Wednesday, October 30, 2013

No. 5: The Conviction of Three STOLI Promoters on Federal Criminal Charges

In the May 2012 and April 2013 issues of The Insurance Forum, I discussed the federal criminal charges filed against three promoters of stranger-originated life insurance (STOLI). The defendants are Michael Binday (Scarsdale, NY), James Kevin Kergil (Peekskill, NY), and Mark Resnick (Orlando, FL). (U.S.A. v. Binday et al., U.S. District Court, Southern District of New York, Case No. 1:12-cr-152.)

The Charges
Each defendant was charged with three criminal counts: (1) conspiracy to commit mail fraud and wire fraud, (2) mail fraud, and (3) wire fraud. Kergil and Resnick were charged with a fourth count: conspiracy to destroy records and obstruct justice. Binday initially was charged with one count of obstruction of justice, but U.S. District Court Judge Colleen McMahon dismissed that count in December 2012.

The indictment described five areas where information provided to the companies was alleged to be false: applicants' finances, intent to sell the policies in the secondary market, third-party premium financing, purpose of the insurance, and existence of other policies or applications. The indictment also described four ways in which insurance companies are harmed when they are tricked into issuing STOLI policies: "earlier and greater payout of death benefit," "less premium income," "providers' financial projections rendered unreliable," and "delayed payments causing decreased cash flow."

Trial and Conviction
The trial originally was scheduled to begin on April 8, 2013. However, Judge McMahon delayed it more than five months after an extraordinary development that I discuss below.

Jury selection began on September 17, and there were 11 trial days. On October 7, at 2:25 p.m., the jury began its deliberations. It reached its verdict 15 minutes later. It found the defendants guilty on all counts. Judge McMahon scheduled sentencing for January 15, 2014.

An Extraordinary Development
Binday was represented by Steptoe & Johnson, a major law firm. The lead attorney was Michael Miller. On February 27, 2013, Miller wrote a letter informing Judge McMahon of "a recent development concerning a potential conflict of interests matter and the measures we have taken to address it." He also said: "We do not believe that an adjournment of the trial will be necessary."

On March 7, one month before the trial date, Miller wrote another letter to Judge McMahon. He said: "Regrettably, I write to apprise the Court that my firm believes it is required by Rule 1.16(b) of the New York Rules of Professional Conduct to move to withdraw from the representation of Mr. Binday in his pending case before Your Honor." He said the rule "provides that a lawyer and/or law firm must withdraw from further representation of a client if the lawyer knows that continued representation will violate other ethics Rules." He also said:
When my firm was first retained, we were aware that several of the purported "victim" insurance companies identified in the Indictment were clients of my firm in connection with matters which appeared at the time to be wholly unrelated to the transactions underlying the defendant's supposed conduct in this case.... Some time later, other issues arose and, upon my firm's recommendation, conflict counsel was retained at my firm's expense who would cross-examine at trial any Government witness who is currently, or was previously, employed by an insurance company that is also being represented by my firm in other matters....
Miller had been arguing that Binday was not guilty because the representations in STOLI applications were not material to the companies' decisions to issue the policies. Several companies subpoenaed in the case were moving to quash or modify the subpoenas. Moreover, a major Steptoe client (not identified) said it might terminate its business relationship with Steptoe if Steptoe continued to represent Binday.

(It is likely that the mystery client is Metropolitan Life. One of the subpoenaed companies was MetLife Investors USA, a Metropolitan affiliate. According to public filings, Metropolitan paid Steptoe $14.7 million in 2009, $14.6 million in 2010, $14.3 million in 2011, and $15.4 million in 2012.)

Binday did not consent to Miller's withdrawal. However, he retained Andrew Lankler of Lankler, Carragher & Horwitz as "conflicts counsel."

On March 11, the defendants and all the attorneys met with Judge McMahon in camera (in private in the judge's chambers). On March 14, Judge McMahon issued an order granting Miller's motion to withdraw and requiring Steptoe to (1) return to Binday "every penny he has ever paid to the firm, with interest," (2) continue paying for the services of Lankler until Binday decides to retain Lankler or Lankler's services are no longer required, and (3) cooperate at Steptoe's expense with the new attorney's investigation of the case. Judge McMahon also postponed the trial until September 17. Here is the beginning of Judge McMahon's order (citations omitted, and "in chancery" means "in litigation"):
Virtually on the eve of trial, the law firm of Steptoe and Johnson, counsel for defendant Michael Binday, have petitioned the court for permission to withdraw due to what it has concluded is an unwaivable conflict of interest. After consulting with the firm, both in open court and in an in camera session, I have reluctantly reached the conclusion that Steptoe must be relieved. This will result in the postponement of an imminent trial for three defendants--a particularly painful result for the men who are in chancery, for the Government, and for the court, which calendared this case long ago. However, on the record before me, the presumption in favor of a defendant's choice of counsel has been overcome by "a showing of a serious potential for conflict."
I am providing a complimentary 16-page PDF consisting of Miller's two letters and Judge McMahon's order. Click here to open the PDF.