do lasting damage to the Presidency and to the administration of law within the Executive branch.
Six months later, on December 7, 2018, Trump nominated Barr to succeed Jefferson B. Sessions III as U.S. Attorney General. On February 14, 2019, the Senate confirmed Barr (on a largely party line vote of 54 to 45), thus placing Barr in charge of the investigation he had criticized.

Since then I have been deeply disturbed by numerous actions taken by Barr, not the least of which were his handling of the Mueller report and his role in the Ukraine scandal that led to Trump's impeachment in the Democratic-controlled House and acquittal in the Republican-controlled Senate. What prompted this post, however, was Barr's role in the federal criminal case of Roger J. Stone Jr., a long-time Trump (and Nixon) friend, supporter, and campaign operative.

The Criminal Case Against Roger Stone
The criminal case against Roger Stone grew out of the Mueller investigation. On January 24, 2019, a federal grand jury indicted Stone on seven criminal counts: one count of obstruction of proceeding, five counts of false statements, and one count of witness tampering.

The case was assigned to U.S.District Judge Amy Berman Jackson. She is a graduate of Harvard College and the Harvard Law School. President Obama nominated her in June 2010. Her nomination lapsed at the end of 2010. Obama renominated her in January 2011, and the Senate confirmed her in March 2011.

On January 29, 2019, Stone pleaded not guilty on all counts and was released on personal recognizance. On November 6, the jury trial began before Judge Jackson. On November 14, the trial ended. On November 15, the jury found Stone guilty on all seven counts.

The DOJ Sentencing Memorandum
On February 10, 2020, the DOJ filed a 26-page sentencing memorandum, which is in the complimentary package offered at the end of this post. The memorandum was submitted by Jonathan Kravis and Michael J. Marando, Assistant U.S. Attorneys; and by Adam C. Jed and Aaron S. Zelinsky, Special Assistant U.S. Attorneys. The section entitled "Guidelines Calculation" is on pages 16-18. The first and last sentences of that section, and the three-sentence "Conclusion" on page 26, read:
The government submits that Stone's total offense level is 29 and his Criminal History Category is I, yielding a Guidelines Range of 87-108 months.
Accordingly, Stone's total offense level is 29 (14 + 8 + 3 + 2 + 2), and his Criminal History Category is I. His Guidelines Range is therefore 87-108 months.
Roger Stone obstructed Congress's investigation into Russian interference in the 2016 election, lied under oath, and tampered with a witness. And when his crimes were revealed by the indictment in this case, he displayed contempt for this Court and the rule of law. For that, he should be punished in accord with the advisory Guidelines.
The Roger Stone Sentencing Memorandum
On the same day, February 10, attorneys representing Stone filed a 35-page sentencing memorandum and a 39-page appendix consisting of letters to Judge Jackson urging leniency in the sentencing of Stone. The one-sentence conclusion of the memorandum reads:
For the foregoing reasons, it is respectfully submitted that the Court should impose a non-Guidelines sentence of probation with any conditions that the Court deems reasonable under the circumstances.
The DOJ Supplemental Sentencing Memorandum
On the next day, February 11, the DOJ filed a five-page supplemental and amended sentencing memorandum. The events surrounding this memorandum precipitated the DOJ alumni statement, because when Trump expressed his displeasure with the original DOJ sentencing memorandum, Barr instructed DOJ staff to file the supplemental and amended memorandum which overruled the original memorandum the career prosecutors had filed the day before. Barr later claimed, in a televised statement, that his decision was not influenced by Trump's displeasure, and that the supplemental memorandum was appropriate. However, many people, including 2,688 DOJ alumni, thought that Barr was aiding Trump in using the DOJ to reward Roger Stone. The supplemental and amended memorandum was submitted by John Crabb Jr., Assistant U.S. Attorney and Acting Chief of the Criminal Division. It is in the complimentary package offered at the end of this post. The concluding paragraph reads:
The defendant committed serious offenses and deserves a sentence of incarceration that is "sufficient but not greater than necessary" to satisfy the factors set forth in Section 353(a). Based on the facts known to the government, a sentence of between 87 to 108 months' imprisonment, however, could be considered excessive and unwarranted under the circumstances. Ultimately, the government defers to the Court as to what specific sentence is appropriate under the facts and circumstances of this case.
On the same day, February 11, Kravis, Marando, Jed, and Zelinsky withdrew from the case. According to a 2,328-word front-page article in The New York Times on February 12 by reporters Katie Benner, Sharon LaFraniere, and Adam Goldman, Kravis resigned from the DOJ, but Marando, Jed, and Zelinsky remained with the DOJ. (See U.S.A. v. Stone, U.S. District Court, District of Columbia, Case No. 1:19-cr-18.)

The Roger Stone Motion for a New Trial
On February 18, attorneys representing Stone filed a motion for a new trial. The motion is pending.

The Sentencing of Roger Stone
On February 20, Judge Jackson sentenced Stone to 40 months in prison. A 1,671-word front-page article in The New York Times on February 21 by reporter Sharon LaFraniere describes in detail what happened at the hearing. Judge Jackson did not order Stone to begin his prison term immediately, because she had not yet ruled on his motion for a new trial.

The Roger Stone Motion to Disqualify Judge Jackson
On February 21, attorneys representing Stone filed a motion to disqualify Judge Jackson. The motion is related to Stone's pending motion for a new trial. The motion to disqualify is based on the alleged bias of the jury forewoman and certain comments the judge made during the sentencing hearing, such as: "The jurors who served with integrity under difficult circumstances cared." Stone alleges that such comments "raise grave doubts about the judge's objectivity." The motion to disqualify is in the complimentary package offered at the end of this post.

On February 23, Judge Jackson issued an order denying the motion to disqualify. The order ends as follows (the full order is in the complimentary package offered at the end of this post):
At bottom, given the absence of any factual or legal support for the motion for disqualification, the pleading appears to be nothing more than an attempt to use the Court docket to disseminate a statement for public consumption that has the words "judge" and "biased" in it. For these reasons, defendant's motion is hereby DENIED. SO ORDERED.
The Hearing on the Roger Stone Motion for a New Trial
On the morning of February 24, Judge Jackson held a closed hearing on Stone's motion for a new trial. Reporters were not allowed to attend, but were able to listen to the proceedings through a closed-circuit audio feed to a media room. That afternoon, reporters Darren Samuelsohn and Josh Gerstein of Politico posted a lengthy article about the hearing. At the end of the hearing, the judge did not immediately rule on Stone's motion for a new trial.

The Neil Steinberg Commentary
As I was wrapping up this post, I saw something that readers might find interesting. I refer to a February 2 commentary by Neil Steinberg of the Chicago Sun-Times entitled "Crumbling US Senate echoes Roman collapse." Steinberg cites The History of the Decline and Fall of the Roman Empire, the towering six-volume master work by English historian Edward Gibbon published more than two centuries ago.

General Observations
Should Judge Jackson deny Stone's motion for a new trial, it seems likely that she will order Stone to report to prison, and that Stone's attorneys will file an appeal. The question is whether Trump will pardon Stone and/or commute the 40-month sentence.

Following Trump's Senate acquittal on impeachment charges, he has taken numerous actions—many of them with Barr's support—favoring his friends and attacking those he perceives as his enemies. Those actions have created a fire storm. They make clear that our great republic has become an autocracy. I agree with the DOJ alumni that Barr must resign.

Available Material
I offered a complimentary package in the above mentioned No. 326. That package, which contains the full June 2018 Barr memorandum, remains available.

Now I offer a complimentary 42-page package consisting of the DOJ's original sentencing memorandum (26 pages), the DOJ's supplemental and amended sentencing memorandum (5 pages), Stone's motion to disqualify the judge (5 pages), and the judge's order denying the motion to disqualify (6 pages). Email jmbelth@gmail.com and ask for the March 2020 package about Barr.

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Tuesday, February 25, 2020

No. 357: Philip Falcone Faces a Revolt from Shareholders of His Public Company

Philip A. Falcone is chairman, president, and chief executive officer of HC2 Holdings, Inc. (NYSE:HCHC). He is also the founder of Harbinger Capital Partners, a New York hedge fund. My interest in him grew out of his involvement with long-term care (LTC) insurance, a business in which I am keenly interested. Recent public filings reveal that he now faces a revolt from disgruntled HC2 shareholders.

I have written previously about Falcone's failure to disclose material information in public filings with the Securities and Exchange Commission (SEC). In No. 242 (November 20, 2017), No. 244 (December 11, 2017), and No. 280 (August 2, 2018), I wrote about Falcone, about Kanawha (an LTC insurance company), about Humana (owner of Kanawha for several years, but no longer an owner), and about HC2. Two HC2 filings with the SEC early in 2020 prompted this follow-up post.

The January 2020 Filing
On January 27, 2020, several disgruntled HC2 shareholders filed with the SEC a DFAN 14A. They attached a January 20 letter to their fellow HC2 shareholders announcing a plan to file a preliminary proxy statement in which they will solicit votes for the election of their own slate of HC2 directors. The final section of the letter reads:
Time for a Change: Management's unsuitability, consistent under performance and self-dealing patently disqualify them from continuing to manage the Company. This is why we intend to run our own slate for the Company's board at the next meeting of shareholders as a matter of first priority. Management has wasted six years destroying shareholder value. It's time for a fresh approach.
They point out early in the letter that it has been six years since the appointment of Falcone to the board of directors. The full letter is in the complimentary package offered at the end of this post.

The February 2020 Filing
On February 11, 2020, HC2 filed with the SEC an 8-K (significant event) report and a press release announcing the appointment of an additional member to the board of directors, increasing the size of the board from five to six. What grabbed my attention was that the 8-K includes a one-paragraph "Other Events" section not mentioned in the press release. Here is part of the paragraph that is missing from the press release:
The Compensation Committee of the Board ... has determined that Philip A. Falcone ... will not receive any bonus or other incentive compensation in respect of 2019, whether under the HC2 Executive Bonus Plan ... or otherwise.... Additional information regarding these matters will be provided in the 2020 Proxy Statement.
I sought to understand the significance of the announcement that was buried near the end of the 8-K and was omitted from the press release accompanying the 8-K. I reviewed the DEF 14A proxy statement filed with the SEC by HC2 on April 29, 2019 announcing that the annual meeting of shareholders was to be held on June 13, 2019.

The summary compensation table on page 30 in the 2019 proxy statement shows Falcone's total compensation in 2018 was about $11.5 million, consisting of $600,000 of salary, $7.1 million of stock awards, $1.4 million of option awards, and $2.4 million of non-equity incentive plan compensation. The $11.5 million 2018 total for Falcone dwarfed the 2018 totals for the other top executives, the highest of which was a total of about $2.1 million.

The Forthcoming 2020 Filings
Based on the dates of the HC2 filings with the SEC in 2019, I assume that the 2020 proxy statement with the summary compensation table for 2019 will be posted in late April 2020, and that the 2020 annual meeting of HC2 shareholders will be held in June 2020. I decided not to wait until late April 2020 to see the summary compensation table for 2019 showing Falcone's compensation in 2019. The full "Other Events" paragraph of the 8-K and the press release that accompanied the 8-K are in the complimentary package offered at the end of this post.

Falcone and the SEC
In the previously mentioned No. 244, I discussed Falcone's settlements with the SEC. On August 16, 2013, Falcone and Harbinger settled two SEC complaints, admitted wrongdoing, and paid civil penalties of more than $18 million. (At the time, SEC settlements including admissions of wrongdoing were rare.) Falcone also agreed to be barred from the securities industry for at least five years. However, he was not barred from serving as an officer or director of a public company.

In 2014 Falcone became chairman, president, and chief executive officer of HC2. I searched its subsequent SEC filings but found no disclosure of his settlements with the SEC.

I also searched the statutory financial statements of Continental General Insurance Company (CGIC), a subsidiary of HC2. I found no mention of Falcone. The only familiar name I saw was James Corcoran, a former New York State Superintendent of Insurance, who was shown as one of the directors of CGIC.

Kanawha Insurance Company
Kanawha Insurance Company has been in the LTC insurance business for many years, and was domiciled in South Carolina. On July 12, 2018, the South Carolina Director of Insurance issued an order approving the merger of Kanawha into Texas-domiciled CGIC, and the redomestication of Kanawha from South Carolina to Texas. The order includes a "continuing obligation of CGIC" that "Falcone shall not have any role in the day-to-day operations of Kanawha or CGIC pre- or post-merger." The order also includes a requirement that HC2 maintain a certain risk-based capital ratio for CGIC. The order is in the complimentary package offered at the end of this post.

General Observations
It will be interesting to watch developments relating to Falcone, especially the effort to remove him from the HC2 board and from his position at the helm of the company. It will also be interesting to see his 2019 compensation without the incentive payments. I plan to report developments after HC2 posts information about the June 2020 annual meeting of shareholders.

Available Material
The complimentary packages offered in the previously mentioned Nos. 242, 244, and 280 remain available. Now I am offering a new 10-page complimentary package consisting of the January 2020 letter to HC2 shareholders (4 pages), the "Other Events" paragraph in the February 2020 8-K filing (1 page), the press release that accompanied the 8-K (2 pages), and the South Carolina Director's 2018 order (3 pages). Email jmbelth@gmail.com and ask for the February 2020 package about Falcone and HC2.

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Thursday, February 20, 2020

No. 356: GEICO's "Patriot Penalty" Imposed on Automobile Insurance Premiums Paid by Soldiers Returning from Deployment

On February 11, 2020, the Consumer Federation of America (CFA) issued a press release entitled "Consumer Advocates Call for End to GEICO's 'Patriot Penalty' Revealed by Investigative Report." Here is the opening paragraph of the CFA press release:
Berkshire Hathaway subsidiary GEICO adds a surcharge to the auto insurance premiums of soldiers who dropped their coverage while they served abroad, according to a televised report by investigative reporter Lee Zurik. Consumer Federation of America (CFA), which has verified this "patriot penalty" through its own research, called on the nation's insurance commissioners to intervene, in a letter it sent today.
The letter to the state insurance commissioners is over the signatures of Douglas Heller and Robert Hunter of CFA. The letter is in the complimentary package offered at the end of this post, along with the CFA press release.

The Size and the States
According to the investigative news report, the surcharge on returning soldiers can be as large as $500 every six months, even where the service member has a clean driving record. According to the CFA press release, some states, including California and Florida, explicitly prohibit insurers from imposing such surcharges on safe drivers.

However, according to a preliminary review of GEICO's practices, such surcharges have been found in at least 21 states: Arizona, Arkansas, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Minnesota, Nebraska, Nevada, New Jersey, New York, North Carolina, Tennessee, Washington, and West Virginia. In its letter, CFA says legislation should be sought immediately if the commissioner does not have authority to prevent such surcharges.

My Efforts to Contact GEICO and a Few Commissioners
I attempted to contact GEICO by telephone for comment, but I was not able to reach a human being. I then tried to contact by email a few of the 21 states mentioned in the CFA press release. One of the states replied immediately, but the others have not yet replied.

Indiana, where I live, sent Bulletin 126 dated June 7, 2004. It is entitled "Applications for Personal Lines Coverage by Returning Members of the Armed Services." It cites Indiana Code Sections 27-1-22-26, which say a violation is "an unfair and deceptive act or practice in the business of insurance." The 15-year-old Indiana bulletin is in the complimentary package offered at the end of this post.

General Observations
I was surprised by the CFA press release about the GEICO surcharge imposed on military personnel returning from deployment outside the country. Such surcharges are outrageous. It is unconscionable to impose surcharges on members of the military, who risk their lives to protect our nation. I agree with CFA that insurance regulators should take action to prohibit such surcharges, and should seek state legislation if the regulators do not already have such authority.

The Indiana bulletin and statute raise at least two questions. First, how many states (in addition to California and Florida, which are mentioned in the CFA material), have such rules and regulations? Second, how many states with such rules and regulations enforce them vigorously?

I hope and fully expect that Warren Buffett, the famous chairman of Berkshire Hathaway, will agree with the sentiments expressed by the CFA and in this post. I am attempting to get this post into his hands.

Available Material
I am offering a complimentary 5-page PDF consisting of the CFA press release (2 pages), the CFA letter to the commissioners (2 pages), and the Indiana bulletin (1 page). Email jmbelth@gmail.com and ask for the February 2020 package about GEICO's patriot penalty.

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Thursday, February 13, 2020

No. 355: Greg Lindberg—Another Update on the Federal Criminal Lawsuit in North Carolina

In No. 309 (April 17, 2019), I discussed the indictment of Greg E. Lindberg and three other individuals by a federal grand jury in North Carolina. In No. 320 (July 1, 2019), I reported on the placement of four Lindberg insurance companies into court-ordered rehabilitation at the request of the North Carolina insurance commissioner. In No. 338 (October 24, 2019), I discussed Lindberg's motion to dismiss the criminal lawsuit, and a recent article in The Wall Street Journal. Here I provide another update on the criminal lawsuit. (See U.S.A. v. Lindberg, U.S. District Court, Western District of North Carolina, Case No. 5-19-cr-22.)

Previous Developments
Lindberg is the founder and chairman of Eli Global, LLC, an investment company. He is also the owner of Global Bankers Insurance Group, a managing company for many insurers and reinsurers. The other defendants are John D. Gray, a Lindberg consultant; John W. Palermo, Jr., a vice president of Eli Global; and Robert C. Hayes, chairman of the state Republican party in North Carolina. All four defendants are North Carolina residents.

On March 18, 2019, the grand jury charged the defendants with one count of conspiracy to commit honest services wire fraud; and one count of bribery concerning programs receiving federal funding, and aiding and abetting. Hayes was also charged with three counts of false statements. The defendants pleaded not guilty on all counts, but Hayes later pleaded guilty to one count of false statements.

On September 18, Lindberg filed a motion to dismiss the indictment for failure to state an offense. On September 25, the U.S. Attorney filed an opposition to the motion to dismiss. On October 2, Lindberg filed a reply to the government's opposition to the motion to dismiss. On October 4, The Wall Street Journal carried a lengthy front-page article entitled "Indicted Executive Used Operatives To Spy on Women."

Recent Developments
On October 25, the judge issued an amended scheduling order. It is in the complimentary package offered at the end of this post.

On November 18, Gray filed a motion to dismiss the indictment for failure to state an offense. On December 2, Palermo filed a motion to dismiss the indictment for lack of specificity and for prosecutorial misconduct.

On January 31, 2020, the judge issued an order denying the Lindberg, Gray, and Palermo motions to dismiss the indictment. The order discusses "failure to state an offense," "lack of specificity," and "prosecutorial misconduct." The conclusion of the order reads:
For the foregoing reasons, the Court finds that there is a legally sufficient basis to support defendants' indictment for honest services fraud and federal funds bribery. Moreover, the indictment is sufficiently specific to give the defendants fair notice of the charged offenses. Finally, the defendants have failed to demonstrate prosecutorial misconduct warranting dismissal. Accordingly, the defendants' Motions to Dismiss the Indictment are denied.
The full order is in the complimentary package offered at the end of this post. On February 3, The Wall Street Journal carried another article about the Lindberg case. The article is entitled "Lindberg Trial Set to Proceed." The trial is set to begin on February 18.

General Observations
Lobbying of state insurance regulators by representatives of the insurance business is common. However, detailed allegations of attempted bribery are rare. For that reason, I think this case is important for persons interested in insurance regulation. I plan to report significant developments.

Available Material
The complimentary packages offered in Nos. 309, 320, and 338 are still available. Now I am offering another complimentary 22-page PDF consisting of the judge's amended scheduling order (6 pages) and the judge's order denying the defendants' motions to dismiss the indictment (16 pages). Email jmbelth@gmail.com and ask for the February 2020 package about Lindberg.

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Monday, February 10, 2020

No. 354: Senior Health Insurance Company of Pennsylvania Enters Rehabilitation by Order of a State Court

In No. 352 (January 29, 2020), I reported that Jessica K. Altman, the Pennsylvania Insurance Commissioner and primary regulator of Senior Health Insurance Company of Pennsylvania (SHIP), filed in the Commonwealth Court of Pennsylvania on January 23 an application for an order placing SHIP in rehabilitation. On January 29, President Judge Mary Hannah Leavitt issued the order because "rehabilitation has been requested by and consented to by SHIP's board of directors and the trustees of the Senior Health Care Oversight Trust." (See IN RE: Senior Health Insurance Company of Pennsylvania In Rehabilitation, Commonwealth Court of Pennsylvania, No. 1 SHIP 2020.)

The Leavitt Order
Judge Leavitt appointed Commissioner Altman as rehabilitator of SHIP, and said the rehabilitator may appoint a special deputy rehabilitator. The judge ordered the rehabilitator to file a preliminary plan of rehabilitation on or before April 22, 2020, including a timeline for the preparation of a final plan of rehabilitation.

The 13-page order proposed by Commissioner Altman is in the complimentary package offered at the end of No. 352. The five-page order issued by Judge Leavitt is in the complimentary package offered at the end of this post.

The Department's Press Release
On February 3, 2020, the Pennsylvania Insurance Department (Department) issued a press release announcing the rehabilitation. It said the special deputy rehabilitator is Patrick H. Cantillo. It also said more information is available on the Department's website and on SHIP's website. The press release quoted Commissioner Altman as saying (the full press release is in the complimentary package offered at the end of this post):
At this time there will be no immediate changes to the company's insurance policies. But such changes may be part of any rehabilitation plan. Pending the rehabilitation plan, claims and benefits will continue to be paid as they were before the order. It is important that policyholders continue to pay their premiums to avoid cancellation of their policies and loss of valuable insurance coverage.
The SHIP Posting
SHIP, at www.shipltc.com/rehabilitation, posted information: a short statement from SHIP, general questions, policyholder questions, agent and broker questions, other creditor questions, and a modified version of the Department's press release. The modified version includes this paragraph (all the information SHIP posted is in the complimentary package offered at the end of this post):
As is typical with financially troubled insurers, there are many contributing causes to SHIP's difficulties, including poor performance of investments and other such matters the details of which are not yet fully known to the Rehabilitator. However, one key contributing factor that is common to many long-term care insurers is that the expected cost of benefits that will be due under the insurance policies in effect greatly exceeds the assets and expected revenues from which such benefits will have to be paid. Many issues contributed to this shortfall and it is too early for the Rehabilitator to be able to identify them with specificity. One that stands out, however, is that the premiums charged historically for many, if not most, of SHIP's long-term care insurance policies were inadequate for the benefits expected to be due under such policies. In this respect, SHIP is no different than much of the LTC industry.
The Judge
Judge Leavitt has extensive experience with rehabilitations and liquidations of long-term care (LTC) insurance companies. Currently she is President Judge of the Commonwealth Court of Pennsylvania, a position to which she was elected in 2016. My experience with her work dates back to May 2012, when she handed the then Pennsylvania commissioner and his predecessor a major defeat in the case of Penn Treaty Network America Insurance Company. Briefly, here is what happened.

Joel S. Ario was the Pennsylvania commissioner from 2007 to 2010, and Michael F. Consedine succeeded him. Penn Treaty and an affiliate, LTC insurance companies, were insolvent in January 2009. Ario petitioned the court to place them in rehabilitation. The court did so, and appointed Ario the rehabilitator. In April 2009, Ario submitted to the court a preliminary rehabilitation plan, and said he planned to submit a formal plan in October 2009. Instead he petitioned to convert the plan to a liquidation. Penn Treaty and its board chairman petitioned to allow them to intervene in opposition to the liquidation petition. The court granted the petition.

The parties tried unsuccessfully to reach a settlement. A bench trial before Judge Leavitt began in January 2011. The trial was suspended while the parties tried to reach a settlement. Again the effort failed and the trial resumed in October 2011. The trial lasted 30 days and ended in February 2012. Under Pennsylvania law, the rehabilitator (then Consedine) had to prove the rehabilitation would substantially increase the risk of loss to creditors, policyholders, or the public, or would be futile. In May 2012, Judge Leavitt issued a 162-page opinion and a brief order. She ruled Consedine had not met his burden of proof, and she denied the liquidation petition. She ordered Consedine to develop a rehabilitation plan in consultation with the intervenors, and ruled the intervenors were entitled to attorney fees and costs. Here are some extraordinary comments in Judge Leavitt's ruling:
The Insurance Commissioner, wearing his hat as a regulator of the Pennsylvania insurance industry, refused to approve the Companies' actuarially justified rate increase filings in the amount requested, both before and after rehabilitation. The Commissioner has even discouraged other state regulators from approving rate increases. Now the Commissioner seeks to liquidate the Companies because their premium rates are inadequate....
The Rehabilitator's evidence showed that rate regulation is governed by politics, not actuarial evidence or legal principles. The Rehabilitator has even included Pennsylvania in the list of problem states that have refused to approve [Penn Treaty's] actuarially justified rate increase filings for [certain] policies. This case presents a serious indictment of the existing system of rate regulation of long-term care insurance.
At the trial, the rehabilitator's actuarial expert was an actuary at Milliman, Inc., an actuarial consulting firm. There were major differences of opinion in 60-year projections by Milliman and the intervenors' actuary. Judge Leavitt found the testimony by the intervenors' actuary more compelling than Milliman's testimony.

I wrote about the Penn Treaty incident in the August 2012 issue of The Insurance Forum, the monthly newsletter I published from January 1974 until December 2013. The article is in the complimentary package offered at the end of this post. Judge Leavitt placed Penn Treaty in liquidation on March 1, 2017, as reported in No. 208 (March 13, 2017).

General Observations
I fear the proposed rehabilitation plan to be submitted to the court by April 22 will involve a devastating combination of premium increases and benefit reductions, including benefit reductions for policyholders currently receiving benefits. Furthermore, I consider it possible that Judge Leavitt will reject the plan, and that she will order liquidation of the company. That would lead to SHIP being placed in the hands of the National Organization of Life and Health Guaranty Associations, which would coordinate the response of the state guaranty associations.

Available Material
I am offering a complimentary 23-page PDF consisting of Judge Leavitt's order (5 pages), the Department's press release (1 page), the information posted on SHIP's website (15 pages), and the August 2012 Forum article (2 pages). Email jmbelth@gmail.com and ask for the February 2020 package about the SHIP rehabilitation.

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Wednesday, February 5, 2020

No. 353: The Massachusetts Securities Division Files a Complaint Against the Promoter of Free Lunch Workshops

On December 17, 2019, the Enforcement Section of the Securities Division in the Office of the Massachusetts Secretary of the Commonwealth filed an administrative complaint against an insurance agent and two companies. The individual respondent is Ryan Patrick Skinner. The other respondents are Summit Financial Partners and Summit Financial Ptrs Inc. (collectively, "Summit"). (See In the Matter of Ryan Patrick Skinner, Massachusetts Securities Division, Docket No. E-2019-0055.)

The Complaint
The complaint alleges that Skinner "acted as an unregistered investment adviser and unregistered investor adviser representative," and that Summit "acted as an unregistered investment adviser that employed an unregistered investment adviser representative." Here is one paragraph in the "Summary" section of the complaint (the full compliant is in the complimentary package offered at the end of this post):
Respondents' modus operandi is to entice residents of the Commonwealth, especially seniors, to attend "free lunch" workshops where Skinner convinces the attendees that he can provide advice to help them maximize their Social Security and retirement income. He then holds individual meetings with the attendees, often at their homes, and uses these meetings as an opportunity to make his pitch. Skinner repeatedly recommends that prospective clients liquidate securities from their retirement investment accounts to purchase fixed indexed annuities. In many instances, Skinner recommends that prospective clients surrender existing annuities thereby incurring significant penalties. In some cases Skinner recommends that an investor's entire life savings consist of annuities sold through him.
The Answer
On January 7, 2020, the respondents' attorney filed an answer to the complaint. The answer includes the usual "admit," "deny," and "insufficient knowledge" responses. It also lists eight affirmative defenses, one of which reads as follows (the full answer is in the complimentary package offered at the end of this post):
The claims are barred because the Respondents lie within the exclusive jurisdiction of the Division of Insurance in accordance with Mass. Gen. Laws ch. 155 section 9 and Mass. Gen. Laws ch. 175 section 162G et. seq.
Further Filings
On January 16, the respondents' attorney filed a letter with the Securities Division. The letter consists of one paragraph:
As you know, Ryan Skinner ("Skinner") and Summit Financial Partners Inc. ("Summit") hold licenses in good standing with the Massachusetts Division of Insurance ("DOI"), and both remain subject to supervision and enforcement by DOI. It has come to my clients' attention that the Enforcement Section has contacted Athene Life and Annuity Co. and other carriers with whom Skinner and Summit hold appointments. If true, please identify the authority upon which the Enforcement Section relies in doing so. Please be advised that Skinner and Summit do hereby reserve all rights, including the right to seek injunctive relief in Superior Court, to protect its appointments and licenses, and to enjoin any unlawful interference with its contractual relations.
On the same day, the respondents' attorney filed a "Stipulation Relative to Scheduling" that suggested eleven deadlines ending with a hearing on October 16, 2020. He also filed a "Respondents' First Request for Production of Documents."

On January 23, the Enforcement Section filed a motion for a scheduling conference. The next day, the Presiding Officer, on behalf of William F. Galvin, Secretary of the Commonwealth, issued an order setting a pre-hearing conference for February 13, 2020.

FINRA
A report on Skinner (CRD# 4574898) may be viewed through Broker Check on the website of the Financial Industry Regulatory Authority (www.finra.org). He is currently not registered, but was registered with four firms from 2002 through 2008. The report reveals three "disclosure events," the details of which are shown in the report.

One of the disclosure events was initiated by the Massachusetts Division of Insurance (DOI) on February 5, 2016. The matter was resolved on March 17, 2016, when Skinner paid a civil and administrative penalty of $2,500. 

Division of Insurance
I have been in contact with the Massachusetts Division of Insurance (DOI). It is aware of the recent allegations by the Securities Division against Skinner, and has opened an investigation of its own. The spokesperson declined further comment on the matter.

On January 31, I requested from the DOI records access officer, pursuant to the Massachusetts statute governing access to public records, copies of the dockets relating to the 2016 investigation of Skinner and the current investigation of Skinner, as well as all documents listed on those dockets. I await a reply.

Insurance and Securities Regulation
I have long been interested in the relationship and overlap between insurance regulation and securities regulation. The reference in this post to Secretary of the Commonwealth Galvin, who has been in that position for many years, reminded me of an incident more than 20 years ago, when Boston-based John Hancock Mutual Life Insurance Company adopted a demutualization plan. Boston newspapers reported that a huge number of notification letters to Hancock policyholders were returned by the postal service as undeliverable. Galvin intervened because the Massachusetts unclaimed property agency was part of the office of the Secretary of the Commonwealth, and the amount of unclaimed funds was likely to be huge. Insurance regulators and other states' unclaimed property agencies tackled the issue of unpaid benefits later, but it was Galvin who led the way.

General Observations
Free-lunch seminars have been a serious problem for many years. I remember attending a couple of such seminars, and coming away from them appalled by the extent of the deceptive information presented to the attendees, most of whom were gullible seniors. I plan to report further on the Skinner case and other possible future developments.

Available Material
I am offering a complimentary 24-page PDF consisting of the complaint filed by the Securities Division (18 pages) and the answer filed by the respondents' attorney (6 pages). Send an email to jmbelth@gmail.com and ask for the February 2020 package about the Massachusetts complaint against Skinner.

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