Friday, July 17, 2015

No. 110: Aviva, Guggenheim, Allegations of Phony Reinsurance, and a Strange Coincidence

In No. 107 posted June 30, 2015, I wrote about a federal class action lawsuit filed on June 12 against Aviva, Athene, and Apollo alleging phony reinsurance and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). At the time I vaguely recalled a similar lawsuit filed earlier and withdrawn without explanation the next day. I located the earlier lawsuit and found a strange coincidence. The earlier case was against Guggenheim and others. There were differences from the Aviva case; however, the earlier case involved the same plaintiffs' law firms, many of the same plaintiffs' attorneys, similar allegations of phony reinsurance, and similar RICO allegations. Here I update the Aviva case and describe the earlier Guggenheim case.

The 2015 Complaint against Aviva
In No. 107 about the Aviva case, I identified the plaintiffs' attorneys. The defendants' attorneys are Bruce Roger Braun, Hille von Rosenvinge Sheppard, Joel Steven Feldman, Peter K. Huston, and Sarah Alison Hemmendinger of Sidley Austin LLP; and Reginald David Steer and Steven M. Pesner of Akin Gump Strauss Hauer & Feld LLP. The parties have consented to proceed before a magistrate judge, and have agreed that the defendants will answer, move, or otherwise respond to the complaint by August 24. (See Silva v. Aviva, U.S. District Court, Northern District of California, Case No. 5:15-cv-2665.)

The 2014 Complaint against Guggenheim
On February 11, 2014, the plaintiffs' attorneys filed a federal class action lawsuit against Guggenheim and others. The 105-page complaint alleged phony reinsurance transactions with affiliates and participation in a RICO enterprise. The lead plaintiffs were Clarice Whitmore, an Arkansas resident who bought an annuity in 2012 from Security Benefit Life Insurance Company; and Helga Maria Schulzki, a California resident who bought an annuity in 2013 from EquiTrust Life Insurance Company.

The plaintiffs' attorneys in the 2014 case (italics indicate those involved in the Guggenheim case but not involved in the Aviva case) were Steve W. Berman, Sean R. Matt, Elizabeth A. Fegan, and Robert B. Carey of Hagens Berman Sobol Shapiro LLP; Andrew S. Friedman and Francis J. Balint Jr. of Bonnett Fairbourn Friedman & Balint PC; Erin Dickinson and Chuck Crueger of Hansen Reynolds Dickinson Crueger LLC; and Ingrid M. Evans and Elliot Wong of Evans Law Firm Inc.

The defendants in the 2014 case were Guggenheim Partners LLC, Guggenheim Life and Annuity Company, Security Benefit Life, and EquiTrust Life. Other participants in the alleged RICO enterprise were Mark Walter, chief executive officer of Guggenheim Partners and chairman and controlling owner of the Los Angeles Dodgers; Todd Boehly, president of Guggenheim Partners; Robert Patton Jr., client and associate of Walter and Boehly; Paragon Life Insurance Company; and Heritage Life Insurance Company. The docket does not identify the defendants' attorneys because the case ended almost immediately after it was filed. (See Whitmore v. Guggenheim, U.S. District Court, Northern District of Illinois, Case No. 1:14-cv-948.)

The Allegations against Guggenheim
The introduction to the 2014 complaint against Guggenheim contained 30 paragraphs summarizing the allegations. Here were ten of them:
7. This case is about the fraud that Guggenheim and others working in association with it committed to sell Guggenheim Insurers' annuity products to unwitting annuity purchasers, many of whom are elderly, while concealing the adverse effects of their depletion of the funds needed to satisfy the Guggenheim Insurers' long-term obligations to these annuity purchasers.
8. Guggenheim's plan was pernicious: acquire insurance companies weakened by the recession and use them to sell seemingly safe and secure annuity products (particularly annuities with large, upfront premiums) while funneling cash out to Guggenheim and its affiliates, friends and associates rather than holding or reserving it to satisfy their long-term obligations to the annuity holders.
11. In addition to saddling the Guggenheim Insurers with the highly illiquid affiliated promissory notes and billions of dollars of highly illiquid mortgage and other risky asset-backed securities, Guggenheim Chief Executive Officer Mark R. Walter, Guggenheim President Todd L. Boehly, and Guggenheim business associate Robert "Bobby" Patton Jr. used the Guggenheim Insurers as a cash machine to buy the most expensive sports franchise in world history, the Los Angeles Dodgers, with over a billion dollars in policyholders' funds.
13. To accomplish their illicit goals Defendants took a page out of the Enron playbook, creating a fraudulent scheme through complicated accounting machinations that gave the false appearance of financial strength and stability to Security Benefit Life, Guggenheim Life and EquiTrust Life by: (1) moving liabilities off their books to affiliated and secretly affiliated entities (primarily through non-economic "reinsurance" transactions with affiliated entities), (2) inflating their assets by counting already encumbered assets as though they were available to make annuity holder payments, (3) executing billions of dollars of what appear to be essentially uncollateralized loans to affiliated entities or associates and portraying the related-party unsecured paper as assets, and (4) hiding their non-performing assets.
14. At the center of this scheme was a shell game that Defendants hoped no one could follow, where money and liabilities were continuously shifted between companies with whom the Guggenheim Insurers acknowledged an affiliation (Security Benefit Life, Guggenheim Life, EquiTrust Life and Paragon Life Insurance Company of Indiana) and with a separate, secretly affiliated company that Defendants acquired and corrupted to facilitate the fraudulent scheme, Heritage Life Insurance Company (AZ).
18. At the same time Defendants were hiding the Guggenheim Insurers' liabilities, Defendants were also inflating their assets by additional fraudulent accounting machinations.
19. For example, collectively the three Guggenheim Insurers improperly counted as "admitted assets" over $2.59 billion of collateral that was already pledged to repay loans to the Federal Home Loan Banks.
23. In sum, after their acquisition by Guggenheim each of the Guggenheim Insurers was in short order rendered statutorily impaired, each having an essentially negative surplus (which means annuity holder funds were consequently impaired).
25. Flush with their annuity holders' cash, for example, Security Benefit Life and EquiTrust Life paid over $445 million in dividends to their respective Guggenheim parents, over $217 million in management fees to Guggenheim affiliates, and over $55 million in investment fees to Guggenheim affiliates. Additionally, beyond the $5.1 billion the Guggenheim Insurers paid to various affiliates within the Guggenheim family of companies in what appears to be largely unsecured promissory notes, they loaned almost $1 billion to Guggenheim business associates. Perhaps the most perverse aspect of Defendants' fraudulent scheme, however, is the acquisition of the Dodgers by Guggenheim, Walter, Boehly and Patton for $2.15 billion—$1.2 billion of which was financed by policyholder and annuity holder money from the Guggenheim Insurers.
30. Defendants' fraudulent scheme constitutes a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1962(c) and (d). Plaintiffs and the Class have been damaged by Defendants' pattern of racketeering activity because they were misled into purchasing annuities based on material misrepresentations of the financial strength of the issuing companies, annuity products that no reasonable person would purchase if not deceived. This suit is necessary to remedy the injury caused by Defendants' racketeering activity.
The Withdrawal of the 2014 Complaint
The 2014 complaint against Guggenheim was assigned immediately to District Judge Samuel Der-Yeghiayan. (In 2003 President George W. Bush nominated him and the Senate confirmed him.) On February 12, 2014, the day after the complaint was filed, one of the plaintiffs' attorneys filed a notice of voluntary dismissal. The notice contained no explanation. On February 13, the case was dismissed without prejudice.

General Observations
The preparation of the elaborate 2014 complaint against Guggenheim undoubtedly required a major expenditure of resources. I asked one of the plaintiffs' attorneys to explain why the complaint was withdrawn the day after it was filed, but he did not respond. Thus the reason for the abrupt withdrawal of the complaint is a mystery.

Available Material
I am offering a complimentary 172-page PDF consisting of the 105-page complaint against Guggenheim and 67 pages of exhibits. E-mail and ask for the Whitmore/Guggenheim complaint.

At the outset I mentioned No. 107 (6/30/15). I wrote about related matters in Nos. 44 (4/22/14), 66 (8/21/14), 71 (11/6/14), 72 (11/12/14), 73 (11/19/14), 93 (4/17/15), 94 (4/20/15), 99 (5/6/15), 100 (5/11/15), and 109 (7/13/15).