Thursday, January 25, 2018

No. 250: Beneficiary Designations—Another Case Involving the Outrageous Practices of an Insurance Agent

In No. 249 (January 17, 2018) I described a case illustrating how the actions of an insurance agent led to a dispute over who should receive the proceeds of two annuities. While preparing that post, I learned of an earlier case in which an insurance agent used outrageous practices to victimize two elderly widows. Here I discuss the earlier case.

Richard Klinkner
Richard J. Klinkner (Two Rivers, Wisconsin) received his agent's license in 1983. He worked for New York Life Insurance Company (NYL) until 1992, when he became an independent agent. His victims were Mrs. Mildred Kaufman and Mrs. Janet Hlinak (both of Manitowoc, Wisconsin).

Mrs. Mildred Kaufman
Mildred was born in 1914. She and her husband had three children and five grandchildren, and were longtime Klinkner clients. Mildred paid the bills and mostly handled finances when her husband was alive and after he died in 2000. For a number of years Klinkner handled Mildred's investments and financial affairs. He also prepared her tax returns, for which she paid him. In 2003 Mildred appointed her daughter-in-law her power of attorney (POA) for finances. In 2006 Mildred moved into an assisted living facility. She died in 2008 after the hearing in this case.

In 1990 Klinkner sold Mildred a whole life insurance policy issued by NYL. In February 2006 Klinkner hand wrote a beneficiary change letter for the policy. The letter asked that her "friend" Klinkner be named beneficiary. NYL recorded the change effective on the date of the letter. Klinkner later testified that Mildred wanted him to be the beneficiary, that she signed the letter, that he took it to his office to make a copy, that he mailed it back to Mildred to send to NYL, and that he did not know whether NYL received the letter until an attorney representing Wisconsin's Office of the Insurance Commissioner (OIC) contacted him. A few days after the proceedings in this case began, Mildred named her daughter-in-law and grandchildren beneficiaries of the NYL policy.

In 2002 Klinkner sold Mildred, who was aged 88 at the time, a deferred annuity issued by National Western Life Insurance Company (NWL). It was funded by surrendering four annuities issued by Jackson National Life Insurance Company (JNL) and five annuities issued by a Conseco company. Mildred incurred substantial surrender charges.

Mrs. Janet Hlinak
Janet was born in 1923. She and her husband had no children. Her husband handled finances until he died in 1999. Shortly before her husband died, Janet appointed her husband's brother her POA for finances. Janet and her husband were longtime clients of Klinkner. He prepared tax returns for them, and for Janet after her husband died. They paid Klinkner for that work.

Janet has an 8th grade education and has always had difficulty with basic math skills. She does not know what bills to give the cashier to pay for a $15 lunch, and she generally does not understand what things cost or are worth. She does not know how to write checks, and she signs her name after someone writes the checks for her. She takes care of herself and her home, and lives by herself.

After Janet's husband died, Klinkner, at his own suggestion, came to her house each month to write checks to pay her monthly bills. She signed the checks and Klinkner mailed them. Each month she paid Klinkner $100 in cash (or by checks Klinkner wrote) for that work.

Klinkner sold Janet two life insurance policies issued by NYL (and was servicing another), one policy issued by a Conseco company, and three annuities issued by JNL. One of the JNL annuities was paid for by surrendering the Conseco policy. On the JNL application, which Janet signed and Klinkner mailed, Klinkner named himself the beneficiary.

On another JNL annuity, Klinkner typed a letter to JNL from Janet stating that she "would like Mr. Richard J. Klinkner listed as beneficiary on this annuity" and that her "husband before he passed away on April 10, 1999 had asked Mr. Klinkner to act as my caretaker until the day I die." Janet signed the letter and Klinkner sent it to JNL. At various times Klinkner typed letters asking NYL to list her "friend/caretaker" Klinkner beneficiary on the NYL policies.

In October 2000 Janet signed a will making bequests of $4,000, naming Klinkner beneficiary of the rest of her estate, and naming him her personal representative. She later testified she put Klinkner in her will because she thought he would handle her finances but did not want him to have all her money when she died. She later signed a new will.

In January 2001 Janet revoked the appointment of her brother-in-law as her POA for finances. Two weeks later she appointed Klinkner her POA for finances. In 2007, after the proceedings in the case began, she appointed her sister-in-law her POA for finances.

The Complaint
In August 2006 Mildred's daughter-in-law filed a complaint about Klinkner with the OCI. In June 2007 OCI issued a hearing notice alleging that Klinkner violated insurance laws by naming himself beneficiary on multiple life insurance policies he had sold to two different consumers, that he made false or misleading statements to OCI when asked whether he was named beneficiary on any customers' insurance policies, that he made false or misleading statements to consumers, and that he made unsuitable sales of life insurance policies and annuities to two elderly consumers. Klinkner generally denied the allegations.

The ALJ's Proposed Decision
In 2008, after amended hearing notices and pre-hearing conferences, an administrative law judge (ALJ) held a six-day hearing—three days in late May and three days in early July. In April 2009 the ALJ issued a proposed decision to be considered by the Wisconsin insurance commissioner. The ALJ recommended that the insurance commissioner issue an order that would revoke Klinkner's license as an insurance agent, require him to forfeit $7,000 for naming himself beneficiary on life insurance policies and for other violations, require him to pay Janet and her current POA $6,513 as restitution for the net loss on surrender charges she incurred when he replaced her JNL annuities, and require him to pay Mildred $67,000 as restitution for his profit from the sale of the NWL annuity.

Commissioner Dilweg's Final Decision
In August 2009, after he considered the objections filed by Klinkner and by the OCI, then Commissioner Sean Dilweg issued his final decision. He discussed the parties' objections and made numerous findings of fact. He ordered that Klinkner's license be revoked, that Klinkner pay $8,000 to the state of Wisconsin for six violations of insurance laws, that Klinkner pay $10,000 to the state of Wisconsin for repeated violations of another insurance law, that Klinkner pay $27,137 to Janet and her current POA for the surrender charges she incurred when Klinkner replaced her JNL annuities, that Klinkner pay Mildred's estate $17,592 for the surrender charges she incurred when Klinkner replaced her JNL annuities and Conseco annuities, and that Klinkner pay $67,000 to the state of Wisconsin for the profit he made from the sale of the NWL annuity to Janet.

Klinkner's Appeals
Klinkner appealed Commissioner Dilweg's decision to a Wisconsin circuit court. The judge affirmed the commissioner's decision except for reimbursement of the surrender charges Mildred incurred in the surrender of her Conseco annuities. The judge remanded that portion of the decision to the commissioner with the request that the commissioner either remove that requirement or explain further why the replacement was unsuitable.

Klinkner appealed the circuit court judge's ruling to the Wisconsin Court of Appeals. A three-judge panel affirmed the ruling.

Commissioner Nickel's Final Decision on Remand
In July 2011 then Commissioner Ted Nickel issued his final decision on remand. He explained why replacement of the Conseco annuities was unsuitable, and he retained the requirement that Klinkner reimburse Mildred for the surrender charges she incurred when Klinkner replaced her Conseco annuities.

General Observations
I am deeply troubled by the Klinkner case, for two reasons. First, the facts of the case describe outrageous actions by Klinkner. Second, the amount of time and effort expended by numerous regulatory employees, by numerous court employees, and by all the others involved in this case must have been staggering. Cases like this one and the one described in No. 249 cause me to ask how there can ever be enough resources to protect the public adequately against wrongdoing in the insurance business.

Available Material
I am offering a complimentary 19-page PDF consisting of Commissioner Dilweg's August 2009 final decision (10 pages) and Commissioner Nickel's July 2011 final decision on remand (9 pages). E-mail and ask for the January 2018 package about the Klinkner case.


Wednesday, January 17, 2018

No. 249: Beneficiary Designations and How an Insurance Agent's Actions Can Create a Dispute

On December 29, 2017, the Milwaukee Journal Sentinel carried an article by reporters Cary Spivak and Mary Spicuzza entitled "Who gets $1.6 million inheritance—relatives of a virtual hermit or his financial adviser?" The case focuses on Blanche Berenzweig, an insurance agent in Wisconsin, and illustrates how an agent's actions can lead to a major dispute over who should receive annuity proceeds.

The Berenzweig Case
LeRoy Ern, a Wisconsin resident, purchased an annuity from Lincoln Benefit Life Company in October 1993 with an initial deposit of about $33,000. He named his estate the primary beneficiary. Berenzweig signed the application as agent. Less than two weeks later Ern made an additional deposit of about $67,000 into the annuity.

In May 2006 Ern applied for an annuity with Integrity Life Insurance Company. He named his sister the primary beneficiary, and Berenzweig was the agent. Less than two weeks later he transferred about $166,000 from an ING annuity into the Integrity annuity as an initial deposit.

In November 2009 Berenzweig faxed a Broker Dealer Change of Record form to Lincoln Benefit. On the fax cover sheet, she hand-wrote: "Please make me agent of record for [this contract]. I have tried repeatedly to become the agent on this contract. My insurance license is attached w/this fax."

Less than two weeks later Ern executed three estate planning documents: a last will and testament, a durable power of attorney for property and finances, and a durable power of attorney for health care. Attorney Susan M. Drewitz drafted, witnessed, and notarized the estate planning documents. At the time Drewitz shared office space with Berenzweig, who referred Ern to Drewitz and accompanied him on his first meeting with Drewitz.

In the last will and testament, Ern named Berenzweig his personal representative and beneficiary of all tangible personal property and the residual estate. In the durable power of attorney for property and finances, Ern appointed Berenzweig his attorney-in-fact. In the durable power of attorney for health care, Ern designated Berenzweig his primary health care agent.

In April 2010, when Ern was aged 86, he transferred about $315,000 from a bank account to the Lincoln Benefit annuity. About two weeks later a request for beneficiary change was submitted to Lincoln Benefit naming Berenzweig primary beneficiary, identifying her as "friend," and naming Ern's estate contingent beneficiary. Two days later a request for beneficiary change was submitted to Integrity naming Berenzweig primary beneficiary, identifying her as "friend," and naming no contingent beneficiary. In April 2015 Berenzweig faxed the durable power of attorney for property and finances to Lincoln Benefit.

Ern's Death
Ern died on April 13, 2016 at age 92. According to the death certificate, the cause of death was "failure to thrive due to or as a consequence of advanced dementia." The interval between onset of the dementia and death was listed as "years." He died at a hospice facility. On May 12 Berenzweig submitted a death claim to Integrity. On May 26 she submitted a death claim to Lincoln Benefit. On May 27 Integrity issued a check for about $277,000 to Berenzweig. On June 15 Lincoln Benefit issued a check for about $734,000 to Berenzweig.

The Dispute
On August 3, 2017 an attorney for some of Ern's surviving family members filed a complaint with the Office of the Commissioner of Insurance (OCI) of Wisconsin. On September 1, based on an agreement among the parties, a Milwaukee County Circuit Court judge issued a temporary injunction that prevented Berenzweig from spending the remaining funds from the proceeds of the annuities.

OCI investigated the case and made the findings that are summarized briefly above. OCI alleged it is an unfair trade practice and a violation of a Wisconsin statute for an agent to knowingly be listed as a beneficiary of a life insurance policy or annuity unless the agent has an insurable interest in the life of the customer. OCI further alleged it had grounds to revoke or suspend Berenzweig's license as an agent and to order forfeiture in the amount of twice the profit gained from the violations.

On September 18 OCI announced a two-day public hearing to be held November 28 and 29 before an administrative law judge (ALJ). The hearing was held.

On December 8 OCI filed its initial brief. OCI requested a seven-part order: (1) permanent revocation of Berenzweig's license as an insurance agent, (2) payment of restitution of $2,022,232.62 (twice the profit from the violations), (3) forfeiture of $3,000 ($1,000 for each of three violations of insurance law), (4) bar of Berenzweig from receiving or retaining any proceeds of the Lincoln Benefit and Integrity annuities, (5) return of the full annuity proceeds to Lincoln Benefit and Integrity, (6) change of beneficiary on the Integrity annuity to provide for the proceeds to be paid to Carole Carter per stirpes (she was the original beneficiary), and (7) change of beneficiary on the Lincoln Benefit annuity to provide for the proceeds to be paid to the brothers and sisters of Ern and the issue of any deceased brother or sister of Ern per stirpes.

On December 29 Berenzweig's attorney filed a response brief. Here are the two concluding paragraphs:
There is no dispute but that Blanche Berenzweig was perhaps the only person in LeRoy Ern's life since the death of his long time girlfriend and her son. Ms. Berenzweig gave him the time of day when others did not. He obviously eschewed his family. She was deemed by Mr. Ern to be the worthy beneficiary of his entire estate. He was a frugal man who amassed significant wealth. Nevertheless, he was fully aware of his financial status and dictated the terms of his investments. Blanche Berenzweig simply carried out his wishes. She also undertook the rather onerous duties associated with his durable power of attorney and health care power of attorney. She looked after LeRoy Ern until his death. She did not violate any of the prohibited practices described under Wisconsin's Administrative Code. Moreover, her actions were excepted from the Code requirements because of the lapse of time, the arms-length nature of the transactions and Mr. Ern's natural affinity towards her. It must not be forgotten that Susan Drewitz and Blanche Berenzweig urged him to find different beneficiaries of his estate. He rejected that and insisted upon Blanche Berenzweig. His knowing intentions must be carried out.
Blanche Berenzweig is a good and honest woman. She has never had a single blemish on her record. The character evidence was unequivocal. This case should be dismissed.
On January 12, 2018 OCI filed its reply brief. Here is the concluding paragraph:
Respondent has placed herself in a dire position. Because she has admitted the conduct constituting three violations of insurance law and faces license revocation and a significant financial penalty, she hopes the reputation testimony from her friends and her time invested in Ern will mitigate the penalty for her conduct. However, the substantial evidence supports the maximum penalty. Respondent abused the trust of Ern and acted in her own self-interest in naming herself the beneficiary of two annuities that she sold and was servicing for Ern. Respondent obtained the financial power of attorney for the purpose of isolating Ern and preserving Ern's finances for the eventual transfer to herself. Respondent's conduct violated the ethical obligations of an insurance agent and she was unjustly enriched $1,011,116.31. The maximum financial penalty and permanent insurance license revocation are warranted.
The ALJ is expected to issue her recommendation within 30 days. Wisconsin Commissioner of Insurance Ted Nickel will then rule on the case. If he rules against Berenzweig, she could appeal the ruling to the Milwaukee County Circuit Court.

General Observations
This is a troublesome case. Ern's relatives did not keep in close touch with him, and it is not known exactly when the dementia set in. The briefs are more detailed than my summary under "The Berenzweig Case" at the beginning of this post. My summary was based on OCI's hearing notice. Berenzweig's attorney portrays her as someone who befriended and aided a lonely, elderly person.

The Wisconsin law prohibiting an agent from being the beneficiary of a client's life insurance policy or annuity in the absence of an insurable interest cannot be ignored. Berenzweig claimed ignorance of the law, but the conflict of interest was obvious. Attorney Drewitz should have refused to prepare the estate planning documents. Berenzweig should have contacted family members and obtained their assistance in caring for Ern. I plan to report further developments in this case.

Available Material
I am offering a complimentary 60-page PDF consisting of OCI's hearing notice (6 pages), OCI's initial brief (16 pages), the response brief prepared by Berenzweig's attorney (21 pages), and OCI's reply brief (17 pages). E-mail and ask for the January 2018 package relating to the Berenzweig case.


Thursday, January 11, 2018

No. 248: Shadow Insurance—An Update Involving Two Surprises

In No. 107 (posted June 30, 2015) I wrote about a federal class action lawsuit filed in June 2015 on behalf of Rachel Silva and Don Hudson, who had purchased Aviva annuities in 2010. The elaborate complaint alleged that Aviva, Athene, and Apollo—together with other companies and individuals—participated in an unlawful Racketeer Influenced and Corrupt Organizations Act (RICO) enterprise involving phony reinsurance with affiliates. (See Silva v. Aviva, U.S. District Court, Northern District of California, Case No. 5:15-cv-2665.)

Since 2015 I had not followed the case. Recently a reader asked what happened to the case, so I decided to write an update. In the process of preparing the update, two developments came as surprises to me.

The Transfer to Iowa
The plaintiffs in the Silva case originally filed their lawsuit in California. The case was assigned to U.S. Magistrate Judge Paul Singh Grewal. In August 2015 the defendants filed motions to dismiss the complaint and transfer the case to Iowa, where most of them were based. In March 2016 Judge Grewal issued an order denying without prejudice the motions to dismiss and granting the motions to transfer the case to Iowa.

The Iowa Case
In Iowa the case was assigned to U.S. District Judge Stephanie M. Rose and U.S. Magistrate Judge Helen C. Adams. In April 2016 the defendants filed a motion to reinstate their motions to dismiss. In May 2016 Judge Adams denied the defendants' motion. Shortly thereafter Hudson filed an amended complaint against Athene and Apollo. Silva was no longer a plaintiff, and Aviva, whose U.S. business had been acquired by Athene, was no longer a defendant. In June 2016 the defendants filed a motion to dismiss the amended complaint.

In November 2016 Judge Rose issued an order staying the defendants' motion to dismiss the amended complaint. In her order, she mentioned a pending decision in a similar case in the U.S. Court of Appeals for the Eighth Circuit, which covers Iowa, Missouri, and five other midwestern states.

In May 2017 Judge Rose lifted the stay and granted the defendants' motion to dismiss the amended complaint. In the order she relied on the Eighth Circuit ruling. (See Hudson v. Athene, U.S. District Court, Southern District of Iowa, Case No. 4:16-cv-89.)

The Ludwick Case
The Eighth Circuit case to which Judge Rose referred was indeed similar to the Hudson case. The appellate ruling grew out of a district court case in Missouri. (See Ludwick v. Harbinger, U.S. District Court, Western District of Missouri, Case No. 4:15-cv-11.)

In April 2015, two months before Silva filed her RICO complaint in California, Dale Ludwick filed a class action RICO complaint against Harbinger Group, Inc., Fidelity and Guaranty Insurance Company, Raven Reinsurance Company, and Front Street Re (Cayman), Ltd. The case was assigned to U.S. Chief District Judge David Gregory Kays. In February 2016 Judge Kays dismissed the complaint. Here, without citations, are the fifth paragraph and the concluding paragraph of his order:
Plaintiff alleges that F&G [Life Insurance Company], Harbinger, and Harbinger's chairman and CEO, Philip A. Falcone, created a fraudulent accounting scheme to hide F&G's liabilities and artificially inflate F&G's reported assets. This scheme ignored the Statutory Accounting Principles promulgated by the National Association of Insurance Commissioners designed to protect annuity holders and certify that F&G had assets sufficient to meet current and future annuity holder obligations. Harbinger and Falcone orchestrated a series of transactions using wholly-owned captive subsidiaries and a reinsurance company named Wilton Re to transfer F&G's liabilities from its financial statements. Throughout 2011, 2012, and 2013, F&G created a false appearance of capital adequacy by transferring F&G liabilities to and among entities Raven Re, Front Street Cayman, and Wilton Re. F&G also used these transactions to report its holdings of non-agency mortgage-backed securities in its admitted asset base at cost, rather than at their true market value. Plaintiff contends that, absent these financial maneuvers, F&G would have had to report a negative statutory surplus after its acquisition by Harbinger....
Because the McCarran-Ferguson Act preempts RICO claims, the Court need not address whether Plaintiff has plausibly pled these claims. Plaintiff's complaint fails to state a claim upon which relief can be granted and Defendants' Motion to Dismiss is GRANTED.
The Eighth Circuit Ruling
Ludwick appealed the ruling to the Eighth Circuit. In November 2016 the case was assigned to a three-judge appellate panel consisting of Chief Judge William J. Riley and Circuit Judges Roger L. Wollman and Jane Kelly. (See Ludwick v. Harbinger, U.S. Court of Appeals, Eighth Circuit, Case No. 16-1561.)

In April 2017 the appellate panel, in a unanimous ruling written by Chief Judge Riley, affirmed the district court's dismissal of Ludwick's complaint. Here are the introductory and concluding paragraphs of the appellate ruling:
  • The question in this case is whether letting Dale Ludwick pursue her federal racketeering claims against an insurance company and its affiliates would impair state regulation of the insurance business in Iowa, Maryland, or Missouri. We agree with the district court that it would, and the McCarran-Ferguson Act forbids that result. See 15 U.S.C. § 1012(b). We affirm the dismissal of Ludwick's claims....
  • Litigating Ludwick's RICO claims would interfere with state regulation of the insurance business, and the claims are barred by the McCarran-Ferguson Act. The district court was right to dismiss. We affirm.
General Observations
I was surprised by Judge Kays' ruling and the Eighth Circuit's affirmation for two reasons. First, I was surprised by the involvement of Philip Falcone, about whom I wrote in Nos. 242 (posted November 20, 2017) and 244 (December 11, 2017). The Ludwick lawsuit was filed less than two years after Falcone's August 2013 settlement with the Securities and Exchange Commission. In that settlement he and his company paid civil penalties of more than $18 million, he was barred from the securities industry for at least five years, and he admitted wrongdoing.

Second, I had not heard of cases where the McCarran-Ferguson Act was used to dismiss federal RICO lawsuits. However, based on a review of documents in the Ludwick case, it appears that there have been other such cases. It is sobering to consider the implications for insurance consumers when some state insurance regulators are allowed by other state insurance regulators to deviate significantly from statutory accounting principles adopted by all state insurance regulators.

Available Material
In No. 107 I offered a complimentary PDF containing the Silva RICO complaint. The package is still available. Email and ask for the June 2015 package containing the Silva RICO complaint.

Now I am offering a complimentary 48-page PDF consisting of Judge Grewal's order granting the motion to transfer the Silva case to Iowa (13 pages), Judge Rose's order staying the defendants' motion to dismiss the amended complaint in the Hudson case (2 pages), Judge Rose's order dismissing the amended complaint in the Hudson case (7 pages), Judge Kays' order dismissing the complaint in the Ludwick case (13 pages), and the Eighth Circuit panel's ruling in the Ludwick case (13 pages). E-mail and ask for the January 2018 package relating to shadow insurance and the RICO complaints.


Friday, January 5, 2018

No. 247: Donald Trump and the Emoluments Clauses of the U.S. Constitution—A Further Update

In No. 213 (posted April 14, 2017) and No. 216 (May 4, 2017), I wrote about a lawsuit that Citizens for Responsibility and Ethics in Washington (CREW) filed on January 23 against President Donald J. Trump. CREW filed an amended complaint on April 18 and a second amended complaint on May 10. The amended complaints expanded on the allegations and involved additional plaintiffs. Here I provide a further update. (See CREW v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-458.)

The Judges
The case was assigned initially to U.S. District Judge Ronnie Abrams. President Obama nominated her in July 2011, and the Senate confirmed her in March 2012. On July 11 the case was reassigned to U.S. District Judge George B. Daniels. President Clinton nominated him in August 1999, and the Senate confirmed him in February 2000. No reason for the reassignment of the case was given.

The Amicus Briefs
To say the case has drawn a great deal of attention is an understatement. The case generated many amicus briefs from legal scholars, legal historians, former government ethics officers, members of Congress, and others.

The Motion to Dismiss
On June 9 the defendant filed a motion to dismiss the case. The parties filed briefs in support of and in opposition to the motion. On October 18 Judge Daniels held a conference on the motion. On February 6, 2018, a transcript of the conference will become readily available to members of the public.

The Memorandum and Order
On December 21 Judge Daniels issued a memorandum opinion and order granting the defendant's motion to dismiss the case. Here are five key sentences (without citations) and one footnote from the introductory section of the memorandum opinion and order:
  • Plaintiffs principally allege that Defendant's "vast, complicated, and secret" business interests are creating conflicts of interest and have resulted in unprecedented government influence in violation of the Domestic and Foreign Emoluments Clauses of the United States Constitution.
  • Plaintiffs seek (i) a declaratory judgment declaring that Defendant has violated and will continue to violate the Domestic and Foreign Emoluments Clauses; (ii) an injunction enjoining Defendant from violating the Emoluments Clauses; and (iii) an injunction requiring Defendant to release financial records in order to confirm that he is not engaging in further transactions that would violate the Emoluments Clauses.
  • Defendant argues that Plaintiffs lack standing to sue and moves to dismiss this lawsuit for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure Rule 12(b)(1).
  • Defendant also moves to dismiss this case for failure to state a claim under the Emoluments Clauses pursuant to Federal Rule of Civil Procedure Rule 12(b)(6).
  • Defendant's motion to dismiss for lack of standing under Rule 12(b)(1) is GRANTED.
  • Footnote: Because Plaintiffs' claims are dismissed under Rule 12(b)(1), this Court does not reach the issue of whether Plaintiffs' allegations state a cause of action under either the Domestic or Foreign Emoluments Clauses, pursuant to Rule 12(b)(6). Nor does this Court address whether the payments at issue would constitute an emolument prohibited by either Clause.
A notice of appeal to the U.S. Court of Appeals for the Second Circuit must be filed within 30 days of the ruling, or 60 days if an officer of the U.S. is a party, and an extension may be requested. The timetable for the filing of briefs is set by the appellate court.

A Related Case
In No. 213 I mentioned a related case. On February 10 William R. Weinstein filed a lawsuit on behalf of himself and the U.S. people. He is an attorney, a citizen of the United States and New York State, and a resident of the Southern District of New York. He represents himself and is counsel for a proposed class. Weinstein filed an amended complaint on March 7 and a second amended complaint on June 2.

The defendants are Donald J.Trump, Donald J. Trump, Jr., Eric Trump, and Allen Weisselberg. The latter three defendants are trustees of a publicly described but not publicly named trust. On July 7 the defendants filed a motion to dismiss the case. The case was assigned initially to Judge Abrams, and on July 11 it was reassigned to Judge Daniels. On December 21 Judge Daniels issued a memorandum and order granting the defendants' motion to dismiss the case. (See Weinstein v. Trump, U.S. District Court, Southern District of New York, Case No. 1:17-cv-1018.)

General Observations
I am disappointed and troubled by the failure of the CREW case to survive the defendant's motion to dismiss. However, I think the case is not over, because I believe that CREW will appeal the ruling to the Second Circuit. I do not know whether Weinstein will appeal the ruling in his case. I plan to report further when significant developments occur at the appellate level.

Available Material
I am offering a complimentary 40-page PDF consisting of Judge Daniels' memorandum opinion and order in the CREW case (29 pages) and his memorandum and opinion in the Weinstein case (11 pages). Email and ask for the January 2018 package relating to the emoluments lawsuits against Trump.


Tuesday, January 2, 2018

No. 246: Pension Problems—Lost Pensioners and Stolen Pension Benefits

In recent years I have observed two serious problems facing the pension business. One is lost pensioners. The other is stolen pension benefits. Here I discuss the two problems.

Lost Pensioners
On December 15, 2017, MetLife, Inc. (NYSE:MET) filed an 8-K (significant event) report with the Securities and Exchange Commission. The report provided a "Consolidated Company Outlook—Near-Term Guidance." These two paragraphs are at the end of the report:
Further, MetLife has been in the retirement business for many decades. As practices have evolved, we are improving the process used to locate a small subset of our total group annuitant population of approximately 600,000 that have moved jobs, relocated, or otherwise can no longer be reached via the information provided for them. We currently believe the portion of the subset that is most impacted is less than 5% of our total group annuitant population and they tend to be smaller size cases with average benefits of less than $150 per month.
We are making our process more robust to include a wider set of search techniques and better utilize available technology. Taking these actions would result in strengthening reserves, which in the period recorded may be material to our results of operations and is not reflected in the outlook presented herein. We do not have an estimate at this point but we plan to provide further disclosure on our fourth quarter earnings call and in our annual report on Form 10-K for the year ended December 31, 2017.
The same day, John Hele, MetLife's chief financial officer, made similar comments during a "Business Update Call" with analysts. The next day, The Wall Street Journal ran an article by reporter Leslie Scism entitled "MetLife Discloses Pension Bungle" and subtitled "Some Wall Street analysts assumed that payments could be 10 or more years overdue."

In light of these developments, I contacted MetLife. A spokesman provided this statement:
What used to be standard protocol for finding retirees who are owed benefits is no longer sufficient. While it is still difficult to track everyone down, we have not been as aggressive as we could have been. When we realized this was a significant issue, we launched an effort to do three things: figure out what happened, strengthen our processes so that we do a better job locating retirees, and promptly pay anyone we find—as we always do. We are implementing enhanced techniques within MetLife's Retirement and Income Solutions business to better locate and promptly pay any group annuitant who may be entitled to benefits. We are deeply disappointed that we fell short of our own high standards. Our customers deserve better. We are committed to making this right for our customers. We found the issue, we self-reported it, and we are committed to doing better. We are fully cooperating with regulators.
MetLife said in its 8-K, and Hele said in his comments, that further information will be included in the company's 10-K report for the year ended December 31, 2017. MetLife filed its 10-K for 2016 on March 1, 2017. Therefore the company probably will file its 10-K for 2017 on or about March 1, 2018. I plan to post a follow-up then.

Stolen Pension Benefits
In No. 177 (posted August 31, 2016) and No. 179 (September 15, 2016), I wrote about two cases involving stolen pension benefits. Recently I learned of a third case.

In the first case, an individual was charged with grand larceny after stealing over $100,000 from a pension fund. His mother was receiving a pension payable monthly until her death. The payments were sent to her bank account. When she died, no one informed the fund. Her son, claiming power of attorney for her, wrote checks to himself for ten years until he was arrested.

In the second case, an individual was charged not only with grand larceny but also criminal impersonation after he stole over $180,000 from a pension fund. The payments were sent to a trust account for which the pensioner's brother was the trustee. Seven years after the pensioner's death, the fund learned of the problem and stopped the payments. The brother then contacted the fund by telephone, said he was the pensioner, and requested that the payments be resumed. The brother was arrested shortly thereafter.

In the third case, an individual was charged with bank larceny (a federal crime) after he stole more than $100,000 of pension benefits intended for his sister. He did not inform the pension fund of her death, and thereafter stole the benefits.  He pleaded guilty and was ordered to pay restitution. However, his financial and health problems were so serious that he was sentenced to probation for three years and ordered to pay the restitution without interest at the rate of $25 per month.

The Unpaid Death Benefits Analogy
The problem of lost pensioners is reminiscent of a problem that burst on the scene seven years ago involving life insurance death benefits. On July 28, 2010, Bloomberg News ran an article by reporter David Evans entitled "Duping the Families of Fallen Soldiers" and subtitled "Life insurers are secretly profiting from death benefits owed to the survivors of service members and other Americans."

The article involved "retained asset accounts" (RAAs). They are used by many life insurance companies that send a book of drafts to the beneficiary instead of sending a check for the death benefit. The beneficiary then can use the drafts to make withdrawals from the RAA as desired. The article said that many RAAs had gone dormant, and that the companies had lost contact with many RAA owners. The article was a bombshell because of its focus on beneficiaries of life insurance covering deceased members of the military services. The article prompted many investigations of unpaid death benefits involving not only members of the military services but also members of the general public.

I first wrote about unpaid death benefits in the August 1980 issue of The Insurance Forum. After the Evans article appeared, I wrote about RAAs in the October 2010 issue, and about unclaimed property more generally in the November 2010 issue.

General Observations
I think the problems of lost pensioners and stolen pension benefits are far more serious than the isolated cases discussed here. Both problems stem from the mobility of our population and the administrative challenge of dealing with huge numbers of insureds, pensioners, and beneficiaries. I invite the thoughts of readers—especially those with direct knowledge of how records are maintained—about the magnitude of the problems and potential solutions to the problems. The identity of any reader who responds to this invitation will not be divulged unless the reader gives permission.

Available Material
I am offering a complimentary 17-page PDF consisting of MetLife's 8-K filed December 15, 2017 (6 pages), the article in the August 1980 issue of the Forum (2 pages), the article in the October 2010 issue (4 pages), and the article in the November 2010 issue (5 pages). Email and ask for the January 2018 package about lost pensioners and stolen pension benefits.