Wednesday, January 29, 2014

No. 26: The Unsealing of Court Documents Relating to Phoenix's Cost-of-Insurance Increases

A federal judge recently ordered the unsealing of many court documents in several lawsuits over cost-of-insurance (COI) increases imposed on certain policyholders by Phoenix Life Insurance Company and its affiliate, PHL Variable Insurance Company (collectively, "Phoenix"). I have been trying for a long time, with little success, to obtain various documents under state open records laws. Now, at last, many of the documents are in the public domain.

In 2010, Phoenix significantly increased COI charges on universal life policies of the type used in stranger-originated life insurance (STOLI) arrangements. To accomplish the increase, Phoenix created a separate class consisting of policies with face amounts of $1 million and up issued to insureds aged 68 and up. STOLI investors invariably pay as little premium as possible. Consequently, the policies do not develop any accumulation value. In 2011, after an investigation that arose from complaints by STOLI investors, what is now the New York Department of Financial Services directed Phoenix to rescind the 2010 increases on policies issued in New York, credit the refunds to the policies with interest, and refrain in the future from basing COI charges on the ratio of accumulation value to face amount (the "funding ratio"). Phoenix did as directed, and then instituted fresh increases (the "2011 increases") on New York policies using a different methodology. Phoenix maintained the 2010 increases on policies issued in other states.

STOLI investors filed several lawsuits in federal courts. Also, in addition to the New York investigation, regulators in Wisconsin and California initiated investigations after receiving complaints from STOLI investors. I obtained some documents from Wisconsin pursuant to its open records law. However, I was frustrated by sealed documents in the lawsuits, a denial of my open records request to California, and what is now a 17-month delay on my August 2012 open records request to New York. I wrote about Phoenix's COI increases in the October 2012, December 2012, and November 2013 issues of The Insurance Forum, and in blog post No. 9.

The Unsealing Order
U.S. District Judge Colleen McMahon of the Southern District of New York is handling four of the lawsuits. Until recently, the parties filed many documents under seal pursuant to protective orders. The cases are Fleisher v. Phoenix Life (11-cv-8405), Tiger Capital v. PHL (12-cv-2939), and two U.S. Bank N.A. v. PHL cases (12-cv-6811 and 13-cv-1580).

On January 15, 2014, Judge McMahon ordered that one category of material and one exhibit should remain under seal. She also said:
All other material filed in support of or in opposition to the pending motions for summary judgment must be publicly filed. Defendant's [Phoenix's] argument for why these materials—which consist almost entirely of outdated business information from more than five years ago—should be filed under seal is utterly unpersuasive.
Appropriate filings shall be made within three business days. The Clerk of the Court shall remove ALL pending motions (whether noticed motions or letter motions) seeking permission to file materials under seal from the court's list of outstanding motions. This constitutes the decision and order of the court.
The Unsealed Documents
A few of the newly unsealed documents are discussed here. They are listed chronologically. I edited some direct quotes for spelling, grammar, consistency, and readability. Brackets denote my comments.

New York Letter to Phoenix
On September 6, 2011, Michael Maffei, chief of the life bureau in the New York department, wrote a three-page letter to Kathleen A. McGah, vice president and counsel at Phoenix. He directed the company to rescind the 2010 increases, credit the refunds to the policies with interest, and refrain in the future from basing COI charges on the funding ratio. I obtained this letter earlier, and discussed it in blog post No. 9.

Phoenix Letter to New York
On November 15, 2011, McGah wrote an 11-page "inadmissible, confidential settlement communication" to Maffei in response to his September 6 letter. She explained why Phoenix believes that the 2010 increases did not violate New York law and were permitted by the policies. "However, to avoid the costs and uncertainty of administrative or adjudicatory action," Phoenix offered to "undo" the 2010 increases, credit the refunds to the policies with interest, and implement the 2011 increases as described in an October 21, 2011 letter. I have not seen the October 21 letter, but I saw an earlier letter saying the 2011 increases would be "applied as a level percentage to the current COI rate."

Another New York Letter to Phoenix
On November 16, 2011, Maffei wrote a one-page letter to McGah. He acknowledged that Phoenix does not agree with the department's September 6 determination. "Without prejudice to the Department's position," he said the department accepts the plan described in McGah's November 15 letter, and "we are closing our file."

Phoenix "Talking Points"
Phoenix prepared a five-page "Talking Points and Q&A" dated November 18, 2011 and effective January 1, 2012. Here are some of the talking points:
  • Phoenix resolved the 2010 increases on a small number of policies and is moving forward with a different methodology that the New York Department finds acceptable. 
  • Phoenix is reversing the 2010 increases for certain New York policies and applying different increases beginning January 1, 2012. [I call the "different increases" the "2011 increases" because Phoenix sent notification letters to policyholders in September 2011.] 
  • Phoenix continues to believe that the original methodology for the 2010 increases is consistent with the policy provisions, actuarially sound, fair and equitable, and in compliance with state laws and regulations. [Phoenix's position differs totally from that of insurance regulators in New York, Wisconsin, and California.] 
  • The change applies only to policies issued by Phoenix Life (sold in New York). It does not apply to policies issued by PHL (sold in other states). 
  • The 2011 increases will not vary based on the ratio of accumulation value to face amount but rather will apply as a level percentage to all policies subject to increases. [Prior to the recent unsealing of documents, I had not seen any reference to the methodology for the 2011 increases.]
Phoenix Letter to Wisconsin
On August 1, 2012, McGah wrote an eight-page letter to Janelle V. Dvorak, an insurance examiner in the Wisconsin Office of the Commissioner of Insurance. The letter was in response to a July 9, 2012 letter from Dvorak to Robert P. Mallick, second vice president and counsel at Phoenix.

I have not seen the Dvorak letter. However, the McGah letter describes the Dvorak letter, provides background and analysis, lists six questions Dvorak asked, and answers the questions. I think this sentence in the McGah letter warrants close attention:
PHL's use of the relationship between accumulation value and face amount (i.e., the net amount at risk) under a policy was in accordance with policy terms, as policy form 05PAUL identified "Net Amount at Risk" as a factor in determining the COI rates. ["05PAUL" is the "Phoenix Accumulator Universal Life" policy form that was introduced in 2005.]
The net amount at risk is the face amount minus the accumulation value, and the COI charge is the net amount at risk multiplied by the COI rate. However, that "relationship" is not the one Phoenix used in the 2010 increases. Rather, Phoenix based the 2010 increases on the ratio of the accumulation value to the face amount.

Wisconsin Letter to Phoenix
On December 4, 2012, Robin Jacobs, an attorney in the Wisconsin commissioner's office, wrote a three-page letter to McGah explaining why the 2010 increases are "inconsistent with Wisconsin insurance statutes and regulations, as both the policy and the advertising materials fail to sufficiently inform the consumer that actual premiums paid will impact PHL's charge for COI." Jacobs "requests" that Phoenix rescind the COI increase, credit the refunds to the policies, and refrain from imposing future increases that are inconsistent with Wisconsin insurance laws. Jacobs does not use the word "demands," and the word "requests" in the letter is underlined by hand, presumably by someone at Phoenix. As I reported in the November 2013 issue of The Insurance Forum, Phoenix denied the allegations and did not rescind the increases on Wisconsin policies. Wisconsin began an administrative proceeding. The administrative law judge ordered all pleadings to be filed by November 11, 2013, and scheduled a two-day hearing for March 24-25, 2014.

California Letter to Phoenix
On June 21, 2013, Fernando De La Merced, a senior insurance compliance officer in the California Department of Insurance, wrote a two-page letter to Mallick. De La Merced said a complaint the department had received "is justified because the COI rate increase is unfairly discriminatory in violation of California Insurance Code section 790.03f" and "the rate increase violates the express terms of the 05PAUL policy." De La Merced said Phoenix should rescind the increases and refrain from using the funding ratio in determining COI charges. Phoenix disagreed with the findings and did not rescind the increases on California policies. The department took no further action.

The Stern Report
On September 16, 2013, Larry N. Stern, FSA, MAAA, who was retained by the plaintiffs, submitted an 82-page "Expert Report." Here are two excerpts from the "Conclusions" section:
The methods used to determine the group of policies subjected to the COI rate increases, the basis for the need for the COI rate increases, and the methodology for imposing those COI rate increases were not "actuarially sound and fair"--words often used by Phoenix in communications internally and externally to regulators and policyholders. Since the entire block of PAUL policies exhibited different premium patterns from what Phoenix claimed was anticipated in original pricing, Phoenix should not have singled out the policies it subjected to the COI rate increases....
The COI rate increases were discriminatory and not applied uniformly for all insureds in the same class. The definition of "class" was not dependent on factors at issue but rather based on funding characteristics of policyholder behavior after issue. For the 2010 COI rate increases an individual policyholder could avoid being subjected to the COI rate increase by paying more premium. Thus at one point the individual was a member of the "class" and the next moment was not a member of the "class." The 2011 COI rate increases were targeted at those policyholders that were minimally funding, even though the policies had been designed for, and designed to be profitable in, the minimally-funding market and all policyholders had been granted the freedom under the policy to fund minimally. The use of the threshold method to determine which policy would experience a COI rate increase was discriminatory because the COI rate increase was not applied in a uniform manner to all insureds in the same class....
The Stern Rebuttal Report
On October 23, 2013, Stern submitted an eight-page "Rebuttal Expert Report" in response to an expert report by Douglas A. French, FSA, MAAA. I have not seen the report by French, who presumably was retained by the defendants.

Recently unsealed documents show that, for several years prior to the 2010 increases, Phoenix became increasingly concerned about the lack of profitability on universal life policies of $1 million and up issued to insureds aged 68 and up. STOLI investors invariably pay the minimum premiums necessary to cover mortality and expense charges. The policies therefore develop no accumulation value and have a zero funding ratio. That approach is called "ART funding" because universal life policies are thereby transformed into annual renewable term policies.

In 2010, Phoenix split the class of universal life policies, created a separate class of large policies issued on elderly insureds, and increased the COI charges substantially on the policies in the separate class. In 2011, in response to a demand by the New York department, Phoenix rescinded the increases for policies issued in New York, obtained the department's approval of 2011 increases using a different methodology, and maintained the 2010 increases on policies in other states despite findings by California and Wisconsin regulators that the 2010 increases were improper.

I am not surprised that regulators in New York, Wisconsin, and California found the 2010 increases improper. However, I am surprised that the New York department approved the 2011 increases. In my opinion, the 2010 increases and the 2011 increases are improper, because a company should not be allowed to split a class for pricing purposes years after the class is established.

It remains to be seen how Judge McMahon will rule on the parties' motions for summary judgment and what appeals arise from her rulings. I think the cases are far from resolution.


Monday, January 27, 2014

No. 25: Recent Developments in the Neasham Case

I devoted the entire eight-page June 2012 issue of The Insurance Forum to the case of Glenn Neasham, a California agent who sold an Allianz annuity to an elderly woman in February 2008. An important issue in the case was whether the woman was suffering from dementia at the time of the sale.

The Conviction
In October 2011, after a ten-day trial in Lake County Superior Court, the jury found Neasham guilty of felony theft with respect to the property of an elder and dependent adult. The judge sentenced Neasham to 90 days in the county jail, and stayed the sentence pending appeal.

The Appeal
On October 8, 2013, a three-judge panel of the California Court of Appeal reversed the conviction. The ruling was prominently marked "Certified for Publication." In blog post No. 6, I identified one point on which I agreed with the panel, six points on which I disagreed, and three lessons to be learned from the case. In No. 8, I discussed three points raised by a reader.

The California Supreme Court
On November 14, 2013, the California Attorney General's office petitioned the California Supreme Court to review the appellate court ruling. On December 16, Neasham answered the petition. On December 24, the Attorney General's office replied to the answer.

On January 15, 2014, Chief Justice Tani Cantil-Sakauye of the California Supreme Court denied the petition for review and depublished the appellate ruling. Here is the full text:
The petition for review is denied. The Reporter of Decisions is directed not to publish in the Official Appellate Reports the opinion in the above entitled appeal filed October 8, 2013, which appears at 220 Cal. App. 4th 375. (Cal. Const., art. VI, section 14; rule 8.1125(c)(1), Cal. Rules of Court.)
An unpublished ruling is not usually cited as precedent in future cases. I think depublication of a ruling certified for publication by an appellate court is not common. I do not know the reason for depublication in this case.

General Observations
Contrary to reports in the insurance trade press, the California Supreme Court did not "uphold" the reversal of Neasham's conviction. Rather, it chose not to review the case. Furthermore, it took the intriguing step of depublishing the appellate court's ruling.

Neasham's agent license reportedly has been reinstated, and he can now try to rebuild his insurance business. I suspect he learned a great deal from his five-year harrowing and expensive experience. Further, I think his case serves as an important warning to agents that they must be diligent when selling life insurance and annuities to elderly prospects who may be suffering from dementia.


Thursday, January 23, 2014

No. 24: Phoenix's Detailed January 2014 Filing with the SEC

On January 17, 2014, three days after Moody's Investors Service withdrew its ratings of The Phoenix Companies, Inc. (NYSE:PNX) and two operating subsidiaries (see my blog post No. 21), Phoenix filed a lengthy 8-K (material event) report with the Securities and Exchange Commission (SEC). The company reported on the restatement that caused the company to fall far behind in the filing of the parent's GAAP (generally accepted accounting principles) statements with the SEC and the subsidiaries' audited statutory statements. On the same day, the company issued a less detailed press release. The company announced
an unaudited estimated pre-tax decrease of $250 million to total stockholders' equity reported at June 30, 2012 as a result of its previously announced GAAP restatement. The decrease was primarily driven by a GAAP accounting requirement that the company record additional universal life reserves over the restatement period to cover expected losses that otherwise would have been recorded in future periods.
Phoenix said it expects to file its 10-K for 2012 with the SEC by March 31, 2014 and become a "timely SEC filer" with the filing of its 10-Q for the second quarter of 2014. The company said it is assessing its disclosure controls and procedures and internal control over financial reporting. The company said that, in its 10-K for 2012, it expects to report multiple material weaknesses in its internal controls.

Phoenix described its efforts to avoid having the New York Stock Exchange delist the company's stock. The company also described its efforts to obtain bondholder consents following violations of debt covenants caused by the delayed filings with the SEC.

Monday, January 20, 2014

No. 23: The Nasty War over Governance at the NAIC

The late Robert E. Dineen was born in Syracuse, New York (where I was born), received his law degree at Syracuse University (my alma mater), and practiced in a Syracuse law firm. Later he served as Superintendent of the New York State Department of Insurance for seven years. He became a vice president of Northwestern Mutual in 1950, and its president in 1965. When he retired in 1968, he became a consultant to the National Association of Insurance Commissioners (NAIC). He created the first central office of the NAIC, in Milwaukee. After his departure, the central office began a huge expansion, and later moved to Kansas City, Missouri. Dineen was a giant in the history of insurance in the U.S., and I think he would have been appalled by the nasty governance war now engulfing the NAIC.

A Little History
State regulation of insurance in the U.S. is the result of an historical accident. Elizur Wright lived in Boston. Therefore, when he began his push for an insurance regulatory agency, he did so in Massachusetts. Once Massachusetts created an agency, New York State followed suit, and state regulation of insurance was off and running.

Each state created its own financial statement blanks for insurance companies to complete, and the differences among the statements were a headache for companies operating nationally. They pushed for federal regulation, but lost the battle in 1868 when the U.S. Supreme Court handed down its famously absurd decision in Paul v. Virginia that insurance was not commerce. The companies then pushed for creation of the National Convention of Insurance Commissioners (NCIC) to develop uniform statement blanks. The NCIC began operations in 1871, and the blanks it developed were called "convention blanks." In 1939 the NCIC changed its name to the NAIC. The Paul decision was finally reversed in 1944, in U.S. v. Southeastern Underwriters. The latter decision promptly led to the 1945 passage of the McCarran-Ferguson Act, which preserved state regulation.

Problems with the NAIC
To say that the post-Dineen NAIC has had major problems is a serious understatement. Here I mention four in which I was involved.

In 1978, the NAIC created an advisory committee on manipulation (I call it "actuarial manipulation" or "actuarial hanky panky"). The committee was created because of articles I wrote, but I was not invited to serve on the committee. Later, at my insistence, the committee was reconstituted and I became a member. The committee was dominated by its industry members, and nothing significant was accomplished. See the January 1985 issue of The Insurance Forum.

In 1980, the life insurance cost disclosure task force of the NAIC released a proposed new life insurance cost disclosure model regulation. The proposal and accompanying report were excellent. However, the industry attacked the proposal viciously, arranged for the two authors of the proposal to be fired by the NAIC, arranged for the commissioner who chaired the task force to be fired by his governor, and arranged for the report to be shelved. See the January 1981 issue of The Insurance Forum.

In 1985, I began a long struggle to obtain access to the secret results of the NAIC's Insurance Regulatory Information System (IRIS). It required several lawsuits, but eventually I obtained access to the data. Part of IRIS thereafter became available to the public. See the December 1987 issue of The Insurance Forum.

In 2002, the NAIC took action to end free and unrestricted public access to the financial statements of insurance companies. Prior to that time, the public always had access to the statements in the state insurance departments. The NAIC asked the states to allow it to take over the handling of the statements. Most states, led to believe that the NAIC would continue to make the statements freely available to the public, agreed to the change. Now I cannot get the statements without agreeing to restrictions imposed by the NAIC on use of the data. Because I refuse to sign any such agreement, I must obtain statements I need from confidential sources. See the October 2003 issue of The Insurance Forum.

The Leonardi Letter
On December 11, 2013, Connecticut Insurance Commissioner Thomas B. Leonardi wrote a blistering three-page letter to his fellow commissioners about NAIC governance issues. Here is the first paragraph:
"We have met the enemy and he is us!" This famous line from the comic strip Pogo aptly describes the current state of governance at the National Association of Insurance Commissioners. And it comes at a time when our national state-based system of regulation is under perhaps its most critical set of threats and challenges at home (with the ascent of the Federal Insurance Office and the growing regulatory authority of the Federal Reserve) and abroad (at the International Association of Insurance Supervisors and the Financial Stability Board). The recent decision by some of our leadership to decline an invitation to meet with the President of the United States on critical insurance matters was bad enough. But to immediately provide a copy to the national press of a misguided and irresponsible letter criticizing the decision to accept President Obama's invitation makes clear that, in spite of these external threats, the biggest challenge we face is the dysfunction in our own organization. To quote Commissioner Chaney [Mississippi]: "I am shocked and appalled to put it mildly at the reaction" and Commissioner Kreidler [Washington State]: "I am appalled and embarrassed for the NAIC. This could be so bad that it might be the pivotal point we later recognize that doomed state based regulation. Talk about a self inflicted wound!" If we cannot fix these governance issues, then others, including industry and the Federal Government, would be right to question whether we are up to the task of regulating the largest insurance market in the world.
Commissioner Leonardi discussed seven examples of the governance issues. They are under these subtitles: (1) the cult of the "imperial presidency," (2) the myth of the "officers' leadership" role, (3) elections, (4) leadership, (5) ultra vires actions, (6) cronyism, and (7) the lack of understanding of the role and responsibilities of a fiduciary.

A few days later, at a meeting of the NAIC's executive committee during the NAIC's December meeting, Commissioner Leonardi made a motion to hire an outside consulting firm to conduct a governance review of the NAIC. The executive committee rejected the motion and shut down debate on the issue. Many commissioners believe that a review is needed, but think the idea should first be considered by the NAIC's governance committee. To put it mildly, the NAIC is facing a mess.

General Observations
I think the NAIC does not have a governance problem. Rather, I think the NAIC lacks competent leadership. As partial evidence, consider the stupidity of rejecting an invitation to meet with the President of the United States. That action ranks up there with the decision to engage in political retaliation by creating massive traffic jams with a four-day closure of two traffic lanes at the New Jersey approach to the George Washington Bridge, the world's busiest bridge.

I am making Commissioner Leonardi's letter available as a complimentary PDF. Send an e-mail to and ask for the Leonardi letter.

Thursday, January 16, 2014

No. 22: A Devastating Setback for Life Partners

Life Partners, Inc. (Waco, TX) is an intermediary in the secondary market for life insurance policies and the operating subsidiary of Life Partners Holdings, Inc. (NASDAQ:LPHI). In January 2012, the Securities and Exchange Commission (SEC) filed a civil complaint against LPHI and others. The jury trial is set for January 27, 2014, before Senior U.S. District Judge James R. Nowlin. (SEC v. LPHI, U.S. District Court, Western District of Texas, Case No. 1:12-cv-33.)

In November 2013, an important development occurred when Judge Nowlin issued an Order denying LPHI's motion for partial summary judgment. Incorporated in the Order is a ruling that is devastating for LPHI and its officers.

Judge Nowlin's Order
On September 23, 2013, in the current SEC lawsuit against LPHI, the company filed a motion for partial summary judgment. Among other points, and in support of its argument that the court lacks jurisdiction in the case, LPHI asserted that its life settlements are not "securities" under federal securities laws. LPHI cited the infamous 1996 decision of the U.S. Court of Appeals for the D.C. Circuit in the case of SEC v. Life Partners. In that old ruling, a two-to-one decision by a three-judge panel, the D.C. Circuit held that LPHI's life settlements displayed most but not all the characteristics necessary for the life settlements to be deemed securities. The dissenting judge said the life settlements displayed all the necessary characteristics. On November 19, 2013, Judge Nowlin issued an Order denying LPHI's motion for partial summary judgment. He ruled, among other points, that LPHI's life settlements are securities. Here are excerpts:
Viatical Settlements are securities, and even if they are not, there is more than enough evidence to support Plaintiff's claim that Defendants made misleading statements to shareholders and the public that were material.
Defendants next argue that life settlements are not securities under federal securities laws. In support of this position, Defendants cite a single case from the D.C. Circuit. Although the 5th Circuit [encompassing Texas] has not yet directly addressed the question of whether viatical settlements are securities as defined by federal law, the holdings of the Court of Appeals for the D.C. Circuit are not binding upon this Court. Additionally, the thrust of persuasive authority cuts against the D.C. Circuit's 1996 opinion in SEC v. Life Partners....
While Defendants only cite to the D.C. Circuit's opinion in Life Partners, Defendants did not manage to cozen the Court into thinking that Life Partners is the only case on point. Indeed, since the D.C. Circuit handed down Life Partners, several other federal courts have subsequently examined the same question and declined to adopt the D.C. Circuit's position....
[Blogger's notes: Judge Nowlin cited the 2005 decision of the 11th Circuit in SEC v. Mutual Benefits and the 2004 decision of the Northern District of Ohio in Wuliger v. Christie. According to the 2003 edition of Merriam-Webster's Collegiate Dictionary, "cozen" means "to deceive, win over, or induce to do something by artful coaxing and wheedling or shrewd trickery."]
On November 21, 2013, LPHI filed a motion for reconsideration, again asserting that life settlements are not securities, and again citing the D.C. Circuit's 1996 decision. On December 3, 2013, when he denied the motion for reconsideration, Judge Nowlin again ruled that life settlements are securities, and again rejected the 1996 decision.

Delayed Disclosure
LPHI did not file an 8-K report to disclose Judge Nowlin's ruling. I follow LPHI's SEC filings, but did not become aware of the ruling until late December while reviewing recent documents in the current SEC lawsuit against LPHI. LPHI finally disclosed the ruling on January 14, 2014, in a discussion of the SEC lawsuit against LPHI in the "Legal Proceedings" section on page 26 of the 30-page 10-Q report for the quarter ended November 30, 2013. Here is the key sentence:
In denying defendants' motion for partial summary judgment, the court held that the life settlements facilitated by Life Partners, Inc. were securities under Federal Law, despite the fact that (i) Life Partners, Inc. is not a defendant in the case, (ii) the SEC did not allege or argue that the life settlements were securities, and (iii) the offer and sale of our stock is not at issue in the case.
LPHI should have stopped with the words "Federal Law," because the three points that follow are nonsense. First, LPHI and Life Partners are indistinguishable. Second, LPHI argued that its life settlements are not securities. Third, although it is not the major thrust of the case, possible insider trading of LPHI stock is an issue.

A similar recent incident illustrates, in LPHI's words, the significance of a ruling that life settlements are securities. On August 28, 2013, as reported in the November 2013 and December 2013 issues of The Insurance Forum, a Texas state appellate court ruled that "the viatical settlements sold by Life Partners are investment contracts, as a matter of law, under the Texas Security Act and meet the definition of 'security.'" LPHI disclosed that ruling more than two weeks later in an 8-K report filed on September 13, 2013. In that report, LPHI said it would appeal the decision, and also said:
Should the decision ever become final, it would result in a material adverse effect on our operations and require substantial changes in our business model.
I think Judge Nowlin's Order is even more significant than the state appellate court's ruling, because it opens up the possibility that LPHI and its officers could be charged with violations of federal securities laws. That is why I think Judge Nowlin's Order is devastating for LPHI and its officers.

LPHI's delayed disclosure of Judge Nowlin's Order is not only surprising but also ironic. In my blog post No. 15, I discussed a legal victory for LPHI, which the company disclosed immediately in an 8-K report. That is how I learned about it and was able to report on it quickly. LPHI apparently discloses good news immediately and delays disclosure of bad news.

Warnings about the Future
In the recent 10-Q report, LPHI sounded warnings about the significance of the SEC lawsuit against the firm and about a life settlements trust that is in default. These two items are in the "Risk Factors" section on page 27 and are followed by detailed explanations:
The SEC enforcement proceeding has profoundly affected our operations and caused substantial losses, which has adversely affected our working capital and liquidity. It is important that the proceeding is timely resolved in our favor.
We have invested in a life settlements trust, whose secured loan is in default. The resolution of the default could cause the loss of our investment and in possible claims against us.
The Dividend Situation
According to LPHI's June 2013 proxy statement, Brian D. Pardo, LPHI's chief executive officer and a defendant in the current SEC lawsuit against LPHI, beneficially owns slightly over half the outstanding shares (9.4 million out of 18.6 million). Other officers and directors together own 376,000 shares. Pardo Family Holdings Ltd. (PFH) owns all but 14,000 of Pardo's shares. The proxy statement says PFH is located in Waco, Texas. However, according to an August 2009 Form 4 (the most recent Statement of Changes in Beneficial Ownership) filed with the SEC, PFH is located in Gibraltar, a British overseas territory.

Although LPHI incurred net losses in nine of the last eleven quarters, and despite the company's precarious financial condition, the company has continued to pay dividends. Here are the details:

Net Income
05/31/11 $ –874 20
08/31/11 –323 20
11/30/11 –1,083 20
02/29/12 –843 10
05/31/12 1,037 10
08/31/12 –1,849 10
11/30/12 –754 10
02/28/13 –1,311 10
05/31/13 1,677 5
08/31/13 –1,793 5
11/30/13 –939 5

For the eleven quarters combined, Pardo received dividends of about $11.75 million (9.4 million shares multiplied by $1.25 per share). That dwarfs the compensation he received for his services. According to the June 2013 proxy statement, he received total compensation of about $571,000 for the fiscal year ended February 28, 2013, $526,000 for 2012, and $1,080,000 for 2011.

As mentioned, LPHI's 10-Q report showing financial results for the quarter ended November 30, 2013 was filed on January 14, 2014. Nonetheless, in an 8-K report filed on December 17, 2013, LPHI announced a dividend of five cents per share (about $470,000 for Pardo) for that quarter.

My Recent Articles About Life Partners
My only previous article about the SEC's current lawsuit against LPHI is in the April 2012 issue of The Insurance Forum. Other recent articles about Life Partners are in the November 2012, December 2012, November 2013, and December 2013 issues.

Availability of Judge Nowlin's Order
Given the significance of Judge Nowlin's 21-page Order, I am making it available as a complimentary PDF. Send an e-mail to and ask for Judge Nowlin's Order.


Wednesday, January 15, 2014

No. 21: Moody's Withdraws Its Ratings of Phoenix

On January 14, 2014, Moody's Investors Service said it has withdrawn all the ratings it had assigned to The Phoenix Companies, Inc. (NYSE:PNX): the Caa1 senior unsecured debt rating of Phoenix, the Ba2 insurance financial strength ratings of Phoenix Life Insurance Company and PHL Variable Insurance Company, and the B1 debt rating of Phoenix Life's surplus notes. The ratings had been placed under review for possible downgrade on June 17, 2010. Moody's said:
Moody's has withdrawn the ratings because it believes it has insufficient or otherwise inadequate information to support the maintenance of the ratings.... Phoenix has been unable to file GAAP statements since the second quarter of 2012 due to a need to restate its GAAP financial statements for the years ended 2011, 2010, and 2009 and quarterly statements during 2011 and the first and second quarters of 2012.
Phoenix Life and PHL Variable hold A. M. Best financial strength ratings of B with a stable outlook (assigned August 28, 2013). They also hold Standard & Poor's financial strength ratings of BB– with a negative outlook (assigned February 12, 2013).

In 2009, Phoenix stopped providing Fitch Ratings with nonpublic information and ceased paying annual rating fees. Fitch continued to rate Phoenix based on public information until July 2013, when it withdrew all its ratings.


Monday, January 13, 2014

No. 20: An Interesting Letter from a Reader

When I announced early in October 2013 that I was ending publication of The Insurance Forum, I offered subscribers back issues of their choice to meet my obligation for undelivered issues. I owed three issues to Robert H. Harmon, CLU, ChFC (Salt Lake City), a long-time subscriber and friend. He asked me to select the issues, which I did. I knew he had seen them when they were published a decade ago, but I also knew he would want to reread them. In response he sent this letter:
Thank you for the issues you sent. I thoroughly reread them. I admit, however, that rereading "Conseco's Assault on Universal Life Policyholders" in your December 2003 issue was like ripping off the scab of a previously healed wound! Your brilliant and thoroughly researched description of what Conseco did to its policyholders by eliminating the previously undisclosed "R-factor" brought back unhappy memories of what happened to many of my family members and cherished clients.
I thought I had done a remarkable job by selling more than 300 of those policies, which originally were issued by Massachusetts General and later were acquired by Conseco. In addition to meeting with fellow agents around the country, I had visited the Mass General home office, met with several members of top management, and was convinced I would be providing a great service by selling those policies to everyone I knew. It turned out to be the most heart wrenching experience of my business life. I eventually realized I had been betrayed in the worst possible way. I learned a lot from the experience, and since then I have been happy selling policies issued by reputable companies.
I began my life insurance sales career in 1956 after receiving an MBA from UCLA. Except for those unhappy years with Mass General and Conseco, this has been a great business. I am delighted to still be a part of it.
You have had a positive and strong influence on my business life. I am deeply grateful for the unique way in which you have been on the cutting edge of bringing news about what is really going on in our great industry.


Thursday, January 9, 2014

No. 19: A STOLI Criminal Case in Federal Court in California

On July 20, 2013, a federal grand jury in San Diego handed up a 23-count indictment against four individuals in a case involving numerous stranger-originated life insurance (STOLI) policies. The defendants are Byron Arthur Frisch, Kristian Marcus Giordano, Kasra Sadr, and Brenda N. Barrera Merriles. The defendants are charged with one count of conspiracy to commit mail fraud and wire fraud, eight counts of mail fraud, and fourteen counts of wire fraud. The case, which I learned about only recently, has interesting connections to my blog post No. 16 about a STOLI civil case in federal court in Utah. (U.S.A. v. Frisch et al., U.S. District Court, Southern District of California, Case No. 3:13-cr-2774.)

Nature of the Charges
The indictment charges the defendants with deceiving life insurance companies into issuing large life insurance policies to unqualified applicants, obtaining millions in commissions, and selling the fraudulently obtained policies to innocent purchasers. To accomplish those purposes, the defendants, among other things, 
recruited elderly individuals to apply for life insurance policies with death benefits ranging from $1.5 million to $9.5 million with the promise that there would be no cost to the applicant; promised applicants that they would receive two years of coverage at the face value of the life insurance policy, followed by a payment of a part of the sale price of the policy when it was sold to a third party after two years; [and] prepared and submitted to life insurance companies applications for life insurance that intentionally contained false representations and omitted material facts regarding the applicant's net worth, income, source of premium payments, and intent to sell the policy....
Companies and Individuals
The indictment shows in tables the names of certain companies and individuals who sent or received funds by mail or wire. They are "Lincoln B Life Insurance Co.," "Principal Life Insurance Co.," "Producers Group," "Advanced Planning Services," "Cavalier Associates," "Sadr and Barrera," "Washington Mutual Bank," "Principal Financial Group," "Spartan Marketing," "Byron A. Frisch," "Gio3 Group," "K. Giordano," "Bank of America," "Wells Fargo Bank," "US Bank," and "California Bank & Trust."

Names of insureds are not shown but are indicated by initials. Applications are mentioned for policies of $8 million for RMG, $9.5 million for GH, $5 million for DG, $6 million for VC, $4 million for LP, $4 million for TSF, $1.5 million for JDA, $3 million for KH, $3 million for SDC, $3 million for VL, $3 million for RM, and $1.5 million for WS. In addition to fraudulent applications, the examples mention concealment of the identity of the party paying the premiums.

Status of the Case
Pleas of not guilty were entered and the defendants were released on bond. The case was assigned to District Judge Janis L. Sammartino. The trial date is February 7, 2014. 

Connections to a Civil Case in Utah
In my blog post No. 16 dated December 30, 2013, I discussed a civil case in federal court in Utah. The plaintiff was PHL Variable Insurance Company, a unit of Phoenix Companies, Inc. Here are some connections between the PHL case and the Frisch case:
  • In my discussion of the PHL case, I mentioned the San Diego law firm of Sadr & Barrera. The principals of the firm are defendants in the Frisch case. 
  • Frisch was deposed in the PHL case. Unfortunately the transcript is under seal in the court file on the PHL case.
  • Frisch played football at Brigham Young University (BYU) in Provo, Utah. (Later he played professionally with the Tennessee Titans, Dallas Cowboys, New York Giants, and San Francisco 49ers.)
  • Sheldon Hathaway, whose family trust was the defendant in the PHL case, lives in Payson, Utah, near Provo.
  • In my discussion of the PHL case, I mentioned Brock Diediker. He played football at BYU.
  • In my discussion of the PHL case, I mentioned Gabriel Giordano. He played football at BYU.
  • Kristian Marcus Giordano is a defendant in the Frisch case. It seems likely that he is related to Gabriel Giordano.
The Indictment in the Frisch Case
I am making the 12-page indictment in the Frisch case available as a complimentary PDF. Send an e-mail to and ask for the Frisch indictment.

Monday, January 6, 2014

No. 18: Comments from Readers and Others about Universal Health Care

My blog post No. 12 entitled "The Expanded and Improved Medicare For All Act of 2013" (the Conyers bill), which also mentioned the Patient Protection and Affordable Care Act of 2010 (PPACA), generated some diverse responses. There were those who oppose universal health care. For example, Robert Bland, CLU, said:
I respectfully disagree about the need for socialized medicine and the destruction of the private practice of medicine in the U.S. We did the Amtrak and Post Office dance for decades, and mirroring those failures with one-sixth of the entire economy would be a disaster as socialized medicine is in every country that has it.
Mr. Bland went on with horror stories about long waits in Canada for routine tests that take only days in the U.S. He also said kings and queens come to the U.S. for critical medical care.

On the other hand, there were those who support universal health care. For example, Alan Press, CLU, said:
I agree with you that a single-payer system is the only solution and that the Conyers bill is unlikely to pass. However, I am not quite as pessimistic as you are about the future. The PPACA is a good step but it does not adequately address increased costs and the additional medical infrastructure, both of which will be required to provide care for those previously uninsured.
On December 5, 2013, Colin Powell, a long-time Republican, spoke in Seattle at a fundraiser for prostate cancer research. Among other prominent positions, he is a former Secretary of State, a former Chairman of the Joint Chiefs of Staff, and a retired four-star U.S. Army general. According to an article in the Puget Sound Business Journal, he expressed strong support for universal health care. He acknowledged his family's favorable experience with health care provided for the U.S. military. He said both he and his wife had swift, effective treatment for serious health problems and never had to fear whether they could afford the care they needed. He also said:
We are a wealthy enough country with the capacity to make sure that every one of our fellow citizens has access to quality health care. [Let's show] the rest of the world what our democratic system is all about and how we can take care of all of our citizens.
Providing universal health care necessarily will place pressure on the delivery system. However, I am confident that the medical education resources of our great nation are capable of expanding the supply of physicians and nurses, and that our construction industry is capable of expanding medical facilities to meet the demand. I cannot accept the idea that a major portion of our population must be denied access to adequate health care.


Thursday, January 2, 2014

No. 17: Caramadre Sentenced to Six Years in Prison

Chief Judge William E. Smith of the U.S. District Court in Rhode Island recently sentenced Joseph A. Caramadre to six years in prison in a bizarre case about which I have written in The Insurance Forum. Judge Smith also sentenced Raymour Radhakrishnan, an employee of Caramadre's firm, to one year and a day in prison. Edward Maggiacomo and Edward Hanrahan were unindicted co-conspirators. They worked with Caramadre, cooperated with the government, and were not charged. Radhakrishnan placed his faith in Caramadre, did not cooperate with the government, and was charged. (U.S.A. v. Caramadre and Radhakrishnan, U.S. District Court, District of Rhode Island, Case No. 1:11-cr-186.)

In the June 2009 issue of The Insurance Forum, I wrote in general terms about stranger-originated annuities as a vehicle for money laundering. In the April 2010 issue, I discussed civil lawsuits filed by Transamerica and Western Reserve against Caramadre, Radhakrishnan, Maggiacomo, and Caramadre's firm. The complaints alleged that the defendants, using deceptive newspaper advertisements, located terminally ill persons, gave them small cash payments characterized as charitable donations, tricked them and their families into allowing investors to purchase large variable annuities on the lives of the ill persons, arranged for the annuities to provide guaranteed minimum death benefits and other features favorable to the investors, arranged for the investors to pay the premiums and be the beneficiaries, and allowed the investors to profit significantly from the deaths of the ill persons without risk of loss.

In November 2011, the U.S. Attorney in Rhode Island charged Caramadre and Radhakrishnan with 65 counts of wire fraud, mail fraud, conspiracy, identity fraud, aggravated identity theft, and money laundering. Caramadre was also charged with one count of witness tampering. The indictment described not only the variable annuity scheme but also a "death-put bond" scheme. In the latter scheme, a corporate bond was purchased jointly by an investor and a terminally ill person, with right of survivorship. The bond was purchased at a price well below face value. At the death of the ill person, the investor redeemed the bond at full face value.

In November 2012, the trial began. It was expected to last four months. On the first four days, the government presented 14 witnesses, whose testimony was devastating to the defendants.

At the beginning of the fifth day of the trial (a Monday), in a stunning development, the defendants pleaded guilty to one count of wire fraud and one count of conspiracy. Judge Smith closely questioned the defendants about the plea agreements that had been hammered out over the weekend, accepted the pleas, ruled the defendants guilty, set a sentencing date, and terminated the trial. The government agreed to recommend prison terms of not more than ten years and move for dismissal of the other charges at the time of sentencing. The defendants stipulated to a host of facts outlining the scope of their wrongdoing.

In January 2013, although Caramadre had sworn under oath at the plea hearing that he was satisfied with his legal representation, he fired his attorneys and retained new counsel. Then, in another stunning development, he filed a motion to stay all proceedings to permit the defendants to file a motion to withdraw the guilty pleas. Caramadre's public relations firm released this statement from him:
When I pled guilty in November, I did so relying on the advice of my lawyers, and because as a husband and a father I hoped the immediate end of the trial would alleviate the serious health issues that several members of my family were experiencing as a result of the trial.
However, to enter a guilty plea to something that I did not do, simply to relieve the pressure of a 3 1/2 year criminal process, was wrong. I am innocent of the allegations leveled by the federal government against me. In the coming days, I will be asking the Court to allow me to withdraw my plea, and for the opportunity to get my day in court, wherein I can actually defend the false and misguided accusations against me.
Judge Smith denied the motion to withdraw the guilty pleas. He called the effort "bizarre, without merit, and a cynical attempt to manipulate the judicial process." He ordered Caramadre jailed immediately because of flight risk, and delayed sentencing.

Caramadre filed a motion to reconsider the detention order; Judge Smith denied the motion. Caramadre appealed the denial; the U.S. Court of Appeals for the First Circuit affirmed the denial.

Sentencing Memoranda
In its sentencing memorandum, the government asked that Caramadre be imprisoned for ten years, the maximum under the plea agreement. Caramadre asked for two years in prison followed by two years of home confinement and 3,000 hours of community service during the home confinement.

The government asked that Radhakrishnan be imprisoned for eight years. Radhakrishnan asked for one day of prison, one year of home confinement, and 2,000 hours of community service.

Letters to Judge Smith
According to press reports at the time of sentencing, Judge Smith received 89 letters requesting leniency for Caramadre. The letters were not in the electronic court file, and could be viewed by the public only at the court clerk's office in Providence. Some of the letters reportedly were from prominent persons: Thomas J. Tobin, Catholic bishop of Providence; Raymond L. Flynn, former mayor of Boston; and Robert G. Flanders, former associate justice of the Rhode Island Supreme Court.

Caramadre's attorney filed a motion for sentence variation. Attached was a list of charities to which Caramadre contributed. The list did not show dates or amounts. Also attached to the motion was evidence of a contribution of at least $100,000 to United Way, a 1987 award from the Catholic Foundation of Rhode Island, an award from the Diocese of Providence, and an award from Big Brothers of Rhode Island.

On December 16, 2013, Judge Smith sentenced Caramadre to 72 months in prison on one of the counts in the plea agreement and 60 months on the other count, with the terms to run concurrently, three years of supervised release, a $200 special assessment, and no fine. Judge Smith granted the government's motion to dismiss the 64 other counts and the forfeiture allegation, and recommended to the Bureau of Prisons that Caramadre be placed in a facility "as close to Rhode Island as possible." Judge Smith denied Caramadre's motion to be released during the Christmas break, gave him credit for the time he served after being jailed as a flight risk, ordered him to participate in a program of mental health treatment, ordered him to perform 1,000 hours of community service per year for a total of 3,000 hours, and said the "service shall be devoted to the terminally ill elderly in hospice or palliative care or other service for the elderly like Meals on Wheels."

The judge sentenced Radhakrishnan to "12 months and 1 day" on each of the two counts in the plea agreement, with the terms to run concurrently, three years of supervised release, a $200 special assessment, and no fine. Judge Smith granted the government's motion to dismiss the 63 other counts and the forfeiture allegation, recommended to the Bureau of Prisons that Radhakrishnan be placed in the medium-security Federal Correctional Institution (Berlin, NH) "to maintain contact with his family," and ordered him to surrender on January 13, 2014. Judge Smith ordered Radhakrishnan to spend the first six months of supervised release on home detention, perform 1,000 hours of community service per year for a total of 3,000 hours, and said the "service shall be devoted to the terminally ill elderly in hospice or palliative care or other service for the elderly like Meals on Wheels."

U.S. Magistrate Judge Patricia A. Sullivan filed a report about restitution. She said total losses from the scheme were $46.3 million. Losses to insurance companies from 195 annuity transactions were $33.9 million. Insurance companies that suffered losses exceeding $1 million were Nationwide ($11.4), Genworth ($4.0), Security Benefit ($3.0), ING ($2.8), Jefferson National ($2.5), Midland ($1.9), MetLife ($1.7), Hartford Life ($1.5), Pacific Life ($1.3), and Western Reserve ($1.1). Losses to bond issuers from 54 brokerage accounts were $12.4 million. Bond issuers that suffered losses exceeding $1 million were General Motors Acceptance ($4.7), Countrywide Financial ($2.7), and CIT Group ($2.3). Judge Smith delayed ruling on restitution.

Scope of Wrongdoing
To my knowledge, the Caramadre case is the only criminal case thus far relating to stranger-originated annuities. Judge Sullivan, in her report on restitution, and relying on stipulations in Caramadre's plea agreement, described the scope of the wrongdoing as follows:
The Plea Agreement's Statement of Facts lays out the basics of the scheme: Caramadre concocted an insurance annuity investment scheme beginning in 1995 and a death-put bond scheme in 2006; he was joined by Radhakrishnan in July 2007 and they continued until August 2010. The purpose of the scheme was to defraud financial institutions by purchasing variable annuities and death-put bonds with a guaranteed profit by surreptitiously including terminally-ill individuals with no relationship to the real investor as a "measuring life" for the transaction. The object was to fraudulently obtain significant sums of money from insurance companies and bond issuers by making material misrepresentations and omissions. To execute the scheme, the Plea Agreement describes how they fraudulently obtained the identity information and procured signatures from terminally-ill individuals by misrepresenting the true purpose of investment documents and concealing from the terminally-ill individuals and their family members that their identities would be used on annuities and bonds to be purchased by Caramadre and his co-conspirators, clients, and their families, as well as by taking steps to prevent the terminally-ill individuals from understanding the documents they were signing....
Another essential indicia of the scheme, according to the Plea Agreement, was repeated deception of insurance companies, bond issuers, broker-dealers and brokerage houses to prevent them from uncovering the true nature of the transactions. Caramadre, sometimes assisted by or acting through Radhakrishnan or the unindicted co-conspirators, lied to and manipulated his victims: telling insurance companies, broker-dealers and representatives from brokerage houses that some of the annuity owners were friends, clients or acquaintances of the terminally-ill individuals; opening annuities with small deposits that would not attract scrutiny; delaying the filing of death claims to avoid attention; opening brokerage accounts in Radhakrishnan's name although the funds actually belonged to Caramadre; lying about Radhakrishnan's assets and income to qualify him as an account owner; misrepresenting the purpose of the co-owner bond accounts; and falsely stating that some of the funds for the accounts came from the terminally ill....
Notice of Appeal
On December 27, 2013, Caramadre's attorney filed a notice of appeal. It reads:
Now comes the Defendant, Joseph Caramadre, through counsel, and hereby gives notice of appeal to the United States Court of Appeals for the First Circuit of the conviction, sentence, and orders in the above-referenced matter.
The minute entry about the December 16 sentencing hearing states: "Court verifies that the deft [defendant] has waived his right to appeal, pursuant to the plea agreement." The November 19 plea agreement states:
Defendant hereby waives Defendant's right to appeal the convictions and sentences imposed by the Court, if the sentences imposed by the Court are at or below the government's maximum recommended sentence.
It remains to be seen whether Caramadre will actually file an appeal and, if so, what he appeals. No longer does anything about this bizarre case surprise me.

Articles about the Case
In addition to the previously mentioned June 2009 and April 2010 issues of The Insurance Forum, I wrote about the Caramadre case in the March 2012, February 2013, April 2013, and October 2013 issues. The Providence Journal and ProPublica reported often about the case. When the defendants were sentenced, The New York Times and the Associated Press reported on the case.