Friday, December 11, 2015

No. 132: Stranger-Originated Life Insurance—More on the Wertheim Criminal Case

In No. 131 (December 9, 2015) I discussed an appellate opinion affirming the conviction and sentencing of three stranger-originated life insurance (STOLI) promoters on federal criminal charges in the Binday case. I also briefly mentioned the Wertheim case, which I discussed in detail in the October 2013 issue of The Insurance Forum, and which I discuss further here. I also discussed deterrence, an important issue in both the Binday and Wertheim cases. (See U.S. v. Wertheim, U.S. District Court, District of New Hampshire, No. 1:12-cr-136.)

Background of the Wertheim Case
On September 27, 2011, a federal investigation of Imperial Holdings Inc. (Boca Raton, FL), a firm that was in the life insurance premium financing business, became public when federal agents raided Imperial's headquarters. On April 30, 2012, Imperial and the U.S. Attorney in New Hampshire entered into a non-prosecution agreement under which Imperial terminated its life insurance premium financing business, terminated its employees involved in that business, admitted to and accepted responsibility for certain improper conduct, and paid a monetary penalty of $8 million. Also, Jonathan Neuman, Imperial's president and chief operating officer, resigned.

On October 31, 2012, the U.S. Attorney charged Robert Wertheim with one count of conspiracy to commit mail fraud and wire fraud. On February 20, 2013, the U.S. Attorney charged two brothers—Abraham Kirschenbaum (AK) and Maurice Kirschenbaum (MK)—with one count of conspiracy to commit mail fraud and wire fraud. AK and MK were tax advisers.

On February 26, 2013, Wertheim pleaded guilty and signed a plea agreement. On March 7, 2013, AK and MK pleaded guilty and signed plea agreements. Wertheim said that he had been working with Imperial, that he had recruited AK and MK to identify prospects for the STOLI scheme, and that the scheme had involved lying on life insurance applications. There were long delays in sentencing the defendants.

Recent Developments
On May 22, 2015, the U.S. Attorney, with the assent of MK, filed a motion to dismiss the conspiracy charge against MK. According to the motion, MK had been diagnosed with cancer in March 2014, by March 2015 the condition had become more serious, and currently MK was undergoing aggressive treatment. Further details about MK's medical condition were filed under seal. Attached to the motion was a deferred prosecution agreement under which the government may refile the criminal charge at its discretion within five years, at which time MK would, among other things, plead guilty and waive any defense of double jeopardy. U.S. District Court Judge Paul Barbadoro granted the motion.

On May 27, 2015, Judge Barbadoro held back-to-back sentencing hearings for Wertheim and AK. Each hearing lasted 55 minutes, including sealed discussion of the ongoing investigation in which it was anticipated that Wertheim and AK would cooperate and might even testify. The transcripts became readily available in the public court file on September 24, 2015. I obtained them on December 7, 2015.

The government sought probation and minimal financial penalties for Wertheim and AK. Home confinement was also mentioned as a possibility instead of prison time. Among the arguments for probation and minimal fines were the promptness with which they had pleaded guilty, their remorse, and their willingness to assist the government in prosecuting and testifying against other defendants who might be criminally charged in the ongoing investigation.

Judge Barbadoro, however, felt Wertheim and AK should serve at least some prison time for deterrence purposes. The judge deviated downward from the sentencing guidelines and ordered each of the two defendants to serve 18 months in a minimum-security facility, followed by two years of supervised release. They were each fined $7,500, and AK forfeited $1 million.

Judge Barbadoro agreed to defer for one year the need for Wertheim and AK to begin serving their prison time. The judge left open the possibility that the government and/or the defendants would refile within a year for a further reduction in—or even elimination of—prison time as a result of Wertheim's and AK's further cooperation in the ongoing investigation. Therefore the judge ordered Wertheim and AK to report to prison on May 27, 2016.

General Observations
The transcripts of the sentencing hearings are fascinating. They vividly illustrate how the U.S. Attorney, the defense attorneys, and Judge Barbadoro wrestled with the problem of how to arrive at appropriate sentences. Included in the discussions were references to the need for deterrence, the past and potential future cooperation of the two defendants in the ongoing investigation, and other factors that had to be considered.

As I said in No. 131, I do not understand how deterrence can be effective without broad publicity about the punishment. In that regard, I am aware of no major media coverage of the Wertheim case. Nor am I aware of any coverage of the case in the insurance press beyond my article in The Insurance Forum.

Nowhere in the documents I reviewed was there specific reference to what ongoing investigation might require further cooperation and even testimony from the two defendants. However, because Wertheim and AK had worked with Imperial, it seems likely that the ongoing investigation involves current and/or former officials of Imperial.

Available Material
I strongly urge interested persons to read the 32-page transcript of the Wertheim hearing and the 42-page transcript of the AK hearing. They are in large type, double-spaced, and easy to read. I am making them available in separate complimentary PDFs. E-mail and ask for the transcripts of the two May 2015 sentencing hearings in the Wertheim case.