Thursday, December 17, 2020

No. 403: General Electric Enters into a $200 Million Settlement with the Securities and Exchange Commission

In No. 395 (October 26, 2020), I said General Electric Company (GE) had received a Wells notice on September 30, 2020 from the staff of the Securities and Exchange Commission (SEC). The notice related to an SEC investigation of, among other things, GE's inadequate reserves for its legacy long-term care (LTC) insurance business. On December 9, 2020, GE filed an 8-K (significant event) report disclosing that GE and the SEC had entered into a $200 million settlement to end the previously disclosed SEC investigation.

The GE 8-K
In the 8-K, GE said it had reached a settlement in connection with the SEC investigation. GE went on to say (the relevant section of the 8-K is in the complimentary package offered at the end of this post):
Consistent with common SEC practice, GE neither admits nor denies the findings in the administrative order that the SEC issued today. Under the terms of the settlement, GE consented to the entry of an order requiring it to pay a civil penalty of $200 million and to cease and desist from violations of specified provisions of the federal securities laws and rules promulgated thereunder.
The SEC Order
A paragraph near the beginning of the SEC Order Instituting Cease-and-Desist Proceedings reads as follows (the full Order is in the complimentary package offered at the end of this post):
In anticipation of the institution of these proceedings, Respondent [GE] has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, as set forth below.
No Admission of Wrongdoing
The "neither admits nor denies" language is an important part of the GE/SEC settlement. In No. 244 (December 11, 2017), I wrote about an SEC settlement in August 2013 with Philip A. Falcone and companies associated with him. There I quoted at some length from a January 2014 speech by then SEC Chair Mary Jo White. Here is a brief, edited description of what she said:
For many years, the SEC, like virtually every other civil law enforcement agency, typically did not require entities or individuals to admit wrongdoing in order to enter into a settlement. This no admit/no deny settlement protocol makes sense and has served the public interest well. She cited such things as more and quicker settlements and avoidance of litigation risk. So why modify the no admit/no deny protocol? She cited such things as a greater measure of public accountability and the need for public confidence in the strength and credibility of law enforcement. She said that, as a U.S. Attorney, she had required an admission of wrongdoing in a 1994 case, and she brought that mind set when she became SEC Chair in 2013.
General Observations
One knowledgeable reader with whom I spoke about the settlement thought the dollar amount of the settlement was a pittance. However, I am not in a position to express an opinion on that matter.

As for the no admit/no deny protocol, it will be interesting to see what happens when the SEC, the Department of Justice, and other federal law enforcement agencies become part of the Biden administration. I cannot predict what will happen, but I hope the no admit/no deny protocol will receive close attention.

Available Material
I am offering a complimentary 20-page PDF consisting of an excerpt from the GE 8-K (1 page) and the SEC Order (19 pages). Email jmbelth@gmail.com and ask for the December 2020 package about the GE/SEC settlement.

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Friday, December 11, 2020

No. 402: Brian Alfaro, a Former Texas Securities Broker, Goes to Federal Prison

On November 10, 2020, the U.S. Attorney in the Western District of Texas issued a press release announcing that Brian Keith Alfaro, a former Texas securities broker (CRD #4049120), was sentenced to 121 months in federal prison and ordered to pay restitution of almost $10 million for "scheming to defraud investors." I say "former" because Alfaro has been barred from the securities industry. The press release is in the complimentary package offered at the end of this post.

The Federal Indictments
On November 28, 2018, a federal grand jury in San Antonio handed down an eight-count sealed indictment against Alfaro. The indictment was unsealed a few days later, after Alfaro's arrest. He pleaded not guilty.

The case was assigned to U.S. District Judge Samuel F. Biery. President Clinton nominated him in November 1993. The Senate confirmed him in March 1994. He served as Chief Judge from June 2010 to December 2015.

On June 19, 2019, the grand jury handed down a superseding eight-count indictment. The seventh of the eight mail fraud counts in both indictments was later dismissed at the government's request. The superseding indictment is in the complimentary package offered at the end of this post.

The Federal Jury Trial
In early February 2020, the federal jury trial was held. The jury found Alfaro guilty on all seven remaining counts. The jury verdict form is in the complimentary package offered at the end of this post.

On November 20, 2020, the judge sentenced Alfaro to 121 months in federal prison, followed by three years of supervised release, no fine, a $600 special assessment, and restitution of almost $10 million. (See U.S.A. v. Alfaro, U.S. District Court, Western District of Texas, Case No. 5:18-cr-879.)

The Texas Order
On November 9, 2020, Texas Securities Commissioner Travis J. Iles issued an Emergency Cease and Desist Order directed at Alfaro, members of his family, and others associated with him. The order is in the complimentary package offered at the end of this post.

The FINRA Report
"Broker Check" is operated by the Financial Industry Regulatory Authority on its website (finra.org). I reviewed the report on Alfaro. He is described as a "previously registered broker" and as currently "barred." The report shows six "disclosure events" consisting of one "criminal" event, four "customer dispute" events, and one "investigation" event.

Available Material
I am offering a complimentary 32-page PDF consisting of the U.S. Attorney's press release (1 page), the superseding indictment (10 pages), the jury verdict form (3 pages), and the Texas emergency order (18 pages). Email jmbelth@gmail.com and ask for the December 2020 package about Alfaro.

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Friday, December 4, 2020

No. 401: Unum Life of America Takes a $2 Billion Hit to Its Long-Term Care Insurance Reserves

The MBOI Examination of ULA
On June 30, 2020, Eric A. Cioppa, the Superintendent of the Maine Bureau of Insurance (MBOI), accepted and made public the Report of Examination of Unum Life Insurance Company of America (ULA) as of December 30, 2018 (Report). On page 19 of the Report are two paragraphs disclosing that ULA suffered a $2 billion hit to the reserves for its long-term care (LTC) insurance business. Here are the two paragraphs (the full Report is in the complimentary package offered at the end of this post):
As discussed in the Summary of Significant Findings and Note 1 to the Comments on the Financial Statements of this Report, the MBOI found ULA's gross LTC reserves to be deficient by $2,085,740,649 as of December 31, 2018 as a result of this examination. On May 1, 2020, the MBOI approved a permitted practice which allows ULA to delay full recognition of the statutory reserve deficiency identified in connection with this examination that would otherwise be required under Statement of Statutory Accounting Principles (SSAP) 54 Individual and Group Accident and Health Contracts. The request was made subject to the confidential Phase in, Guardrails and Monitoring Plan for Unum Life Insurance Company of America LTC Statutory Reserve Strengthening ("Plan"). The reserve increase will be recognized over a seven-year period beginning with the statutory financial statements for the year-ended December 31, 2020 and continue until the statutory financial statement for the year-ended December 31, 2026 according to a defined schedule, as outlined in the Plan. The permitted accounting practice was approved retroactively to December 31, 2018 and December 31, 2019 such that no additional reserves would be required to be reported until year-end 2020. If this permitted practice had not been granted, it is estimated that ULA's net income and surplus at December 31, 2018 would have been reduced by approximately $2.1 billion due to the need to write off the uncollectible reinsurance recoverable and reverse the cession of the $2.1 billion of reserves to Fairwind. The MBOI will monitor ULA's compliance with the Plan during the reserve phase-in period by continuing the limited scope examination.
[ULA] paid dividends of $492,000,000 to Unum Group during 2019. [ULA] paid a dividend to Unum Group of $234,000,000 in the first quarter of 2020.
Fairwind, referred to above, is Fairwind Insurance Company. It is an affiliated captive insurance company with which ULA had entered into reinsurance arrangements. Those arrangements are discussed in the Report.

The Kansas/GE Parallel
The MBOI bailout of ULA bears a striking resemblance to the 2018 bailout of General Electric Company (GE) by the Kansas Insurance Department. I discussed the Kansas/GE matter in No. 258 (March 19, 2018).

In January 2018, GE disclosed it would contribute $15 billion of capital to Employers Reassurance Corporation (ERAC), a GE subsidiary domiciled in Kansas. ERAC requested and the Kansas department approved an arrangement allowing GE to "spread and delay" contributing the additional reserves over the next seven years.

GE also reported that the Securities and Exchange Commission (SEC) was investigating the matter. In October 2020, GE reported that it received a Wells notice from the SEC staff indicating the staff may recommend enforcement action by the SEC. I discussed the Wells notice in No. 395 (October 26, 2020).

General Observations
I do not know whether the SEC will investigate the MBOI bailout of ULA. However, such an investigation would come as no surprise, given the similarity between the MBOI/ULA bailout and the Kansas/GE bailout. In any case, I plan to report further developments relating to both bailouts.

Available Material
I am offering a complimentary 24-page PDF containing the recent MBOI examination report on ULA. Email jmbelth@gmail.com and ask for the December 2020 package about the MBOI/ULA examination report.

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Tuesday, December 1, 2020

No. 400: Stranger-Originated Life Insurance—A Follow-Up to My Recent Blog Post About the Legislation in New Jersey

In No. 317 (June 13, 2019), I discussed developments that led to recent legislation in New Jersey prohibiting stranger-originated life insurance (STOLI). In No. 396 (November 2, 2020), I discussed the recent legislation in New Jersey, and said I was not aware of any other state in which STOLI is prohibited by law. In response, several readers called my attention to other states with laws prohibiting STOLI. That prompted me to investigate and prepare this further follow-up. The complimentary packages I offered in Nos. 317 and 396 remain available.

The New York State Prohibition
One reader shared with me some information about the New York State prohibition of STOLI. Effective in 2010, what are now sections 7814 and 7815 of the New York Insurance Laws prohibit STOLI. For the purposes of the prohibition, STOLI is defined as
Any act, practice or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured under the laws of this state.
The NAIC and NCOIL Model Laws
Another reader shared with me an article entitled "Deterring STOLI: Two New Model Life Settlement Acts." The article was in the July 2008 issue of the magazine Estate Planning. The authors were Kenneth W. Kingma and Stephan R. Leimberg.

The article discussed the adoption of model laws by the National Association of Insurance Commissioners (NAIC) in 2006, and the National Conference of Insurance Legislators (NCOIL) in 2007. As I went over the article, I had the impression that the NAIC model law frowns upon STOLI but does not include an outright prohibition of the practice. At the same time, I had the impression that the NCOIL model law not only frowns upon STOLI but also includes an outright prohibition of the practice. The article is in the complimentary package offered at the end of this post.

The Minnesota and Nevada Prohibitions
After reading the Kingma-Leimberg article, I wrote to some state insurance departments asking whether they impose statutory prohibitions on STOLI. Spokespersons representing Minnesota and Nevada responded to my inquiry.

The Minnesota spokesperson said the state prohibits STOLI and cited section 60A0783 of the 2012 Minnesota Statutes requiring an insurable interest. The Nevada spokesperson said the state prohibits STOLI and cited section 687B040 of the Nevada Revised Statutes requiring an insurable interest. Neither spokesperson was able to say whether their statutes were enacted in the wake of the NCOIL model law, but I think they were.

The Illinois Consumer Alert
In the course of preparing this follow-up, I stumbled across a "Consumer Alert" that was issued in January 2008 by what is now the Illinois Department of Insurance. The alert advised "consumers to proceed with caution when considering participation in a STOLI arrangement." The Department said that it "does not sanction or approve" such arrangements, and that "These transactions and parties to these transactions may be subject to the Illinois Insurance Code and other applicable laws in the State of Illinois." The alert also described the nature of STOLI arrangements. The alert is in the complimentary package offered at the end of this post.

Available Material
I am offering a complimentary 19-page PDF containing the Kingma-Leimberg article about "Deterring STOLI" (18 pages) and the Illinois Consumer Alert on STOLI (1 page). Email jmbelth@gmail.com and ask for the December 2020 package about STOLI.

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Friday, November 20, 2020

No. 399: John Hancock Defends a Class Action Lawsuit Over Huge Cost-of-Insurance Increases on Universal Life Policies

On June 5, 2018, Jeffrey Leonard (Leonard) and others filed a class action lawsuit against John Hancock Life Insurance Company of New York (John Hancock) and others relating to huge cost-of-insurance (COI) increases on certain universal life insurance policies. On August 22, 2018, John Hancock answered the complaint. On April 9, 2020, Leonard filed a first amended complaint. On May 4, 2020, John Hancock answered the first amended complaint. (See Leonard v. John Hancock, U.S. District Court, Southern District of New York, Case No. 1:18-cv-4994.)

The case was assigned to Senior U.S. District Judge Alvin K. Hellerstein. President Clinton nominated him in May 1998. The Senate confirmed him in October 1998. He took senior status in January 2011.

Thrust of the Case
The "Nature of the Action" section of the first amended complaint consists of 20 paragraphs, and includes a few redactions. Here are some lightly edited excerpts from that section:
1. Plaintiffs seek to represent a class of policyholders who have been subjected to unlawful and excessive COI increases in violation of their insurance policies.
2. The policies at issue are Performance Universal Life policies issued between 2003 and 2010.
3. In February 2018, John Hancock's parent company, Manulife Financial Corporation, which reports on behalf of John Hancock in consolidated statements, announced that it had suffered a $1.6 billion net loss in the fourth quarter of 2017.
4. In May 2018, John Hancock sent cryptic letters to policyholders informing them of a massive increase in COI rates and charges on certain Performance Universal Life policies.
6. John Hancock did not disclose that, when reviewing the proposed COI increase, the New York Department of Financial Services concluded that the assumptions John Hancock had originally used when pricing the policies were not reasonable.
8. Internally, John Hancock had long recognized that its original assumptions were no longer valid.
10. The COI increase is massive. For example, one plaintiff took out a policy on her life in 2008. After paying ten years of premiums at John Hancock's "projected" rates, John Hancock suddenly increased her COI rates by about 70% per year, causing her to have to pay about $225,000 more in premiums per year to keep her coverage. She is now aged 87.
11. Other policyholders have seen increases ranging from 17% to 75%. John Hancock did not provide policyholders with any reason for the wildly disparate COI increases.
12. The COI increase violated terms of the policies in numerous respects.
17. John Hancock did not implement the COI increase on other products it issued between 2003 and 2010.
19. In violation of the policy provision promising illustrations "upon request," John Hancock refused to provide illustrations for subject policies from January 2017 through May 2018.
20. The COI rate hike and John Hancock's actions preceding it breached the policies in at least five respects.
The "Factual Background" section of the first amended complaint consists of 53 paragraphs. Also, the first amended complaint contains the following seven claims for relief: (1) breach of contract, (2) violation of certain New York laws, (3) violation of certain other New York laws, (4) violation of certain California laws, (5) violation of certain other California laws, (6) violation of certain Texas laws, and (7) violation of certain New Jersey laws. The first amended complaint is in the complimentary package offered at the end of this post.

Future Developments
On July 27, 2020, Judge Hellerstein issued a scheduling order listing several pretrial deadlines. For example, the fact discovery deadline is February 22, 2021, the expert discovery deadline is June 28, 2021, and the briefing for class certification is to be completed by September 27, 2021. The scheduling order does not mention settlement, but includes a deadline for "dispositive motions." The scheduling order is in the complimentary package offered at the end of this post.

General Observations
It appears that the case has a long way to go. I plan to report on significant future developments, such as class certification and the terms of any proposed settlement.

Available Material
I am offering a complimentary 58-page PDF consisting of the plaintiffs' first amended complaint (56 pages) and the judge's recent scheduling order (2 pages). Email jmbelth@gmail.com and ask for the November 2020 package about the case of Leonard v. John Hancock.

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Friday, November 13, 2020

No. 398: Long-Term Care Insurance—Yet Another Update on the Skochin Lawsuit Against Genworth

In No. 384 (July 30, 2020), I posted my most recent update on the Skochin class action lawsuit against Genworth Financial, Inc. (Genworth) and Genworth Life Insurance Company (GLIC) relating to premium increases on long-term care (LTC) insurance policies. In that post, I provided a link to my first post on the case, and links to my first two updates. (See Skochin v. Genworth, U.S. District Court, Eastern District of Virginia, Case No. 3:19-cv-49.)

Background
On January 18, 2019, Pennsylvania residents Jerome and Susan Skochin and Maryland resident Larry Huber filed a class action lawsuit against Genworth and GLIC. The plaintiffs had purchased LTC insurance policies in 2003 and 2004 from General Electric Capital Assurance Company, a predecessor of Genworth and GLIC. On October 30, 2019, the plaintiffs filed a notice of settlement. On January 15, 2020, Senior U.S. District Judge Robert E. Payne held a hearing, granted preliminary approval of the settlement, directed that the class notice be mailed to class members, and set the final fairness hearing for July 10, 2020.

Recent Developments
On July 10 and 14, 2020, the judge heard arguments on the objections, and ordered further briefing. On September 14, he ordered further briefing.

On November 5, the judge issued a memorandum opinion and an accompanying order overruling class members' objections to the plaintiffs' motion to approve the settlement. Also on November 5, he issued a memorandum opinion and an accompanying order granting class counsel's motion for an award of attorney fees and expenses. The four November 5 documents are in the complimentary package offered at the end of this post.

An Invitation
When I posted No. 384, I said I do not intend to express an opinion about the fairness of the settlement from an actuarial standpoint because I am not an actuary and do not feel comfortable expressing such an opinion. However, I would welcome expressions of opinion from actuaries. As an aid to expressing an opinion, note that the complimentary packages offered in my five blog posts on the case are available and would provide a good starting point. If you need further documents, I can send you the current court docket and provide you with any court documents you would like to see. Should you respond to this invitation, please indicate whether you prefer your opinion to be with or without attribution, and I will honor your request.

Available Material
I am offering a complimentary 99-page PDF consisting of the judge's memorandum opinion and accompanying order granting final approval of the settlement (68 pages), and the judge's memorandum opinion and accompanying order granting approval of attorney fees and expenses (31 pages). Email jmbelth@gmail.com and ask for the November 2020 package about the case of Skochin v. Genworth.

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Monday, November 9, 2020

No. 397: The Age 100 Problem—A Further Update on the Lebbin Lawsuit Against Transamerica

I have written extensively about what I call "the age 100 problem" in general, and about the Lebbin lawsuit against Transamerica Life Insurance Company (Transamerica) in particular. The most recent update on the case is in No. 372 (May 18, 2020). That blog post contains a detailed summary of the district court case. For that reason, I am dispensing with a summary of that case and including in this further update only major developments in the appellate case. (See Lebbin v. Transamerica, U.S. Court of Appeals, Eleventh Circuit, Case No. 20-11756-EE.)

The Appellate Filings
On August 31, 2020, Transamerica filed a 78-page brief in the Eleventh Circuit. On September 8, Transamerica filed a 1,517-page, six-volume appendix. On October 30, the Lebbin-Spector Family Trust (Trust) filed a 71-page brief. Transamerica's brief and the Trust's brief are in the complimentary package offered at the end of this post.

Transamerica's brief makes five arguments: (1) plaintiffs' breach of contract claim is barred by the statute of limitations, (2) the district court erred in granting summary judgment to plaintiffs on their claim for breach of contract based on an alleged ambiguity, (3) the district court should not have excluded extrinsic evidence that established the intent of the parties, (4) the district court erred in resolving Transamerica's defenses of waiver, ratification, and estoppel without considering any evidence, and (5) the district court's ruling on damages should be reversed. Transamerica concludes:
For the foregoing reasons, Transamerica respectfully requests that this Court reverse the summary judgment orders of the district court and direct entry of judgment in Transamerica's favor.
The Trust's brief includes detailed responses to each of the five arguments in Transamerica's brief. The Trust concludes:
For the foregoing reasons, [the Trust] respectfully request[s] that this Court affirm the summary judgment orders of the district court.
General Observations
At this writing, there is no timetable for the appellate court case. I plan to report on important developments in the case.

Available Material
I am offering a complimentary 149-page package consisting of Transamerica's brief (78 pages) and the Trust's brief (71 pages). Email jmbelth@gmail.com and ask for the November 2020 package about Lebbin v. Transamerica.

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