Monday, February 24, 2014

No. 33: Ohio National's STOLI Lawsuit

In April 2010, Ohio National Life Assurance Corporation filed a civil lawsuit in federal court against ten defendants involved in stranger-originated life insurance (STOLI). In December 2010, the company filed an amended complaint adding three defendants. In October 2012, the company filed a motion for summary judgment (MSJ). In November 2012, two defendants filed MSJs. In February 2014, the judge issued an order largely granting Ohio National's MSJ and largely denying the defendants' MSJs. I decided to discuss the case because I think it illustrates the distortions, misconceptions, gullibility, and sheer ignorance that permeate the STOLI market. (Ohio National v. Douglas Davis et al., U.S. District Court, Northern District of Illinois, Case No. 1:10-cv-2386.)

The Defendants
Attorney Douglas W. Davis (Malibu, CA) was the initial trustee of five irrevocable life insurance trusts (ILITs) that are the subject of the lawsuit. Those trusts and Douglas Davis are among the 13 defendants in the case. The ILITs were in the names of Chicago residents Charles M. Bonaparte, Sr., Shirlee Davis, Theodore R. Floyd, Mary Ann Harris, and Robert S. Harris.

Paul Morady, a southern California resident and the central figure in the case, is an intermediary and premium financier in the STOLI market. He is the owner of Camden Investment Holdings, a California corporation in suspended status. He also owned Security Pacific Premium Financing, an Illinois corporation involuntarily dissolved in 2008.

Mavash Morady, a southern California resident and wife of Paul Morady, is an insurance producer. She owns American Pacific General Agency (APG). In 2006, she obtained an Illinois agent's license and became an Ohio National agent. In April 2010, Ohio National said she materially breached her agent's contract, fined her almost $192,000 (the commissions on seven policies), and terminated her agent's contract.

Shirlee Davis, a Chicago resident, is the mother of Douglas Davis. She is the named insured in a $1 million Ohio National policy and a $750,000 Lincoln National policy. Both were issued in 2007.

Theodore R. Floyd, a Chicago resident, is the named insured in a $400,000 Ohio National policy and a $600,000 AXA Equitable policy. Both were issued in 2007.

Steven Egbert, a California resident, is successor trustee of the Bonaparte ILIT. Thomas M. Tice, a California resident, is successor trustee of the two Harris ILITs. Christiana Bank & Trust Company (Wilmington, DE) is successor trustee of the Shirlee Davis ILIT.

The Complaint
Against all the defendants, Ohio National sought a declaratory judgment, damages, and equitable relief. The company alleged fraud by Douglas Davis and Mavash Morady; violation of the Illinois Consumer Fraud and Deceptive Practices Act by Douglas Davis; breach of contract by Mavash Morady; unjust enrichment by Douglas Davis; and civil conspiracy by Douglas Davis, Mavash Morady, Paul Morady, Shirlee Davis, and Theodore Floyd.

The Depositions
I reviewed many briefs filed in the Ohio National case and the depositions of Paul Morady, Mavash Morady, and Douglas Davis. It was gratifying that, in contrast to many STOLI cases where depositions are sealed, they are publicly available in the Ohio National case.

Paul Morady comes across as knowledgeable about STOLI, grappling with the complexity of STOLI transactions, clever, evasive, unprincipled, and in it for the money. Two excerpts from his deposition are in Appendix A below.

Mavash Morady comes across as knowing nothing about life insurance in general and STOLI in particular. She signed life insurance applications supposedly as the writing agent, but the information was inserted in the applications by others. Two excerpts from her deposition are in Appendix B below.

Douglas Davis comes across as naive about life insurance in general and STOLI in particular. In Appendix C below, instead of excerpts from his deposition, I show his answers to two questions I asked him.

Judge Durkin's Order
When the Ohio National case was filed in April 2010, it was assigned to U.S. District Judge Virginia M. Kendall. In June 2012, the case was reassigned to U.S. District Judge John Z. Lee. In February 2013, the case was reassigned to U.S. District Judge Thomas M. Durkin.

On February 7, 2014, Judge Durkin issued a memorandum opinion and order. I was impressed not only by his excellent description of the case but also by his strong grasp of it. I think he "gets it."

With regard to Ohio National's MSJ, Judge Durkin declared that the five Ohio National policies were void ab initio (from the beginning) because they were procured without an insurable interest in the insureds' lives. He ruled that Paul Morady and Mavash Morady were liable for civil conspiracy, that Mavash Morady was liable for fraud for breach of her agent's contract with Ohio National, and that Ohio National could retain the premiums on four of the policies. However, he ordered Ohio National to refund to Egbert the premiums Egbert paid on the Bonaparte policy because Egbert was not complicit in the scheme perpetrated by Paul Morady, Mavash Morady, and Douglas Davis.

With regard to Egbert's MSJ, Judge Durkin ruled that the Bonaparte policy was void ab initio, but he ordered Ohio National to refund to Egbert the premiums Egbert paid on the Bonaparte policy. Douglas Davis and Mavash Morady did not file any opposition to Ohio National's MSJ.

Judge Durkin denied Paul Morady's MSJ, which was filed pro se (without the assistance of an attorney). Paul Morady argued that the policies were valid and that there was no civil conspiracy. In the order, in a comment that needs to be considered in relation to the second excerpt in Appendix A below, Judge Durkin illustrated (with citations omitted) how "lucrative" Paul Morady's "program" was:
Taking the Bonaparte policy as an example, Paul Morady paid Bonaparte $6,000. Paul Morady also paid the first premium on this policy of $16,040. Paul Morady then sold the Bonaparte policy to Egbert for $69,512, for a potential net profit of $47,472.
I am offering the 23-page order as a complimentary PDF. Send an e-mail to with a request for Judge Durkin's order.

My General Observations
Participants in the STOLI market often assert that the following are not material to a life insurance company's underwriting decision on whether to issue a proposed policy: (1) the purpose of the proposed insurance, (2) the proposed insured's intent to borrow to pay the premiums on the proposed policy, (3) the proposed insured's intent to sell the proposed policy to investors (speculators) in the secondary market, (4) the proposed insured's net worth and income, and (5) the proposed insured's existing life insurance and other life insurance currently applied for. The assertions are false because all those items are material to an underwriting decision. The source of such assertions is a mystery to me.

I think the Ohio National case raises at least two important questions. First, when will state insurance regulators begin to pay close attention to the extent of the fraud perpetrated on insurance companies, investors (speculators), insurance consumers, and the general public by participants in the STOLI market? Second, when will the unacceptable practices of participants in the STOLI market become widely recognized as a form of criminal wrongdoing?

Appendix A: Excerpts from Deposition of Paul Morady
Paul Morady gave a full-day sworn deposition in Chicago on June 28, 2012. He was questioned by Jacqueline J. Herring of Smith, von Schleicher & Associates, a firm retained by Ohio National. Paul Morady was not represented by counsel. The excerpts below are from pages 16-20 and 156-160 of the 279-page transcript.
Q. What was the nature of the business you discussed with Mr. Davis?
A. My background is insurance premium financing and I'm an expert in it.
THE REPORTER: "And I'm" what?
THE WITNESS: An expert in premium financing. And I wanted to see if I could premium finance some of his clients' insurance business or insurance policies.
Q. And by "his clients," you mean Douglas Davis's clients?
A. Yes.
Q. Okay. And what do you mean by a client of Douglas Davis?
A. Douglas Davis, as I understood, he is an estate attorney, an estate planner, and represents clients as an attorney and acts as a trustee for them -- family trustee, an individual trustee
 -- for his clients.
Q. And so what was the business you were going to be doing with Mr. Davis?
A. I said to him, "If they own or have an insurance policy issued to them but not paid, I'm willing to lend them money or cause a loan to them so they could purchase the insurance." Further, I mentioned I have contacts. I can help them sell their interests if they wish to.
Q. Sell their interest in the policy?
A. It's a conceptual thing you're asking me; but the concept is the insured is a donor of the policy, not the owner nor the beneficiary.
Q. Did you say "donor of the policy"?
A. Yes. Donor of life it's called. They donate their life into an irrevocable insurance trust and their beneficiary is usually a family member or someone who has interest in their life, such as a friend, family, attorney, partner, business partner. These are the kinds of interested parties in somebody's life.
Q. And the concept of donating the life, where does that concept come from? I haven't heard that term before.
A. Well, my research, through the major law firms I've retained
Q. Mm-hmm.
-- was that the structure -- it's an acceptable structure in Illinois at that time which should include a donor of a life into a policy. And once the insurable interest is intact, the owner of the policy and/or the beneficial interest holder of that policy, under the Supreme Court of the United States, is allowed to borrow, sell, loan, trade as his personal asset. It's just like owning a condominium or a house that you would own. And I'm a lender. I lend money to people like you who are going to pay it back.
Q. Okay. I'm going to back up and get some more detail from you on that. One of the things you said was once the insurable interest is attached. What does that mean?
A. "Intact," that's what I said.
Q. Once the insurable interest is intact?
A. Correct.
Q. What does that mean?
A. That means once the policy is issued by an insurance carrier and the beneficiary of that insurance policy is granted an insurable interest in the donor, then that insurable interest becomes intact.
Q. What is an "insurable interest"?
A. An individual's participation with someone who is purchasing a life policy, such as a business partner, wife, son, cousins, friends. These are the types of people who have an insurable interest in somebody's life if that individual wants to make them the beneficiary or pick him up as beneficiary through the trust as it's allowed.
THE REPORTER: I didn't hear, "as it's allowed"?
THE WITNESS: Yes, as it's allowed in the trust documents.
Q. At what point does that insurable interest become intact?
A. At the time when the policy has been issued and delivered to the trust, which is the owner of the policy, but not necessarily paid. It could be not still paid, but it's issued. So once the policy is issued, the insurable interest is intact.
Q. Whether the premium has been paid or not?
A. Correct. The owner of the policy has a period of time to decide if they want to pay for it or not. That does not preclude the policy not to be assuredly [insurable?] interest intact.
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Q. Okay. And the e-mail above that -- still on page 71657 -- is that an e-mail that you sent on September 21, 2007, to Regan Brown, George Jarkesy, Jerry Sexton, and others?
A. Yes.
Q. Okay. And in your e-mail, No. 2 and No. 3, you're asking why the insured has to be part of the transaction. Explain that.
A. Well, the insured was not the seller of the beneficial interest in the ILIT.
Q. Okay. So you didn't want the insured to know about the transaction?
A. No. I didn't say that. I said is there a need for him. Is there a reason since this is not the seller or she's not the seller.
Q. Was there a reason why you didn't want to disclose the deal to the insured?
A. No.
Q. Okay. Why were you asking about that?
A. I just wanted to know their position, if they need or required or is a need because it's an additional step to take, a burden to take.
Q. Okay. On the first page of Exhibit Paul Morady 27, which is page 71656, the e-mail at the bottom of the page, which is from Regan Brown to you and others dated September 21, 2007, did you receive that e-mail?
A. Yes.
Q. And at the top of that page is an e-mail from you to Regan Brown and others dated September 21, 2007. Is that an e-mail that you sent?
A. Correct.
Q. Okay. And in the second paragraph of your e-mail, you state, "The insured will not be a party to my indemnification nor are they to know how much is being paid here." Is there a reason why you didn't want the insured to know how much was being paid to you?
A. Not necessarily. I just felt it is not related to them. They're not the sellers.
Q. Why did you want to keep that information from the insured?
A. Because maybe the holder of the beneficial interest did not want it disclosed to them.
Q. And why would that be if the holder of the beneficial interest was somebody that you said was a close family member or friend, somebody that would be interested
A. Sure.
-- in the insured?
A. Well, again, I'll use you as an example. Maybe you don't want your son to know all of your transactions. Maybe you do. I don't know.
Q. Okay. Did any of the holders of the beneficial interest tell you that they didn't want the insured to know what they were doing?
A. Not necessarily. I don't recall if they did or not. I'm just trying to keep my confidentiality with the people involved.
Q. So the person whose death was going to result in a payout didn't need to know how much was being paid?
A. No.
Q. I'd like to hand you Exhibit Paul Morady 26, which is Bates labeled CGP-CAS-CLA 0071644. This is an e-mail dated September 21, 2007, from you to Jerry Sexton and Julian Goldberg, correct?
A. Yes.
Q. And this is, again, you saying, "Jerry, I do not want to get the insured into my private sale transactions." Any particular reason why you considered these your private sales?
A. If Camden Investment Holdings was holding the beneficial interest in them, it is private.
Q. Okay. And Camden was selling the beneficial interest for substantially more than it had been purchased from the original holder of the beneficial interest, correct?
A. Only to the amount of repayment of the loan plus the interest and cost, but not much more.
Q. How much would that typically be, the interest and the cost?
A. It depends on the duration of the promissory note times the interest rate
Q. All right.
-- plus legal costs and so on.
Q. If it's less than a few months, what would that typically be?
A. It would be, I would say
 -- I don't know. Maybe it comes to 1 percent sometimes, one-third of the 3 percent, something like that.
Appendix B: Excerpts from Deposition of Mavash Morady
Mavash Morady gave a full-day sworn deposition in Chicago on June 27, 2012. She was questioned by Ms. Herring. Mavash Morady was not represented by counsel. However, Paul Morady sat in and occasionally interrupted. Ms. Herring reminded him that he was not Mavash Morady's attorney and was not allowed to testify. The two excerpts below are from pages 126-128 and 253-256 of the 300-page transcript.
Q. You submitted applications for life insurance to Ohio National that you knew were going to be premium financed policies, correct?
A. I can't answer that.
Q. Why not?
A. Because I wasn't in premium financing business. I was just APG brokerage.
Q. And you knew some of those Ohio National policies were premium financed?
A. I cannot answer that. I wasn't premium finance.
Q. You testified earlier that you knew some of those Ohio National policies would be premium financed. Are you changing that?
A. I'm not changing that. Some need premium finance and Ohio National also did premium finance.
Q. You knew someone
A. If we were doing wrong, Ohio National would have just let us know right at that time.
Q. You knew some of those
A. They knew as well.
Q. When you say "as well," you're saying you and Ohio National both knew premium financing?
A. As far as I know, if it did premium finance, Ohio National knew exactly what we were doing.
Q. Because you told them? How would they know?
A. I didn't tell them because I wasn't in premium finance.
Q. How would they know?
A. Through my agent. I don't know. I don't know. I don't want to talk about my agent, what they said and what they did.
Q. You knew some of these policies were premium financed. If you would answer the question
A. No.
-- I don't need to keep asking it.
A. You just keep asking the same thing over and over.
Q. Because you won't answer.
A. You're confusing me, and I don't want to be confused.
Q. Did you know that some of the Ohio National policies that you were submitting applications for would be premium financed?
A. I'm not going to answer that because I already told you everything that I know.
Q. Did you know that the applications you were submitting for Ohio National policies would be premium financed?
A. You repeat as much as you want. I don't know.
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Q. So we're back on. What is AVS [American Viatical Services] underwriting?
A. To let us know
 -- AVS?
Q. Yes.
A. I don't remember that. That was a long time ago.
Q. They determined life expectancy for a proposed insured, correct?
A. Yes.
Q. So they'll prepare a report letting you know what somebody's life expectancy is?
A. Correct.
Q. Why was APG requesting to know the life expectancy of the five proposed Chicago insureds?
A. The insurance carrier needs that life
 -- they ask for all that information and life expectancy for the insured for the policy.
Q. Ohio National asked you to go through a separate underwriting company to determine life expectancy?
A. No. We want to make sure who we're dealing with and we want to know what their life expectancy is to fill out the application.
Q. So you would obtain the life expectancy information before you filled out the application?
A. During
 -- same time to make sure, like, everything we're doing on the right track.
Q. And what information would the life expectancy give you for the applications?
A. I don't know.
Q. So we went through the applications earlier, and I didn't see that you were ever asked any questions about life expectancy.
A. No, I didn't. But I want to make sure what is the life expectancy with any life policy.
Q. And why would you want to know that?
A. Like other things you want to know to make sure, like, to get the right insured for the policy.
Q. What impact would the life expectancy have on the insurance policy you apply for?
A. Like, for example, some of the insurance carrier[s] don't accept
 -- We have to make sure what age and how healthy they are. We have to have that life expectancy to figure out if they're okay for the application or insurance carrier to accept.
Q. So was it your understanding that the life insurance companies weren't determining the life expectancy for themselves, they expected you to do it through a separate company?
A. No, no, no. We just wanted to know what's going on and what insurance carrier asking us to
 -- what kind of life expectancy insurance carrier asked for.
Q. Which insurance carriers asked
 -- Let me narrow that. Did Ohio National ever ask you to determine somebody's life expectancy while submitting an application for life insurance?
A. I don't remember.
Appendix C: Comments by Douglas Davis
On February 11, 2014, I e-mailed Douglas Davis and asked him to confirm he is the lead defendant named in the Ohio National case. He said he is, and expressed interest in any questions I might have because "I am being portrayed as a vagabond when our goal was to help those who did not have access to Life Settlements legally obtain said access." I asked him two questions: (1) When and from whom did you learn about STOLI? (2) Why do you believe that a person can "legally obtain" access to STOLI by submitting materially false information on an application to a life insurance company?

In answer to the first question, Davis said: "I was introduced to the life settlement concept by Mr. Morady who was also named in this lawsuit." In answer to the second question, he said:
I disagree with the court's interpretation that any of the defendants engaged in material omissions designed to obtain insurance policies. Ohio National claimed that the failure to set forth that some of the applicants had applied previously for insurance policies was a material omission. An individual is not prohibited from purchasing more than one insurance policy. In fact it is common among wealthy individuals to have more than one policy. Insurance policies are property and one can purchase more than one for investment purposes. Whether they had purchased policies prior to applying for insurance from Ohio National was not material to the issuance of the insurance policy. An individual's income is also not an underwriting factor that is a major determinant by an insurance company when it decides to issue a policy. Ohio National, after discovering that it had issued policies to middle class African Americans who intended to sell them, looked for any possible reason to void those policies because it knew that if the concept became popular they would have policies issued where the risk was now on them as most of those policies were not going to lapse if they were sold compared to the normal lapse rate among African Americans which is around 60%-80%. Furthermore at the time these policies were issued there were no prohibitions in Illinois regarding what insurance companies deem stranger originated life insurance policies. We feel that the court made several errors in their decision to grant parts of Ohio National's MSJ. For example, how can there be a conspiracy to sell STOLI policies when they were not illegal. We obtained an opinion from a reputable Illinois law firm that told us there was no such prohibition. How can there be fraud regarding matters that were not material to the issuance of policies? We feel that these and other issues will be resolved in our favor at the Appellate level.