No. 47: Legal Expenses Incurred in 2013 by Ten Life Insurance Companies

In post No. 31 published February 17, 2014, I identified the law firms to which Phoenix Life Insurance Company paid large amounts in 2012. I was interested in Phoenix because of the huge amount of litigation in which the company has been involved relating to stranger-originated life insurance. In this follow-up, I show similar data for 2013 for ten large companies including Phoenix.

Schedule J

Legal expenses incurred by life insurance companies licensed to do business in New York are disclosed in detail in Schedule J of the New York Supplement to the statutory annual statement companies file with the New York Department of Financial Services (DFS). Schedule J for many years was part of the uniform annual statement blank the National Association of Insurance Commissioners (NAIC) promulgated each year. As discussed in my post No. 38, the NAIC eliminated the schedule from the blank several years ago. What is now DFS, however, retained the schedule as part of the New York Supplement to the NAIC blank.

Legal Expenses

By way of DFS's public portal, I obtained easy access to the Schedule Js for 2013 filed March 1, 2014. For ten large life insurance companies, I show here the name of each law firm or other payee that received at least $1 million from the company in 2013. For each insurance company, I list payees in descending order of amount received, and I also show the amount of Schedule J legal expenses paid to all others combined.

AXA Equitable Life Ins Co
Milbank Tweed Hadley & McCloy	6,495,265
DeBevoise & Plimpton	3,334,234
Mayer Brown	1,333,871
Epstein Becker & Green	1,027,128
Others	9,610,061
Guardian Life Ins Co of America
Ogletree Deakins	1,285,530
McGuire Woods	1,069,017
Others	10,493,916
Massachusetts Mutual Life Ins Co
Quinn Emanuel Urquhart & Sullivan	28,549,933
EPIQ Discovery Solutions	3,875,241
Perkins Coie	3,089,986
Sidley Austin	2,912,920
Bingham McCutchen	2,682,930
Skadden Arps Slate Meagher & Flom	2,390,738
Axiom Global	1,160,740
Alix Partners	1,003,654
Others	10,149,039
Metropolitan Life Ins Co
Steptoe & Johnson	14,764,711
Skadden Arps Slate Meagher & Flom	7,217,245
CMS Cameron McKenna	2,979,988
Sidley Austin	2,837,920
Mayer Brown	2,705,394
Willkie Farr & Gallagher	2,388,804
DeBevoise & Plimpton	2,210,099
Sutherland Asbill & Brennan	2,043,426
Patton Boggs	2,041,108
Wachtel Lipton Rosen & Katz	2,000,000
Morgan Lewis & Bockius	1,836,011
Bradley Arant Boult Cummings	1,608,129
Kasowitz Benson Torres & Friedman	1,528,897
Barger & Wolen	1,493,375
Baker & McKenzie	1,492,722
Shutts & Bowen	1,423,614
Proskauer Rose	1,390,071
Others	27,730,483
New York Life Ins Co
Sutherland Asbill & Brennan	1,579,274
Morgan Lewis & Bockius	1,534,219
Others	8,293,643
Northwestern Mutual Life Ins Co
Bartlit Beck Herman Palenchar & Scott	3,271,007
Others	5,764,990
Phoenix Life Ins Co
Edison McDowell & Hetherington	9,586,508
Carlton Fields Jorden Burt	6,982,328
Day Pitney	2,846,559
DeBevoise & Plimpton	1,425,158
Others	6,785,926
Principal Life Ins Co
Sidley Austin	4,509,066
Analysis Group	1,169,345
Maynard Cooper & Gale	1,068,905
Morgan Lewis & Bockius	1,037,412
Others	7,500,973
Prudential Ins Co of America
Seyfarth Shaw	6,514,446
Paul Weiss Rifkind Wharton & Garrison	5,530,234
DeBevoise & Plimpton	5,308,645
Sullivan & Cronwell	2,750,685
Goodwin Procter	2,726,099
O'Melveny & Myers	2,498,013
D'Arcambal Ousley & Cuyler Burk NJ	2,254,923
Alston & Bird	2,118,199
Clifford Chance	1,915,406
Sidley Austin	1,702,010
Nukk-Freeman & Cerra	1,657,198
Wilmer Hale	1,412,553
Mayer Brown	1,308,861
Meserve Mumper & Hughes	1,269,547
Drinker Biddle & Reath	1,100,966
McCarter & English	1,027,485
Others	22,084,429
Teachers Ins & Annuity Assn of America
O'Melveny & Myers	4,300,060
DeBevoise & Plimpton	4,020,675
Others	5,879,238

General Observations

It would be interesting to see similar information for companies that are not licensed to do business in New York. That would have been possible if the NAIC had not removed Schedule J from the uniform annual statement blank.

 

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 46: Michigan's Department of Insurance Summarily Suspends an Agency and Two Agents

The Michigan Department of Insurance and Financial Services (DIFS) recently issued an order summarily suspending the licenses of Larson's Insurance Solution Agency, Inc. (Livonia, MI) and two members of the agency: Keith Larson, president, secretary, treasurer, and director of the agency; and Karen Larson. The agency was a licensed resident insurance producer agency and the two individuals were licensed resident insurance producers. The respondents were licensed in the lines of accident, health, property, casualty, life, and variable annuities.

The Order

On March 20, 2014, Chief Deputy Director Teri L. Morante of DIFS issued an "Order of Summary Suspension, Notice of Opportunity for Hearing, and Notice of Intent to Revoke." The order is directed at the Larson agency and the two Larsons.

In February 2014, after receiving a complaint alleging misconduct in the handling of customers' insurance transactions, DIFS began an investigation into the respondents' business activities. Here is one paragraph of the order:

DIFS' investigators found several transactions where Respondents submitted forged applications to a premium finance company using customers' information to obtain money for Respondents' personal and business use. Respondents have borrowed funds using customers' information for their own use and failed to repay the funds. Respondents have also exposed customers to liability for the borrowed funds, and have jeopardized the coverage provided under the customers' commercial liability policies.

An Illustrative Case

In November 2013, a Larson client had four policies scheduled to renew with Liberty Mutual Insurance Company. The account was set up to bill the client monthly for premiums to be paid by electronic funds transfer (EFT).

On November 27, 2013, an agent at the Larson agency completed and submitted a premium finance application to Prime Rate Premium Finance Corporation using the client's business and policy information. The client's signature was forged on the premium finance application. The agent asked for $18,411 to pay a portion of the premiums due on the client's policies. The client had no knowledge of the premium finance application. The client was making on-time payments to Liberty by EFT and did not need premium financing.

On December 5, 2013, Prime Rate, unaware of the forgery, sent the funds to the Larson agency's bank account, which was jointly owned and controlled by the two Larsons. Thereafter several withdrawals were made by the respondents to pay personal and business expenses. None of the money was used to pay premiums on the client's policies.

Other Cases

The order describes another case in December 2013 involving two premium finance applications to Prime Rate purportedly to pay a portion of the premiums due on a client's two commercial liability policies with Great American Insurance Company. In this case, a third premium finance application was submitted relating to a non-existent policy. Prime Rate sent $170,842 to the Larson agency's bank account, and the Larsons withdrew funds to pay personal and business expenses. None of the money was used to pay premiums on the clients' policies, on which the client already had paid the premiums.

The order describes a third case in December 2013 where Prime Rate sent $17,648 to the Larson agency's bank account purportedly to pay the premiums on a client's policies. In January 2014, the client received from the insurance company a Notice of Cancellation for Nonpayment. The Larson agency remitted only the minimum premium of $2,092 necessary to reinstate the coverage.

The order says Auto-Owners Insurance Company informed DIFS in March 2014 that the respondents submitted premium finance applications to PREMCO Financial Corporation Inc. requesting funding for Auto-Owners policies that do not exist. The order says the "investigation

also revealed that the Respondents habitually submitted premium finance applications to premium finance companies to obtain money for their own personal and business use." The order also says:

DIFS' staff continues to field calls and complaints from insurers, premium finance companies and insureds pertaining to Respondents' misconduct related to debt incurred, policy validity, policy effectiveness, premium payments, forged documents, false insurance policy information, and possible lapses in coverage.

General Observations

When I saw the order in the Larson case, I contacted DIFS. I said the activities described in the order appear to be felonies, and asked whether the case has been referred to criminal prosecutors. Deborah K. Canja, deputy general counsel, promptly replied: "We do not typically disclose whether we have or have not referred issues/persons/cases to criminal prosecutors." I think her response is appropriate.

Although the order mentions—in its title and its text—the possibility of license revocation, I also asked DIFS why the order is for summary suspension rather than summary revocation. Ms. Canja said: "Our statute and due process considerations do not allow us to summarily revoke." I think the opportunity for a hearing is adequate for due process purposes. As for the statute, I think it illustrates what one often hears about insurance laws being drafted primarily by and for the benefit of the insurance industry rather than for the benefit of the public.

I am offering the eight-page order as a complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for the Michigan order in the Larson case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 45: STOLI and a Distressing Telephone Call

Recently I received an e-mail from a woman in Pennsylvania who saw one of my blog posts about stranger-originated life insurance (STOLI). She said her elderly mother in Florida was victimized in the same manner and by the same parties I mentioned in the blog post she saw. I invited her to call me. She did so, and the conversation was distressing.

The caller said her mother was approached in 2008 by an insurance agent who sold her mother on the idea of applying for a life insurance policy with a face amount of several million dollars. The agent said the policy would cost her mother nothing and she would receive more than $100,000 when the policy was sold into the secondary market two years later. Her mother took a physical examination and signed various documents. Her mother now has neither the policy nor copies of the documents. The policy is in the hands of the premium finance company, which is dunning her mother for money she does not have. Also, her mother is troubled by the big policy in force on her life.

I will speculate about what transpired, based on many STOLI cases I have seen. The mother probably signed an insurance policy application, trust documents, and loan documents. She probably signed all of them in blank without looking at them and without any understanding of what she was doing. She probably was given no copies of anything. The agent probably filled out the application and the agent's supplement with false statements about the mother's net worth, the mother's income, the financing of the premiums, the purpose of the insurance, and the intent to sell the policy in the secondary market. The purpose of the false information was to hoodwink the insurance company into issuing the policy. The company probably issued the policy without an adequate investigation and the agent pocketed a large commission. Deterioration of the secondary market probably made it impossible to sell the policy at the end of two years. Thus the policy fell into the hands of the premium finance company after the premium loan went into default. Now the mother is being dunned by the finance company, and a large policy remains in force on her life in the hands of a party that has no insurable interest and, indeed, has a strong financial interest in her early death.

During our telephone call, I mentioned the insurance regulators in Florida. The caller said she had already contacted the Florida insurance regulators, who had referred her to a Florida fraud agency. I made another suggestion to her, and asked her to keep me apprised of developments.

I asked the caller how her mother could be taken in by such a scam, and whether her mother had concluded that the proposition was too good to pass up. The caller said that is exactly what happened. Thus her mother was not aware that propositions too good to be true usually are false.

Insurance regulators, securities regulators, and law enforcement authorities try to prevent the public from being victimized by wrongdoers. However, these governmental agencies cannot shield everybody in a timely manner. In other words, it is impossible to protect all gullible consumers from all smooth-talking con artists. That is why I found the telephone conversation distressing.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 44: Symetra Life's Reasons for Changing Its Domicile from Washington State to Iowa

Over the years many life insurance companies have redomesticated; that is, they have changed their states of domicile. For example, some companies redomesticated to Nebraska, and more recently some companies redomesticated to Iowa. I was not familiar with the reasons for those moves. Therefore, when I learned early this year that Symetra Financial Corporation (Symetra) is redomesticating its principal operating subsidiary, Symetra Life Insurance Company (Symetra Life), from Washington State to Iowa, I tried to find out the reasons for the move.

Symetra's 8-K Filing

On January 14, 2014, Symetra (NYSE:SYA) filed an 8-K (material event) report with the Securities and Exchange Commission (SEC) disclosing the plan to redomesticate Symetra Life. The 8-K said:

Symetra expects the redomestication to further its efforts to grow and diversify Symetra Life's product portfolio and risk profile by permitting Symetra Life to take advantage of state-of-the-art statutes and regulations governing the life insurance industry, including regulations relating to derivative transactions.

Symetra's Press Release

Attached to the 8-K was a press release. It quoted Tom Marra, president and chief executive officer of Symetra, as saying:

After much consideration, our decision to change Symetra Life's state of incorporation was driven by a complex, challenging and quickly changing regulatory environment. We believe that the redomestication will further our efforts to grow and diversify Symetra Life's product portfolio and risk profile by permitting Symetra Life to take advantage of the state-of-the-art statutes and regulations governing the life insurance industry in Iowa, where some of the industry's biggest players are domiciled.

My Public Records Request in Iowa

In an effort to learn more, I filed a public records request with the Iowa Insurance Division (Division) asking for copies of the redomestication application and attachments. In response, the Division sent me two letters that had been written by Symetra—one to the Iowa commissioner and one to a deputy commissioner—and said the remainder of the application is a confidential examination workpaper pursuant to Iowa Code section 507.14. Here is some of what Symetra said in the two letters:

We believe that the redomestication will further our efforts to grow and diversify Symetra Life's product portfolio and risk profile. We are mindful of the need for our companies to meet your statutory requirements for redomestication, which include the placement of jobs in the State of Iowa. To that end, we have formulated a proposed plan to hire 20 to 40 employees in Iowa within the next two to four years....

We understand that the Application and its contents will be treated as materials disclosed to the Division in the course of analysis of the financial condition or market conduct of the Applicant, and therefore will be treated as privileged and confidential pursuant to the authority set forth in Iowa Code section 507.14. In the event that the Division at any time receives a request for or a subpoena requiring production of all or any portion of the Application that does not fall within the exceptions set forth in Iowa Code section 507.14, subsection 3, we respectfully request that the Division immediately advise us of such request or subpoena in order that we may take the appropriate action to protect confidential information within the Application.

My Public Records Request in Washington

I also filed a public records request with the Washington Office of the Insurance Commissioner (OIC). On March 7, the OIC said:

The documents you have requested have been marked confidential by the company. While we do not have a statutory exemption to withhold the documents, it is necessary to give the company an opportunity to file a court order to prevent the OIC from releasing them. If we do not receive a court order by 5:00 p.m., April 4, 2014, I will be able to release the requested documents to you on April 7, 2014. Should the OIC be restrained from releasing these documents, you will be notified.

My Request to Symetra

I also wrote to David S. Goldstein, senior vice president, general counsel and secretary of Symetra. I indicated what documents I had seen and asked him to tell me the reasons for the redomestication in greater detail than shown in those documents. He said in part:

Symetra Life expects to benefit from a fairly substantial reduction in the amount of premium taxes that it is assessed on a retaliatory basis. We also believe that Symetra Life needs a level playing field to effectively compete with other life insurance companies, particularly with regard to current and emerging industry standards that deal with reserve financing, accounting and reinsurance rules. A handful of states, including Iowa, are leading the way in engaging life insurance companies on these complex regulations. Many of these jurisdictions have the resources to dedicate to the life insurance industry. Attention to these issues by the state legislature is equally important. We evaluated a number of states across several criteria and concluded that Iowa is most closely aligned with our objectives. Among other things, Iowa has state-of-the-art statutes and regulations governing the life insurance business and is the domicile of some of the biggest players in the industry.

Documents from the OIC

Symetra did not provide a court order, and the OIC sent me 978 pages on a CD. The cover letter from Symetra mentions the simultaneous redomestication application to Iowa, makes no claim of confidentiality for the documents, and includes this paragraph:

We believe that the redomestication will further our efforts to grow and to diversify Symetra Life's product portfolio and risk profile. Following the redomestication, Symetra will maintain its corporate headquarters in Bellevue, Washington, which includes nearly 900 employees in the home office. In this regard, please note that Symetra Life recently renewed its lease for its home office space in downtown Bellevue through July 2025.

A one-page document in the filing with the OIC is entitled "Narrative in Support of the Redomestication Application of Symetra Life Insurance Company." It says in part:

Symetra believes that redomestication of Symetra Life to Iowa will further its efforts to grow and to diversify its product portfolio and risk profile, as Symetra Life will benefit from the sophisticated and robust statutes and regulations governing the life insurance industry in Iowa. Specifically, Iowa supports the following initiatives, among others, that are relevant to the life insurance industry: the financing of certain statutory reserve amounts associated with universal life insurance products with secondary guarantees; the implementation of principles-based reserving; the enforcement of termination and netting provisions under qualified financial contracts entered into by life insurance companies; and the implementation of reinsurance collateral reform. In addition, Symetra Life's status as an Iowa-domiciled company will generate savings in retaliatory taxes which Symetra Life would otherwise pay on premiums written in other jurisdictions.

Also included on the CD are articles of incorporation; bylaws; amended articles of incorporation; amended bylaws; certificates of authority for states where Symetra Life operates; organizational documents; variable annuity prospectuses; the latest Symetra 10-Q quarterly report filed publicly with the SEC; biographical affidavits of officers, directors, and key employees; the latest Symetra Life quarterly financial statement filed publicly with state insurance regulators; and market conduct examination reports filed publicly by insurance regulators in Illinois, Nevada, Washington, Connecticut, California, and Oklahoma.

The Iowa Confidentiality Ruling

As mentioned earlier, the Division denied most of my request for documents relating to the redomestication. The Division cited Iowa Code section 507.14 and Symetra cited subdivision 3 of that section as the basis for the denial. Iowa Code section 507.14 is entitled "Confidential Documents—Exceptions." Subdivision 3 reads:

3. All work papers, notes, recorded information, documents, market conduct annual statements [sic], and copies thereof that are produced or obtained by or disclosed to the commissioner or any other person in the course of analysis by the commissioner of the financial condition or market conduct of an insurer are confidential records under chapter 22 and shall be privileged and confidential in any judicial or administrative proceeding except any of the following:....

b. An administrative proceeding brought by the insurance division under chapter 17A.

Although a redomestication application is not mentioned specifically as an exception in chapter 17A, I think the intent of the chapter is to exempt a redomestication application from confidential treatment. Thus I disagree with the denial. However, I did not appeal the denial because I received the entire file from the OIC.

General Observations

The redomestication of Symetra Life is a token move, with only 20 to 40 employees to be hired in Iowa in the next two to four years, and with 900 employees remaining in Washington. I am not familiar with Iowa's statutory requirements for redomestications, but the Iowa Economic Development Authority, which promotes business development in the state, and which describes the Division as "supportive," "fair," and "responsive," cannot be pleased with so few new jobs in Iowa.

Symetra mentions the "biggest players" being in Iowa as a reason for the move. That refers primarily to big players in indexed life insurance and indexed annuities.

Symetra mentions a "fairly substantial reduction" in retaliatory premium taxes. I do not understand that complex subject well enough to know whether Symetra Life will achieve a significant reduction in premium taxes as a result of the redomestication.

Symetra mentions "state-of-the-art statutes and regulations" as a reason for the move. That is a euphemism for weak reserve requirements, weak accounting rules, and weak reinsurance rules. Anyone interested in what it means to be domiciled in Iowa in terms of reserves, accounting, and reinsurance should examine section 1(A) in the "Notes to Financial Statements" in the 2013 statutory statement of Iowa-domiciled Transamerica Life Insurance Company. Its statutory surplus at the end of 2013 on the "Iowa basis" was $4.7 billion, compared to $488 million based on statutory accounting principles. One Iowa "prescribed practice," relating to "reserve credits with respect to secondary guarantee reinsurance treaties," added $3.5 billion to statutory surplus. Another Iowa "prescribed practice," relating to treatment of a "parental guarantee" as an "admissible asset," added $751 million to statutory surplus.

Iowa and Washington have not yet acted on the redomestication applications. I plan to report developments. Meanwhile, I am offering, as a complimentary one-page PDF, section 1(A) in the "Notes to Financial Statements" in Transamerica's 2013 statutory statement. Send an e-mail to jmbelth@gmail.com and ask for the Transamerica statement excerpt.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 43: Florida's Pasco County School District Faces a Decision on a "Too Good To Be True" Life Insurance Plan

On April 8, 2014, the Tampa Bay Times carried an article by Jeffrey S. Solochek entitled "Pasco school district scrutinizes creative life insurance offer." The article discusses a "legacy life" plan the promoters are trying to sell to the district. Here is how the article describes the plan:

Four New York families would put $100 million each into a premium on life insurance policies for Pasco's 9,769 school workers. The district would create a trust through which the employees could be insured and their families be paid a $50,000 benefit after they die. The district also would get a $50,000 benefit when an employee dies. Neither the district nor the employees would pay anything.

The Solochek article refers to the plan as a "55-year program," and says the promoters project "about 13 deaths per year in the early stages." Meanwhile, the $400 million would be invested, although the promoters are not divulging how the funds would be invested. The article says broker Edward H. Netherland (Nashville, TN) is a consultant to Swiss Re and Pollock Financial Group. (Netherland was involved some years ago in "Life Insurance and Life Annuities Based Certificates," or LILACs. See, for example, "Charities Look to Benefit from a New Twist on Life Insurance" in the June 5, 2004 issue of The New York Times.)

According to the Solochek article, Netherland said a "team of lawyers" found the plan "perfectly legal," and actuarial tables—which the school district does not have—showed the plan is viable. Netherland seems to be a name dropper; the article says he created similar programs before, "working with investors including Warren Buffett."

I have not seen the details of the plan. Nor is it likely the school district will ever see the details. Promoters of such plans claim the details are proprietary and confidential. At the same time, they respond to criticism by saying the critics do not understand the plans.

As I said in the July/August 2004 and July 2012 issues of The Insurance Forum, such plans will end in disappointment. Here is how I explained the problem:

The fundamental flaw is that such a plan can perform as illustrated only when the life insurance company underprices the policies. For the death benefits to be sufficient to service the debt and provide funds for the charity, the present expected value of the death benefits when the policies are issued must exceed the present expected value of the premiums. However, for a life insurance company to survive, the present expected value of the premiums must exceed the present expected value of the death benefits.

According to the Solochek article, the school district is trying to figure out whether the plan is "too good to be true." I think it is, because the plan is sure to collapse. What is not known is when it will collapse and degenerate into a legal battle involving the district, the investors, the promoters, the life insurance companies, and other parties. My unsolicited advice to the district is to reject the plan.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 42: Phoenix's Further Delayed Financial Statements

In my post No. 41 published April 14, I reported on the March 21 cease-and-desist order issued by the Securities and Exchange Commission (SEC) directed at The Phoenix Companies, Inc. (Phoenix) and PHL Variable Insurance Company (PHL), a wholly owned indirect subsidiary of Phoenix. The companies agreed to filing dates for their many delayed financial statements. I further reported that the first deadline in the SEC order required Phoenix to file its 10-K report for 2012 not later than Monday, March 31, and that Phoenix filed it Tuesday morning, April 1, before the market opened.

The next deadline in the SEC order was April 15, on which Phoenix was required to file its 10-Q report for the quarter ended September 30, 2012, and PHL was required to file its 10-K report for 2012. On April 15, the companies filed 8-K (material event) reports saying they expect to file the documents on or before April 25.

I asked the SEC Office of Public Affairs what happens next; a spokesperson declined to comment. I also asked Phoenix what happens next; a spokesperson declined to comment. Thus it remains to be seen what consequences, if any, will flow from Phoenix's latest failure to file financial statements in a timely manner. I plan to report further developments.

 

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 41: Phoenix Settles with the SEC and Begins Filing Its Delayed Financial Statements

The Securities and Exchange Commission (SEC) recently instituted cease-and-desist proceedings directed at The Phoenix Companies, Inc. (Phoenix) and PHL Variable Insurance Company (PHL), a wholly owned indirect subsidiary of Phoenix. The SEC subsequently received and accepted a settlement offer from the companies. Phoenix recently filed the first delayed statement pursuant to the agreement.

Background

On September 18, 2012, PHL said certain previously issued financial statements could no longer be relied upon and should be restated. The statements in question were audited statements for years ended December 31, 2011, 2010, and 2009, and unaudited statements for quarterly periods dating back to March 31, 2011.

On November 8, 2012, Phoenix made a similar announcement and warned that "[m]anagement will likely conclude that there are one or more material weaknesses" in its disclosure controls and procedures and internal controls over financial reporting. Phoenix also said it expected to file the restatements prior to filing of its 2012 10-K report in March 2013.

On March 15, 2013, Phoenix said it would not meet its previously announced timetable and would not timely file its 2012 10-K. Phoenix also said it "expects that it will continue to identify, assess for materiality and correct additional errors during the course of the Restatement, some of which may be material and adverse."

During the remainder of 2013—on April 24, May 31, June 28, August 15, October 15, and December 30—Phoenix made announcements relating to the reinstatement. None of the announcements specified a timetable.

On January 17, 2014, Phoenix said it expected to file its 2012 10-K by March 31, 2014. Phoenix also said it expected to become a timely filer with the filing of its 10-Q quarterly report for the second quarter of 2014. See my post No. 24 published January 23, 2014 for a discussion of Phoenix's January 17 announcement.

The Cease-and-Desist Order

On March 21, 2014, the SEC issued a cease-and-desist order directed at Phoenix and PHL. The SEC described how the companies had failed to file certain reports and thereby had violated requirements in the Securities Exchange Act of 1934 (Act). The companies consented to the entry of the order "without admitting or denying the findings [in the order], except as to the [SEC's] jurisdiction over them and the subject matter of these proceedings, which are admitted."

The order includes a chart, as of March 19, 2014, showing six delinquent filings of Phoenix and five delinquent filings of PHL. The order also includes a list of 15 undertakings—seven by Phoenix and eight by PHL. The order requires the companies to cease and desist from committing or causing any violations and any future violations of the Act, and to comply with the undertakings. The order requires Phoenix and PHL to pay civil monetary penalties of $375,000 each to the U.S. Treasury.

The order lists the delayed statements and the dates by which the companies have undertaken to file them. Here is a tabulation showing, for each company, each delayed statement and the date by which the company has undertaken to file it.

Phoenix's Delayed Statements	Filing Deadlines
10-K 2012 Annual	March 31, 2014
10-Q 2012 Third Quarter	April 15, 2014
10-K 2013 Annual	June 4, 2014
10-Q 2013 First Quarter	July 15, 2014
10-Q 2014 First Quarter	July 15, 2014
10-Q 2013 Second Quarter	August 11, 2014
10-Q 2013 Third Quarter	November 10, 2014
PHL's Delayed Statements	Filing Deadlines
10-K 2012 Annual	April 15, 2014
10-Q 2012 Third Quarter	April 30, 2014
10-K 2013 Annual	July 3, 2014
10-Q 2013 First Quarter	August 4, 2014
10-Q 2014 First Quarter	August 4, 2014
10-Q 2013 Second Quarter	September 8, 2014
10-Q 2014 Second Quarter	September 8, 2014
10-Q 2014 Third Quarter	November 14, 2014

Filing of the 10-K for 2012
The first deadline in the above tabulation is March 31, 2014, on which Phoenix undertook to file its delayed 10-K report for the year ended December 31, 2012. On Tuesday morning, April 1, 2014, before the market opened, Phoenix filed its 312-page 10-K for 2012.

Phoenix disclosed the impact of the restatement on income from continuing operations in 2011 and 2010, net income attributable to Phoenix in 2011 and 2010, and stockholders' equity as of December 31, 2011. Income from continuing operations in 2011 was $30.1 million as previously reported and minus $9.6 million as restated. Income from continuing operations in 2010 was minus $24.6 million as previously reported and minus $31.3 million as restated. Net income attributable to Phoenix in 2011 was $8.1 million as previously reported and minus $30.7 million as restated. Net income attributable to Phoenix in 2010 was minus $12.6 million as previously reported and minus $34.4 million as restated. Stockholders' equity as of December 31, 2011 was $1,126.2 million as previously reported and $695.7 million as restated. The company also made this statement on internal controls:

As a result of the errors discussed above, management identified material weaknesses in our internal control over financial reporting. As a result, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2012. Further, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were not effective as of December 31, 2012. These material weaknesses have not been fully remediated as of the filing date of this report.

PricewaterhouseCoopers LLP (PwC) is Phoenix's independent registered public accounting firm. PwC's March 31, 2014 report to the company's board of directors and stockholders goes into detail concerning the company's internal controls.

Executive Compensation

For many years I published in The Insurance Forum tabulations of executive compensation. Because Phoenix did not make SEC filings during 2013, I was not able to show 2012 data for Phoenix in the SEC section of my July 2013 issue. Here is the total compensation for 2012 for the Phoenix executives shown in the recently filed 10-K for 2012:

James D. Wehr	$2,931,694
Philip K. Polkinghorn	2,138,768
Edward W. Cassidy	1,336,003
Christopher M. Wilkos	1,280,088
Bonnie J. Malley	1,155,362
Peter A. Hofmann	974,684
John T. Mulrain	781,835

Wehr is president and chief executive officer. Polkinghorn, who left the company effective October 31, 2012, was senior executive vice president, business development. Cassidy is executive vice president, distribution. Wilkos is executive vice president and chief investment officer. Malley is executive vice president, chief financial officer, and treasurer. Hofmann is executive vice president, strategy and business development. Mulrain is executive vice president, general counsel, and secretary.

General Observations

Phoenix has finally filed its 10-K report for 2012. It remains to be seen whether Phoenix and PHL will meet the other filing deadlines to which the companies have agreed.

I am offering, as a complimentary PDF, a package consisting of the SEC's cease-and-desist order and PwC's report. Send an e-mail to jmbelth@gmail.com and ask for the Phoenix package.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 40: Failure of the Effort to Repeal Nebraska's Executive Compensation Disclosure Law

In post No. 39 dated April 7, I discussed the effort—led by United Services Automobile Association (San Antonio, TX)—to repeal the century-old executive compensation disclosure law in Nebraska. Two days later I learned that Legislative Bill (LB) 799—the bill to repeal the disclosure law—will not be enacted in this session of the legislature. A source at the state capitol said the legislature ran out of the time allotted to LB 799, the legislature is at the end of the session, the bill can no longer get on the agenda, the bill will remain unresolved, and all bills unresolved at the end of the session are killed as one of the final acts of the session.

In No. 39, I said the Nebraska disclosure law grew out of developments in New York a century ago, and reformers at the time thought problems such as nepotism should be solved by full disclosure (often called "sunshine") rather than restrictions on compensation. It now appears the sun will continue shining in Nebraska, at least until the next session of the legislature.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 39: Executive Compensation Disclosure in Nebraska and the Insurance Industry's Effort to Repeal the Requirement

My post No. 38, published one week ago, is entitled "Weakening of Disclosure Requirements Imposed by State Regulators on Insurance Companies." Recent developments in Nebraska prompt this follow-up.

The Hammel Telephone Call

On Friday, March 21, 2014, Paul Hammel, a reporter at the Omaha World-Herald, contacted me by telephone. He said a bill was introduced in January in the Nebraska legislature to repeal a century-old law requiring insurance companies doing business in the state to file executive compensation data with the Nebraska director of insurance. The call was my first knowledge of the repeal effort.

The Hammel Article

On Sunday, March 23, the newspaper published the lengthy Hammel article, which was entitled "Texans target Nebraska law requiring insurance firms to disclose top executives' pay." The article ran prominently; it began at the top of the front page of the newspaper's second section and continued on the second page of that section.

Behind the repeal effort is San Antonio-based United Services Automobile Association (USAA). It is a large company that caters to current and former members of the military and their families. It has top ratings for financial strength from the major rating firms.

USAA paid $50,000 to Mueller Robak, a legal and lobbying firm whose office is one block from the Nebraska state capitol building in Lincoln. Spearheading the repeal effort is USAA Senior Vice President and Associate General Counsel William H. McCartney. He was director of insurance in Nebraska from 1987 to 1994, and he was president of the National Association of Insurance Commissioners in 1992.

The Nebraska Disclosure Law

The executive compensation disclosure law at issue is Section 44-322 of the Nebraska Revised Statutes. The law was enacted in 1913 as part of the reforms that grew out of the Hughes-Armstrong investigation in New York in 1905. The section relates to the contents of annual financial statements filed by insurance companies. Subdivision 1(a)(iii) reads:

The salaries and compensation of the officers and any other information required by the director [of insurance] shall be filed with the director.

The Bill To Repeal
Legislative Bill (LB) 799, as originally introduced, would simply repeal the one-sentence Subdivision 1(a)(iii). A proposed amendment to LB 799 would leave the sentence unchanged and add this second sentence:

All information regarding salaries and compensation filed pursuant to this subdivision shall be maintained as confidential by the director and shall not be subject to disclosure by the director to persons outside of the Department of Insurance except as agreed to by the insurance company or as ordered by a court of competent jurisdiction.

LB 799 was one of several bills on the agenda for discussion at a January 28, 2014 legislative committee hearing. McCartney of USAA testified at length in support of the repeal effort. The only other witness who testified on the bill was Janis McKenzie, executive director and lobbyist representing the Nebraska Insurance Federation, who also supported the repeal effort. Current Nebraska Director of Insurance Bruce R. Ramge was in attendance at the hearing to testify on another bill, but he did not testify on LB 799.

The Arguments

The Hammel article shows some arguments made by those in favor of the repeal effort. State Senator Tom Carlson, an insurance broker who introduced the bill, is quoted as saying the disclosure requirement is unfriendly to business. McKenzie of the Nebraska Insurance Federation is quoted as saying the executive compensation data could be used by a newsletter or opinion-piece writer to create an "image or bias that something is improper." McCartney of USAA is quoted as saying it is unfair to require a private employer to make compensation figures public when other private, licensed businesses and professionals do not have such requirements. He also said that it is unfair to allow competing insurance companies to learn what USAA is paying its company leaders, and that buyers of insurance do not care how much executives are paid.

The Hammel article also shows some arguments made by those opposed to the repeal effort. State Senator Paul Schumacher criticized USAA for paying a lobbyist $50,000 to repeal a law allowing the insurance-buying public to decide whether a company is justly compensating its executives. He also said "there is no public interest served by the repeal of this law," and he urged his colleagues to resist "Texas-style politics." The article quotes Robert Hunter, a former Texas insurance commissioner who is now with the Consumer Federation of America, as saying that insurance companies are almost like public utilities because people must have insurance to drive a car or buy a home, and that it is important for insurance companies to be transparent. The article also mentions that the Nebraska disclosure law, like its counterpart in New York, was enacted in the wake of scandals involving nepotism, including the hiring of relatives who did little or no work for large salaries.

My Executive Compensation Tabulations

In The Insurance Forum, I published annual tabulations of executive compensation for almost 40 years. I obtained the data from insurance companies' public filings with the Securities and Exchange Commission (SEC); the New York Department of Financial Services and its predecessor, the New York Department of Insurance; and the Nebraska Department of Insurance.

The USAA Filings

Because USAA is a private company, it does not file with the SEC. USAA itself does not operate in New York, and the public filings of its New York subsidiary contain no useful data. Thus Nebraska was my only source of significant executive compensation data for USAA. USAA executive compensation exhibits filed in Nebraska each year contain this notice in italicized, boldface, solid capital letters:

NOTICE: THIS INFORMATION IS PROPRIETARY AND CONFIDENTIAL. DO NOT FILE WITH ANNUAL STATEMENT OR IN ANY OTHER PUBLICLY ACCESSIBLE FILE OR DOCUMENT.

The Nebraska disclosure law contains no provision under which the director of insurance is permitted to maintain confidentiality for the executive compensation data. Therefore, the Nebraska department provides the USAA exhibits to anyone who requests them pursuant to the Nebraska public records law.

The USAA Data

On March 31, 2014, I received the executive compensation exhibits for 2013 that I had requested from the Nebraska department. Among them are exhibits for USAA and four subsidiaries that operate in Nebraska. Because the compensation is allocated among the companies, for each individual I combined the figures in the exhibits filed by those five members of the USAA group.

Shown here in descending order of 2013 compensation are the figures for every person listed in the 2013, 2012, and 2011 exhibits. A dash means there is no information for the person in that year's exhibit. The figures may be understated because they do not include compensation allocated to several USAA subsidiaries that do not operate in Nebraska.

	2013	2012	2011
Josue Robles Jr	$6,506,222	$10,485,017	$7,361,163
Kevin J Bergner	4,001,398	3,378,975	-----
Christopher W Claus	3,373,155	3,499,897	3,248,502
Wayne S Peacock	2,689,309	2,743,433	2,678,303
Stuart Parker	2,217,676	2,453,827	5,071,870
Steven A Bennett	2,189,148	2,426,666	2,476,659
Alice H Gannon	1,636,209	1,689,469	1,479,603
Shon J Manasco	1,600,504	692,384	678,122
Kenneth E Rosen	1,550,747	1,511,320	1,290,542
Alan W Krapf	1,519,794	1,657,281	-----
Jeffrey G Nordstrom	1,005,680	1,019,397	808,799
Shawn T Loftus	982,827	813,604	666,251
James E Goral	856,213	859,025	850,317
Gregory J Marion	813,885	649,073	536,883
Carl C Liebert III	734,214	-----	-----
Robert J Schaffer	658,159	502,070	-----
Nadeem Chowdhury	578,001	574,321	621,065
Michael A Merwarth	566,074	-----	-----
Kirby W Wisian	365,985	-----	-----
Rhonda C Noland	133,193	131,130	128,795
Kimberly A Ross	118,130	-----	109,721
Kristi A Matus	-----	-----	2,316,033
Wendi Strong	-----	1,197,461	1,223,264
Elizabeth D Conklyn	-----	-----	1,161,113
Russell A Evenson	-----	-----	836,902
Michael A Belko	-----	-----	530,605
Michael P Egan	-----	510,652	530,278
Stephen K Dunlap	-----	493,702	-----
William H McCartney	-----	399,156	-----
Edwin T McQuiston	-----	-----	387,515
Kim C McCracken	-----	176,770	176,513
Elizabeth A Hammel	-----	-----	169,196
Laurie A Philippon	-----	-----	146,287
Mary G Rutledge	-----	133,393	127,254

General Observations
It would be contrary to the public interest to repeal Nebraska's century-old insurance company executive compensation disclosure law, for at least four reasons. First, insurance companies, even though many are private, are public in the sense that they hold money essentially in trust for the benefit of and later delivery to policyholders.

Second, insurance companies are required to file publicly with insurance regulators a large amount of financial data. How the companies compensate their executives is an important part of that data.

Third, as mentioned in the Hammel article, laws requiring disclosure of executive compensation grew out of scandals that revealed significant abuses, including nepotism. Legislators at the time believed that full disclosure (often called "sunshine") was preferable to restrictions on executive compensation.

Fourth, the information filed pursuant to the executive compensation disclosure law is important to many people inside and outside the insurance industry. Their interest is evidenced by the substantial number of requests that people make for executive compensation data.

Whether USAA and its lobbyists will succeed in their quiet effort to push through the repeal of the Nebraska disclosure law remains to be seen. I say "quiet" because the brief and innocuous description of the bill in the legislative committee statement reads: "Change a filing requirement for insurance companies." A brief and more meaningful description would be "Stop allowing the public to have access to data on compensation of insurance company executives." The Hammel article brought the repeal effort to the attention of the public and I think it reduced the likelihood of repeal.

Some readers may be interested in seeing what would be lost to the public if the repeal effort succeeds. The Nebraska department assembles on a single CD all the executive compensation exhibits it receives. Anyone may obtain the CD by sending $80 to Nebraska Department of Insurance, Attention Sue Williams, P.O. Box 82089, Lincoln, NE 68501-2089. When you send for it, say your request is pursuant to the Nebraska public records law, ask for the CD containing executive compensation exhibits for 2013, and provide a regular address for first class mail.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 38: Weakening of Disclosure Requirements Imposed by State Regulators on Insurance Companies

The National Convention of Insurance Commissioners (Convention) was created in 1871 in the wake of the 1868 U.S. Supreme Court decision in Paul v. Virginia, which held that insurance was not commerce. An important reason for creation of the Convention was to prepare uniform annual financial statement blanks that insurance companies could file in all states. The Convention became the National Association of Insurance Commissioners (NAIC) in 1939, and to this day a major function of the NAIC is the promulgation of uniform annual statement blanks.

Removal of Schedules

Over the years the NAIC removed several important schedules from the life insurance company blanks. Among the schedules removed were Schedule G (executive compensation), Schedule J (legal expenses), Schedule K (lobbying expenses), and Schedule M (life insurance policy dividends).

The NAIC once thought the information in those schedules was important. However, the life insurance industry lobbied the NAIC to remove the schedules from the blank, and the NAIC did so. Although there was public interest in the information in those schedules, the NAIC said the schedules served no useful regulatory purpose.

Removal of Schedule G

Public interest in the executive compensation information in Schedule G always has been strong. In the January 1987 issue of The Insurance Forum, in an article entitled "More Secrecy from the NAIC," I said removal of Schedule G from the NAIC blank ended a long tradition of executive compensation disclosure in life insurance company annual statements dating from legislation enacted in 1906 after the Hughes-Armstrong investigation of 1905.

A New York law requires life insurance companies doing business in New York to disclose executive compensation information in annual statements filed in New York. For that reason, the New York Department of Insurance, which is now the New York Department of Financial Services (DFS), had to retain Schedule G in the New York Supplement to the NAIC blank.

Decimation of the New York Law

In the October 2008 issue of The Insurance Forum, in an article entitled "The Decimation of New York State's Century-Old Compensation Disclosure Law," I described how the life insurance industry lobbied the New York legislature to curtail sharply the amount of executive compensation information that had to be disclosed. The amendment passed easily with no hearings, no debate, and no media scrutiny.

Until I received a tip after the amendment had cleared the legislature, I was not aware of the amendment even though its purpose was to reduce the amount of information available for my annual tabulations of executive compensation. I immediately wrote to then New York Governor David A. Paterson asking him to veto the amendment, but he signed it.

Special Treatment of Schedule G

Even in its decimated form, Schedule G is subject to special treatment. The DFS instructs companies to file Schedule G separately from the rest of the New York Supplement. Then the DFS posts the New York Supplement, without Schedule G, on the DFS's public portal. Thus a person who wants one or more Schedule Gs must file a formal request pursuant to the New York Freedom of Information Law and experience the delays associated with such requests.

On March 13, 2014, I asked Michael Maffei, chief of the life bureau of the DFS, to explain why the DFS gives special treatment to Schedule G. He did not reply. I think the life insurance industry lobbied the DFS, and the DFS agreed, to prevent the public from gaining easy access to executive compensation information.

General Observations

The history of Schedule G with the NAIC and the DFS vividly illustrates the contrast between the strong disclosure requirements in federal securities laws and the weak disclosure requirements in state insurance laws. Public companies are required to include executive compensation information in filings with the Securities and Exchange Commission (SEC). Most of the companies include the information in proxy statements, and a few include it in 10-K annual reports.

Those documents are readily available to the public on the SEC's website with no restrictions, no delays, no expenses, and no questions asked. One can only imagine the furor that would arise if shareholders, other investors, reporters, and the public had to incur the long delays associated with formal requests pursuant to the federal Freedom of Information Act to obtain access to executive compensation information.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 37: A Life Partners Attorney Sends Me a Letter

On March 19, 2014, I received a letter by e-mail from C. Alfred Mackenzie. He is special counsel for Life Partners, Inc. (Waco, TX), an intermediary in the secondary market for life insurance and a subsidiary of Life Partners Holdings, Inc. (NASDAQ:LPHI). The subject of his letter is my post No. 29 dated February 10, 2014. The text of his letter is shown below in boldface type, and my comments are in regular type.

As legal counsel for Life Partners, Inc., I am writing about the defamatory article on your website, at the following URL: 
http://www.josephmbelth.com/2014/02/no-29-federal-jury-finds-life-partners.html.

My post No. 29 was not and is not defamatory.

Your article reports that the jury returned a verdict on February 3, 2014, in a civil lawsuit brought by the Securities and Exchange Commission (SEC) against Life Partners and three of its executive officers. At the outset, I should point out that the terms "guilty" and "not guilty" are applicable to criminal prosecutions, but not a civil action such as the case against Life Partners.

It would have been more precise for me to refer to the jury findings as "yes" or "no" on each question of whether Life Partners and its officers "violated" federal securities laws and regulations.

More importantly, however, in keeping with journalistic standards, it is reasonable for Life Partners to expect that you will update your reporting to inform your readers that Life Partners has been cleared of all fraud charges asserted by the SEC. As you are probably aware from recent news reports, on March 12, 2014, the United States District Court for the Western District of Texas ruled that the SEC failed to prove any of its fraud claims against Life Partners and its CEO, Brian Pardo, and General Counsel, Scott Peden. The ruling followed a jury finding in February that neither Life Partners, Mr. Pardo, nor Mr. Peden committed securities fraud under Rule 10b-5 and that Mr. Pardo and Mr. Peden did not engage in insider trading.

From court records I was aware of the March 12 ruling and I intended to post a follow-up soon. Because The Wall Street Journal reported the ruling immediately, I felt no urgency to report it quickly. Given the Mackenzie letter, however, I will reply to his comments rather than prepare a separate post. When further important developments in the case occur, I will report them. I do not operate a daily newspaper, and lately I have been posting one item per week. A majority of my posts are on subjects other than Life Partners. On March 17, however, I posted No. 36 about an Oregon consent order directed at a Life Partners agent in connection with securities violations. I think the case is important and to my knowledge it has not been reported in the major media.

Although the jury had found in favor of the SEC's fraud claim under Section 17(a) relating to the company's revenue recognition policies, that claim, which a government attorney characterized as "a lead" claim in the case, was challenged by Life Partners on the basis that it was not supported by any evidence. Senior U.S. District Judge James R. Nowlin agreed with Life Partners that there was no evidence to support the revenue recognition claims for the period of time in question and ordered that judgment be entered in favor of Life Partners, Mr. Pardo, and Mr. Peden on that issue. As a result of this ruling, the Company, Mr. Pardo, and Mr. Peden have been completely exonerated from any allegations of fraud alleged by the SEC. The Court let stand the jury's findings against Life Partners relating to bookkeeping, reporting and certification by the CEO on the company's financial statements, none of which involve fraud or knowingly or recklessly misleading shareholders.

If I had posted a follow-up, I would have said Judge Nowlin rejected one jury finding of violations and retained three jury findings of violations. I also would have said that the text of LPHI's 8-K (material event) report filed with the SEC on March 14 did not describe the ruling, that the text of the 8-K merely referred to an attached press release, that the press release was entitled "Life Partners Cleared of All Fraud Claims," that Judge Nowlin's retention of three jury findings of violations was not mentioned until the third paragraph of the press release, and that the press release was posted on LPHI's website.

Because Life Partners has now been cleared of all fraud charges asserted by the SEC, I am requesting, on behalf of Life Partners, that you correct the statements on your website that have now become misleading and set the record straight. Your prompt attention to this matter is greatly appreciated.

My statements were not and are not misleading or incorrect.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 36: A Life Partners Agent Runs Afoul of the Oregon Securities Law

On February 21, 2014, the securities regulator in Oregon issued a press release announcing a consent order directed at James Walter Malanowski, a resident of Oregon and an agent of Life Partners, Inc. (LPI). LPI, based in Waco, Texas, is an intermediary in the secondary market for life insurance policies. The consent order, issued August 13, 2013, provides a rare glimpse into the activities of an LPI agent.

Background

In 1983, Malanowski became licensed as a resident producer by the Insurance Division of the Oregon Department of Consumer and Business Services (Department). In 2010, he became an LPI agent. He was not licensed by the Department's Division of Finance and Corporate Securities (DFCS) to offer or sell securities.

As explained in the consent order, LPI buys a life insurance policy directly from the insured or through a broker. LPI resells the policy to an institutional buyer for more than LPI paid for it, or sells fractionalized interests to individual buyers. In the latter case, if the insured outlives the estimated life expectancy, the buyer of a fractionalized interest must pay additional premiums for his or her portion of the policy.

Malanowski's Workshop

Malanowski used various techniques to sell fractional interests. In one instance, he hired a company in Irvine, Texas, to advertise, through a mailer, a free meal at a "Senior Financial Workshop" held in a Portland-area restaurant. The mailer went to about 4,500 Portland-area residents and said the workshop would introduce "some options and useful financial strategies which [the recipient] may not have been aware existed."

The Sale to WMH

In February 2011, WMH, a 77-year-old resident of Oregon, attended the workshop. There he learned about life settlements and agreed to a private meeting with Malanowski. In March 2011, at the private meeting, Malanowski recommended that WMH, the owner of a Roth individual retirement account (IRA), surrender the Roth IRA and use the proceeds to buy fractionalized interests.

Malanowski told WMH he had to be an "accredited investor" to buy fractionalized interests. According to Rule 501 promulgated by the Securities and Exchange Commission (SEC) in connection with Regulation D, an individual must have a net worth of at least $1 million or an annual income of at least $200,000 to qualify as an accredited investor. The consent order said:

Malanowski then provided WMH an LPI Suitability Questionnaire, which required WMH to attest to his accredited investor status. WMH initialed the space providing: "I hereby affirmatively represent that I am an accredited investor as defined in SEC Rule 501 under Regulation D for one or more of the foregoing reasons which I decline to specify due to issues of financial privacy."

Malanowski took no further steps to verify WMH's accredited investor status. WMH later told DFCS that he had neither the net worth nor the annual income to qualify for accredited investor status, and that Malanowski had counseled him to initial the questionnaire as though he qualified for that status.

WMH opened a self-directed Roth IRA with IRA Plus Southwest, LLC (IPS) of Dallas, Texas. IPS was a custodian recommended by LPI. WMH transferred about $35,000 from his Roth IRA to the IPS Roth IRA. Malanowski then sold WMH fractionalized interests in the policies of three insureds—Newmark, Zayonts, and Lesser—for a total of about $35,000. The fractionalized interests were not registered as securities with the DFCS in accordance with the Oregon Securities Law. Malanowski did not disclose to WMH that he—Malanowski—was not licensed to sell fractionalized interests in Oregon.

The consent order describes the three fractionalized interests that WMH purchased. With regard to Newmark, for example, the consent order—in exactly the following language—illustrates a significant discrepancy in LPI documents:

The Newmark Policy Funding Agreement specifically stipulated that "both parties understand and agree that their relationship is one of principal and agent and does constitute the sale of a security[.]" (Emphasis added.) Other documents provided to WMH contained statements that the LPI interests were not securities.

WMH paid $11,650, which was treated as a "loan" to LPI, for a fractionalized interest of about 0.25 percent in the $8 million Newmark policy. Upon Newmark's death, WMH was to receive about $20,000 to repay the "loan." However, if Newmark outlived his 84-month estimated life expectancy, WMH would be required to pay additional premiums.

The Department's Findings

The director of the Department found that the fractional interests were securities under Oregon law, that Malanowski offered and sold three unregistered securities to WMH, and that Malanowski sold securities in Oregon without being licensed to do so. The director also found that Malanowski made misleading statements in violation of Oregon law, that he failed to disclose the fractionalized interests were not registered, and that he failed to disclose he was not licensed to sell securities in Oregon.

The director ordered Malanowski to cease and desist from violating Oregon laws, and denied him for at least two years the use of exemptions to registration requirements. The director assessed a civil penalty of $40,000, with a dollar-for-dollar reduction for the amount Malanowski paid to WMH as restitution and with an upper limit of $35,000 in the amount of the reduction in the civil penalty. Malanowski returned the entire $35,000 to WMH, and therefore the net civil penalty was $5,000. The director also ordered Malanowski to pay $1,000 to the Department's consumer protection trust fund.

Malanowski neither admitted nor denied the facts and allegations in the consent order. However, he agreed to cooperate with any investigation by the director into the business dealings of LPI or any of its associated companies, and into any interests similar to those sold by LPI. Cooperation includes but is not limited to providing testimony at any interview, deposition, administrative hearing, or trial.

General Observations

The punishment in this case seems modest. However, the consent order is significant because of the details it provides in areas such as the perennial question of whether LPI's offerings are securities and the role played by LPI in the marketing of its life settlements to individual buyers.

The "neither admit nor deny" language is common not only in insurance and securities settlements, but also in settlements in all industries. Currently, however, some regulators—the SEC is an example—are trying to force wrongdoers to acknowledge wrongdoing as part of settlements.

I am offering the 12-page consent order as a complimentary PDF. Send an e-mail to jmbelth@gmail.com and ask for the consent order in the Malanowski case.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com

No. 35: Life Partners Holdings and Selective Disclosure

Life Partners, Inc. (Waco, TX) is an intermediary in the secondary market for life insurance policies and the operating subsidiary of Life Partners Holdings, Inc. (NASDAQ:LPHI). In post No. 22 entitled "A Devastating Setback for Life Partners," I mentioned LPHI's practice of disclosing good news immediately and delaying disclosure of bad news. I decided on this follow-up after LPHI failed to disclose promptly a recent Texas appellate court decision that may have a material adverse effect on the company.

Regulation FD

Regulation FD (Fair Disclosure) promulgated by the Securities and Exchange Commission (SEC) has been in effect since October 23, 2000. The SEC said the regulation addressed the issue of "selective disclosure of material information by issuers," which "bears a close resemblance ... to ordinary 'tipping' and insider trading." The SEC also intended to address "the potential for corporate management to treat material information as a commodity to be used to gain or maintain favor with particular analysts or investors."

8-K Reports

Among the documents public companies file with the SEC and thereby make publicly available are 10-K annual reports, 10-Q quarterly reports, and 8-K reports. I call an 8-K a "material event report," and the SEC calls it a "current report on Form 8-K." The SEC says the 8-K "provides investors with current information to enable them to make informed decisions."

Numerous categories of information are disclosed in an 8-K. Here are three examples: Item 1.01 is "entry into a material definitive agreement," Item 2.02 is "results of operations and financial condition," and Item 5.07 is "submission of matters to a vote of security holders."

The 8-K category on which I focus here is Item 8.01, which is "other events." The SEC says: "This is the place where companies may report anything that they believe is important but is not specifically required elsewhere in the 8-K."

LPHI's Recent 8-K Reports

Consider LPHI's ten most recent 8-K reports. The following seven of them contain an Item 8.01 disclosure, with the date of the event and the date LPHI filed the 8-K shown in parentheses:

1. The denial of class certification in a consolidated class action lawsuit against LPHI (7/9/13; 7/10/13)
2. LPHI's announcement of the declaration of a quarterly dividend to shareholders (9/6/13; 9/12/13)
3. A Texas state appellate court reversal of a lower court decision that had been favorable to LPHI (8/28/13; 9/16/13)
4. The plaintiffs' withdrawal of the class action lawsuit referred to in (1) above (12/2/13; 12/4/13)
5. LPHI's announcement of the declaration of a quarterly dividend to shareholders (12/17/13; 12/17/13)
6. LPHI's announcement of a verdict following the jury trial in the SEC's lawsuit against LPHI (2/3/14; 2/4/14)
7. LPHI's announcement of the declaration of a quarterly dividend to shareholders (3/4/14; 3/5/14).

Events 1, 2, 4, 5, and 7 above were good news for LPHI and the 8-K reports were filed within four business days after the event. Under SEC rules, an 8-K generally is supposed to be filed within four business days.

Event 3 was bad news for LPHI. A three-judge panel of a Texas state appellate court ruled unanimously that LPHI's life settlements are securities under Texas law. The court handed down the decision on Wednesday, August 28, 2013. LPHI filed the 8-K on Monday, September 16, the 12th business day after the event. In the 8-K, LPHI said it strongly disagreed with the decision and will appeal. In recognition of the materiality of the decision, LPHI also said:

Should the decision ever become final, it would result in a material adverse effect on our operations and require substantial changes in our business model.

Event 6 related to a federal jury verdict in the recent case of SEC v. LPHI. As I discussed in post No. 29, LPHI and its top two officers were found guilty of some and not guilty of other civil securities violations. The verdict was clearly a material event. LPHI promptly filed an 8-K, but the two-sentence text of the 8-K did not describe the verdict. Instead, the text said LPHI had issued a press release, had attached the press release to the 8-K as an exhibit, and had posted the press release on LPHI's website. However, LPHI cleverly and falsely titled the press release "Life Partners Prevails in SEC Lawsuit." In the press release, LPHI featured the "not guilty" elements of the verdict in the first few paragraphs, and briefly mentioned the "guilty" elements later in the press release. Also, LPHI prominently displayed the title of the press release at the top of the home page of the company's website with a link to the press release.

Another Adverse Court Decision

On Thursday, February 6, 2014, as I discussed in post No. 30, a three-judge panel of another Texas appellate court unanimously reversed a state district court judgment that had been favorable to LPHI. This was another ruling that LPHI's life settlements are securities under Texas law. An LPHI attorney told a reporter for The Wall Street Journal and me that LPHI plans to petition the Texas Supreme Court to review the decision.

As of the close of business on Friday, March 7, the 20th business day after February 6, LPHI had not filed an 8-K disclosing the decision. I believe that LPHI decided not to file an 8-K about the decision, and instead to mention it deep in LPHI's next major report, in the "Legal Proceedings" section of the report. LPHI's next major report will be the 10-K for the fiscal year ended February 28, 2014. LPHI filed its 10-K last year on May 29, 2013.

General Observations

In my opinion, LPHI's practice of disclosing good news immediately and delaying disclosure of bad news is precisely the type of selective disclosure about which the SEC has expressed concern. Whether LPHI will be called to account for its practice of selective disclosure remains to be seen.

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Email: jmbelth@gmail.com

Blog: www.josephmbelth.com