Monday, February 8, 2016

No. 142: Imperial Holdings, Emergent Capital, and the End of a Criminal Investigation into STOLI Premium Financing

On January 4, 2016, Emergent Capital (Boca Raton, FL), formerly Imperial Holdings, announced the end of a criminal investigation into premium financing of stranger-originated life insurance (STOLI). The investigation, led by the U.S. Attorney's Office in New Hampshire (USAO), became public in 2011 when federal agents raided the company's headquarters. I wrote about the investigation in the May 2012, July 2012, and October 2013 issues of The Insurance Forum, and in No. 132 (posted December 11, 2015).

On September 27, 2011, federal agents conducted a surprise raid at Imperial's headquarters in Boca Raton. The same day, the company issued a press release saying some of its employees were under investigation regarding the company's life insurance premium financing business.

On April 30, 2012, Imperial and the USAO 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 civil penalty of $8 million. Also, Jonathan Neuman, Imperial's president and chief operating officer, resigned.

On October 31, 2012, the USAO charged Robert Wertheim with one criminal count of conspiracy to commit mail fraud and wire fraud. Wertheim was one of two co-founders of a company named Premium Finance Group. (See U.S. v. Wertheim, U.S. District Court, District of New Hampshire, Case No. 1:12-cr-136.)

On February 20, 2013, the USAO charged two brothers—Abraham and Maurice Kirschenbaum—with one criminal count of conspiracy to commit mail fraud and wire fraud. They were tax advisers. The USAO said the investigation into others was ongoing.

On February 26, 2013, Wertheim pleaded guilty to the criminal charge and entered into a plea agreement with the USAO. On March 7, 2013, the Kirschenbaums pleaded guilty to the criminal charge and entered into plea agreements with the USAO. Wertheim said he had been working with Imperial, he had recruited the Kirschenbaums to identify prospects for the STOLI scheme, and he and his associates had made false statements in life insurance applications.

May 2015 Developments
On May 22, 2015, the USAO filed a motion to dismiss the criminal charge against Maurice Kirschenbaum. He had been diagnosed with cancer in March 2014, his condition had become more serious by March 2015, and he was undergoing aggressive treatment. Attached to the motion was a deferred prosecution agreement that said the USAO could refile the criminal charge at its discretion within five years. The judge granted the motion to dismiss the charge.

On May 27, 2015, the judge held separate, back-to-back, 55-minute sentencing hearings for Wertheim and Abraham Kirschenbaum, including sealed discussions of the ongoing investigation in which Wertheim and Abraham Kirschenbaum were cooperating. USAO sought probation and small fines for those two defendants. Among the USAO's arguments were the promptness with which the two defendants had pleaded guilty, their remorse, and their assistance in prosecuting others who might be charged.

The judge, however, felt that Wertheim and Abraham Kirschenbaum should serve at least some prison time. He deviated downward from the sentencing guidelines and ordered each of them to serve 18 months in a federal minimum-security facility, followed by two years of supervised release. The judge fined each of them $7,500, and Abraham Kirschenbaum forfeited $1 million. The judge left open the possibility that the USAO and/or the two defendants would refile within a year for a further reduction in, or elimination of, prison time as a result of their continuing cooperation in the ongoing investigation. Therefore the judge allowed them to postpone reporting to prison until May 27, 2016.

Recent Developments
On December 31, 2015, the USAO sent Emergent's attorney a letter saying the investigation is over, the company fully complied with the terms of the April 2012 non-prosecution agreement, and all obligations imposed on the company by the agreement are satisfied. Emergent attached the letter to an 8-K (material event) report filed with the Securities and Exchange Commission on January 4, 2016.

As for the investigation of former Imperial employees, the USAO required civil forfeiture and did not file criminal charges. The ongoing investigation had focused on three individuals who left Imperial in 2011: Jonathan Neuman, Jonathan Moulton, and James Purdy.

On December 31, 2015, the USAO filed a civil forfeiture complaint relating to each individual. However, instead of naming an individual as the defendant, each complaint names a dollar amount as the defendant. The complaints call for civil forfeitures for alleged mail fraud. Each complaint is an "in rem proceeding," which is a legal action directed at property instead of a person. The effect of such a proceeding is to eliminate the person's name from the case name, although the person's name appears in the text of the complaint. [See U.S. v. $5,000,000, U.S. v. $750,000, and U.S. v. $750,000, U.S. District Court, District of New Hampshire, Case Nos. 1:15-cv-526 (relating to Neuman), 1:15-cv-527 (relating to Moulton), and 1:15-cv-528 (relating to Purdy).]

The civil forfeiture complaints relating to the three former Imperial employees are similar in their descriptions of the alleged wrongdoing. For example, here are five paragraphs from the 19-paragraph "Facts" section of the complaint relating to Neuman:
At all relevant times, certain insurance companies required that a prospective insured, and sometimes the Imperial internal life agent, applying for a life insurance policy disclose information relating to premium financing on applications for life insurance policies. These questions typically required the prospective insured to disclose if he or she was using premium financing in connection with the policy.
In certain instances, Neuman knew that answering insurance application questions to indicate that the potential insured was not using premium financing to pay the premiums increased the likelihood that an insurance company would issue the policy. The issuance of a policy, in turn, offered Imperial the opportunity to make a premium finance loan and thereby make a profit.
It was therefore in Imperial's interest that these prospective insureds in the retail non-seminar business indicated on applications that they were not using premium financing to pay insurance premiums. However, in certain instances, such answers were false because the insureds were interested in a life insurance policy only on the condition that the premiums would be financed.
At Neuman's direction, in certain instances, Imperial internal life agents facilitated and/or made misrepresentations on insurance applications that the prospective insureds in the retail non-seminar business were not using premium financing to pay premiums when the insurance carrier was likely to deny the policy on the basis of premium financing.
Neuman profited from this fraudulent scheme by receiving compensation from Imperial in excess of $5,000,000.00. After a discussion with counsel for the government, during which counsel for Neuman was given wire transfer instructions, counsel for Neuman advised in writing that he had arranged for a voluntary payment of the defendant in rem, $5,000,000, to be made to the United States Secret Service on December 30, 2015, and that an agreement has been reached to waive notification of this Complaint under Rule G(4) of the Supplemental Rules for Admiralty Or Maritime Claims And Asset Forfeiture Actions, as well as to allow the United States to move immediately for a Final Order of Forfeiture in this matter.
On January 7, 2016, the USAO filed motions seeking a final order of forfeiture in each of the three cases. The motions refer to the amounts as "voluntary payments" that were made "without admitting liability." On January 8, the judge issued final orders of forfeiture relating to Neuman and Purdy. The judge has not yet issued a final order of forfeiture relating to Moulton.

General Observations
Imperial was required to pay a civil penalty of $8 million and shut down its life insurance premium financing business. Neuman, Moulton, and Purdy lost their jobs but avoided criminal charges. Wertheim and Abraham Kirschenbaum were criminally charged, pleaded guilty, entered into plea agreements with the USAO, and face the possibility of 18-month prison terms that are currently set to begin on May 27, 2016.

It is ironic that headquarters employees who developed the scheme escaped criminal charges, while others pleaded guilty to criminal charges. I believe that the decision not to pursue criminal charges against the former Imperial employees was prompted by the USAO's concern that it might not be able to meet the tough standards of proof that are required to obtain criminal convictions.

Available Material
I am making available a 25-page complimentary PDF consisting of the three articles in The Insurance Forum, three court documents relating to Neuman (the civil forfeiture complaint, the motion for final order of forfeiture, and the final order of forfeiture), and the 8-K report. Email and ask for the February 2016 Imperial package.