Tuesday, September 16, 2014

No. 67: AIG Declares War against Coventry and the Buergers

On September 5, 2014, Lavastone Capital, a unit of American International Group (AIG), filed a complaint in federal court against Coventry First, an intermediary in the secondary market for life insurance. Later that day, Coventry filed a complaint in state court against Lavastone.

The Lavastone Complaint
The text of the Lavastone complaint is 151 pages long. There is an 89-page appendix showing "selected predicate acts" relating to 80 "fraudulently marked-up policies."

The plaintiff is Lavastone Capital LLC, an indirect subsidiary of AIG. The nine defendants are: Coventry First LLC (Fort Washington, PA), a wholly owned subsidiary of Montgomery Capital; LST I LLC and LST II LLC (Fort Washington, PA), wholly owned subsidiaries of Montgomery Capital; LST Holdings Ltd. (Dublin, Ireland), a wholly owned subsidiary of Montgomery Capital; Montgomery Capital Inc. (Fort Washington, PA), which is wholly owned by Alan Buerger, Constance Buerger, Reid Buerger, and/or other members of their families or trusts of which they are beneficiaries; Alan Buerger; Reid Buerger, son of Alan Buerger; Constance Buerger, wife of Alan Buerger; and Krista Lake, wife of Reid Buerger.

Lavastone makes 13 claims for relief. The first two claims, against all defendants, are for violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act and for conspiracy to violate RICO. Three other claims, against all defendants, are for fraud, fraudulent inducement, and unjust enrichment. Six other claims, against Coventry, are for breach of contract, breach of the implied covenant of good faith and fair dealing, indemnity, negligent misrepresentation, faithless servant doctrine, and breach of fiduciary duty. Two other claims, against all defendants except Coventry, are for aiding and abetting breach of fiduciary duty and tortious interference with contract.

Lavastone seeks general and compensatory damages; treble damages in accordance with statute; injunctive relief, including an order permitting Lavastone to unwind its relationship with Coventry in an orderly fashion at Lavastone's direction; and a series of declaratory judgments. Lavastone also seeks disgorgement of compensation and other payments to Coventry; disgorgement of moneys received by the defendants as a result of their misconduct toward Lavastone; Lavastone's attorneys' fees and costs; punitive damages; and prejudgment interest. (Lavastone v. Coventry, U.S. District Court, Southern District of New York, Case No. 1:14-cv-7139.)

An Excerpt from the Lavastone Complaint
In the text of the Lavastone complaint, the description of the "Nature of the Case" consists of 14 paragraphs. Here is the first paragraph:
Lavastone brings this action to seek redress for Defendants' egregious criminal scheme to defraud Lavastone out of hundreds of millions of dollars. Lavastone enlisted Defendant Coventry First LLC ("Coventry") with the responsibility of finding attractive life insurance policies ("life settlements" or "Life Policies") for Lavastone to purchase from policyholders on the open market, and paid Coventry more than a billion dollars in fees to do so. In return, Coventry was obligated to convey to Lavastoneat cost, meaning exactly what Coventry paidthe Life Policies that it procured for Lavastone. Instead of fulfilling that obligation, Coventry formed an illegal enterprise with its co-conspirators, including the other Defendants here, in which they abused Lavastone's confidences, bought Life Policies at prices below what it knew in confidence Lavastone would pay to purchase them, "laundered" the Life Policies' titles and purchase prices through affiliated shell companies, and then induced Lavastone to purchase those Life Policies at inflated prices, marked up to approach or reach Lavastone's ceiling, unbeknownst to Lavastone. Defendants' fraudulent conduct breaches not only the Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. §§ 1961-1968, but also Coventry's contracts and fiduciary duties owed to Lavastone. Moreover, it has resulted in Defendants being unjustly enriched at Lavastone's expense. In sum, Defendants are scam artists whose criminal scheme to defraud Lavastone falls squarely within the very racketeering conduct that the RICO statute was intended to redress.
A Possibly Related Pending Lawsuit
In 2009, Ritchie Risk-Linked Strategies Trading (Ireland) filed a complaint in federal court against Coventry. The Ritchie complaint differs from the Lavastone complaint; however, Ritchie alleges that it suffered significant losses when it was forced into bankruptcy, and that Coventry is responsible for the losses. In November 2013, U.S. District Court Judge Jed Rakoff of the Southern District of New York presided over a ten-day bench trial in the Ritchie case. In December 2013, each party filed proposed post-trial findings of fact, and they also filed a joint stipulated list of admitted trial exhibits. Judge Rakoff has not yet handed down his decision in the Ritchie case. (Ritchie v. Coventry, U.S. District Court, Southern District of New York, Case No. 1:09-cv-1086.)

Lavastone, on the day it filed its complaint against Coventry, filed a "statement of relatedness" that the case is related to the Ritchie case. The Lavastone case has not yet been assigned to a judge, but it was referred to Judge Rakoff as a case that is possibly related to the Ritchie case.

In the Ritchie case, the plaintiff's proposed post-trial findings of fact include an incredibly detailed description of the events that led up to the filing of then New York Attorney General Eliot Spitzer's 2006 civil lawsuit in state court against Coventry. That case was settled in 2009 by then New York Attorney General Andrew Cuomo. (See the January/February 2007, December 2007, and December 2009 issues of The Insurance Forum.)

The Coventry Complaint
The text of the Coventry complaint is 20 pages long. There are five appendixes: a 28-page appendix showing a 2011 arbitration award in a dispute between an AIG subsidiary and a premium finance company, a 245-page appendix showing a 2010 registration statement filed with the Securities and Exchange Commission by Imperial Holdings, Inc., and three "Origination Agreements" between Lavastone and Coventry that Coventry says it will seek to file under seal.

The plaintiff is Coventry, and the defendant is Lavastone. Coventry makes two claims; one is for breach of contract, and the other is for a declaratory judgment. Coventry seeks monetary damages it suffered as a result of Lavastone's breach of the exclusivity provision of the Origination Agreements. Coventry also seeks a series of declaratory judgments. (Coventry v. Lavastone, Supreme Court of the State of New York, County of New York, Index No. 652712/2014.)

An Excerpt from the Coventry Complaint
Coventry's opening description of the "Nature of the Case" consists of eight paragraphs. Here is the first paragraph:
For more than a decade, Coventry First and Lavastone, along with their respective predecessors and affiliates, have been parties to a series of agreements ("Origination Agreements") by which Coventry First acquired life insurance policies on the secondary market and sold them to Lavastone. Lavastone, formerly known as AIG Life Settlements LLC, is an affiliate of American International Group, Inc. ("AIG") and acquired these life insurance policies for the asset portfolio of the AIG family of companies. Lavastone not only has breached the Origination Agreements, but also wants to change the terms of the deal it made. Thus, after many years of amicable and cooperative dealings under the Origination Agreements, Lavastone's new business team now refuses to honor its obligations. But instead of bargaining for its desired changesand in an effort to escape contractual provisions that affect Lavastone's ability to resell the policies (such as privacy restrictions to protect insureds)Lavastone now accuses Coventry First of breaches. The contractual provisions Lavastone seeks to escape have an estimated value to the portfolio, and to Coventry First, of $700 million. To date, to Coventry First's knowledge, AIG has not revealed these restrictions in its annual securities filings.
"Hank" Greenberg Got It Right in 2001
In May 2005, then Attorney General Spitzer and then New York Superintendent of Insurance Howard Mills filed a civil complaint in state court against AIG, then AIG chairman and chief executive officer Maurice "Hank" Greenberg, and another AIG senior officer. One section of the complaint dealt with "life settlements." The complaint said AIG entered the business with Coventry in 2001, and included the allegation that AIG was falsely reporting income from life settlements as underwriting income. The complaint said: "AIG and Greenberg decided as a public relations matter that it was best not to use the AIG name to handle its life settlements business...." The complaint said Greenberg had expressed this comment in April 2001 to the AIG executive heading up the life settlements initiative: "It seems to me that anybody doing anything in the field stands the risk of adverse PR.... I am uneasy about this." I think Greenberg was right to be "uneasy" about the life settlements business. (See the August 2005 issue of The Insurance Forum.)

General Observations
I believe that the Coventry lawsuit is not a response to the Lavastone lawsuit. Rather, I believe that Coventry knew Lavastone was preparing to file a lawsuit, and that Coventry prepared a lawsuit in advance in order to be able to file it immediately after the filing of the Lavastone lawsuit. Indeed, in news stories published electronically on September 5, after the filing of the Lavastone lawsuit, Alan Buerger, the chief executive officer of Coventry, was quoted as saying he had not yet seen the Lavastone lawsuit. Although I was able to obtain the Coventry lawsuit from the state court late on September 5, I was not able to obtain the Lavastone lawsuit from the federal court until late on September 9.

The Lavastone lawsuit is a sweeping attack not only on Coventry, but also on the Coventry group of companies and the Buerger family. The allegations are so extensive and so detailed that I think the Lavastone lawsuit is an effort to destroy Coventry and the Buerger family. In my opinion, the Lavastone lawsuit is the beginning of an outright war.

I am offering two complimentary PDFs. One is the 151-page text of the Lavastone complaint and the other is the 20-page text of the Coventry complaint. Send an e-mail to jmbelth@gmail.com and ask for the two Lavastone-Coventry documents.