Monday, September 21, 2015

No. 117: Life Partners—A New Dimension of the Bankruptcy Case

Life Partners Holdings, Inc. (LPHI), together with its operating subsidiaries, was an intermediary in the secondary market for life insurance. On January 20, 2015, LPHI (Waco, TX) filed for bankruptcy protection under Chapter 11 of the federal bankruptcy law. The case was assigned to U.S. Bankruptcy Court Judge Russell F. Nelms. On March 13, 2015, the U.S. Trustee appointed H. Thomas Moran II the Chapter 11 Trustee in the LPHI case, and Judge Nelms affirmed the appointment six days later. (See In re LPHI, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-40289.)

I wrote extensively about LPHI in The Insurance Forum, and later I posted numerous blog items before and after the bankruptcy filing. Here I discuss a new dimension of the LPHI bankruptcy case. On September 11, 2015, Trustee Moran filed a 52-page complaint against Brian D. Pardo, the former chief executive officer of LPHI. (See Moran v. Pardo, U.S. Bankruptcy Court, Northern District of Texas, Case No. 15-04079.)

The Adversary Proceeding
Trustee Moran's complaint is called an "adversary proceeding," which is a lawsuit filed within a bankruptcy case and assigned its own case number in the bankruptcy court. In this instance, a major purpose of the adversary proceeding is to recover, for the benefit of the bankruptcy estate, property that Trustee Moran alleges was fraudulently transferred to Pardo prior to the bankruptcy filing.

The cover sheet of the complaint mentions a "demand" of $41 million. That figure appears at two places in the complaint, but other figures also appear. Therefore, I asked Trustee Moran to clarify what the figure represents. In response he said:
The $41 million is the total of salaries, bonuses, and other compensation ($5.8 million), dividends ($34 million or more), and other personal remuneration.
Trustee Moran is represented by three attorneys in the Dallas firm of Thompson & Knight LLP. Pardo is representing himself.

Trustee Moran's Complaint
The introductory section of Trustee Moran's complaint briefly describes the "scheme to defraud" and the "marketing of fraudulent life expectancy estimates." The factual background section contains three subsections, one of which is a subsection about such matters as purposeful reduction of life expectancies to lure investors and inflate profits, transfers to an insider company, failure to disclose policy lapses, exorbitant and undisclosed commissions and fees, and monies paid to Pardo.

The complaint contains 12 counts: two counts of actual fraudulent transfer, two counts of constructive fraudulent transfer, and one count each of preferences, fraud, breach of fiduciary duty, sham to perpetrate a fraud, unjust enrichment, disallowance of Pardo's claims, violation of the federal Racketeer Influenced and Corrupt Organizations Act of 1970, and equitable subordination. Trustee Moran also seeks attorneys' fees.

General Observations
Trustee Moran's complaint contains an elaborate discussion of the arbitrage involving two life expectancy estimates. One estimate, on which Life Partners relied in deciding what it would pay to acquire a policy, was based on a realistic estimate provided by one of the prominent firms that provide life expectancy estimates. The second estimate, invariably much shorter, was used in pricing fractional interests sold to investors. The shorter estimates were provided to Life Partners by Donald T. Cassidy, MD (Reno, NV), an internal medicine practitioner with no experience or training in the preparation of life expectancy estimates.

Trustee Moran's complaint relies heavily on a declaration he filed in the bankruptcy case on May 20. I described the declaration in No. 102 posted May 26, and offered the declaration to readers at the time. However, the recent complaint goes beyond the declaration in some respects, and I think it is stronger than the declaration.

In an adversary proceeding, trial is set routinely at the time of filing. On September 14, the bankruptcy court clerk set the trial for March 2016 before Judge Nelms. Under federal bankruptcy rules, the parties are to confer within 30 days, consider the claims and defenses, consider the possibilities for a prompt settlement, and submit a proposed schedule. In the absence of a settlement, a brief bench trial to resolve the complaint seems likely.

Available Material
I am offering a complimentary 52-page PDF containing Trustee Moran's complaint. E-mail and ask for Trustee Moran's September 11 complaint against Pardo.


Thursday, September 17, 2015

No. 116: Voting Rights—An Important New Book about the Ongoing Battle for the Franchise in the United States

Ari Berman is a political correspondent for The Nation. He is the author of an important 2015 book about the long and arduous political and legal battle for the franchise in our country. The book is entitled Give Us the Ballot: The Modern Struggle for Voting Rights in America.

Selma and the 1965 Voting Rights Act (VRA)
The book begins with "Bloody Sunday" in Selma, Alabama, and President Lyndon Johnson's introduction of a voting rights bill eight days later. Johnson already had achieved passage of the Civil Rights Act of 1964, and had defeated Barry Goldwater decisively in November 1964. When Johnson signed the Voting Rights Act (VRA) in August 1965, it became one of the crown jewels of his "Great Society," along with the Civil Rights Act and Medicare. The purpose of the VRA was to prevent racial discrimination in the voting process and thereby enforce the 14th and 15th Amendments to the U.S. Constitution.

Many were surprised by Johnson's actions because they differed so sharply from many of his previous actions in Congress. For example, Berman notes that Johnson's first vote as a freshman member of the U.S. House of Representatives in 1937 was against an anti-lynching bill.

Berman describes Johnson's famous speech—later known as the "We Shall Overcome Speech"—announcing introduction of the voting rights bill. Johnson delivered the speech to a joint session of Congress in March 1965; it was the first joint session in 19 years.

Early Efforts to Undermine the VRA
Berman describes early efforts to undermine the VRA. They were unsuccessful in part because of the U.S. Supreme Court headed by Chief Justice Earl Warren (an Eisenhower appointee). In 1966, for example, in an 8 to 1 decision, the Warren court upheld the constitutionality of the VRA in the case of South Carolina v. Katzenbach. (In 1954, in a 9 to 0 decision, the Warren Court had ordered desegregation of public schools in the landmark case of Brown v. Board of Education.)

Developments in 1968
Berman describes some major events in 1968. Among them were Johnson's decision not to seek re-election, the assassinations of Martin Luther King, Jr. and Robert Kennedy, Richard Nixon's "Southern Strategy," Nixon's election, and the appointment of Attorney General John Mitchell to head the U.S. Department of Justice, whose Civil Rights Division was charged with enforcing the VRA.

Developments in 1976
Berman describes some major events in 1976. Barbara Jordan of Texas in 1972 had become the first black woman elected to Congress from the South. In July 1976 she became the first black politician to keynote the Democratic National Convention. That event occurred 28 years before an Illinois state senator named Barack Obama keynoted the convention.

Jimmy Carter was elected in 1976, and he owed the election to black voters. Ironically, the state that put him over the top in that tight election was Mississippi, where blacks delivered a third of Carter's total and gave Carter the state by 11,537 votes. Nationally, Carter narrowly lost the white vote, but won 92 percent of about 6.6 million black votes.

Obama's Election in 2008
The election of Barack Obama in 2008 was a wake-up call for VRA opponents. Berman describes the voter identification laws and other laws enacted in various states to restrict voting rights. Also, by then the U.S. Supreme Court had moved sharply to the right with the appointments of Justice Antonin Scalia (a Reagan appointee), Justice Clarence Thomas (a George H. W. Bush appointee), Chief Justice John Roberts (a George W. Bush appointee), and Justice Samuel Alito (a George W. Bush appointee).

The Veasey Lawsuit
Berman describes a major lawsuit that grew out of the enactment of Texas Senate Bill 14 (SB 14) in 2011. It placed important restrictions on the ability of many Texans to vote, especially Hispanics, African-Americans, and the poor. In June 2013 several individuals and organizations filed a lawsuit seeking to prevent implementation of SB 14.

The lead plaintiff was Marc Veasey, then a member of the Texas House of Representatives and now a member of the U.S. House of Representatives. Among the organizations was the Civil Rights Division of the U.S. Department of Justice. The lead defendant was Rick Perry in his official capacity as Texas governor; Greg Abbott became the Texas governor in 2015 and succeeded Perry. (See Veasey v. Perry, U.S. District Court, Southern District of Texas, Case No. 2:13-cv-193.)

The case was assigned to District Judge Nelva Gonzales Ramos (an Obama appointee). She conducted a nine-day bench trial. On October 9, 2014, she issued a 147-page opinion. She entered a permanent and final injunction against enforcement of the voter identification provisions of SB 14. The seven major sections of the opinion are Texas's history with respect to racial disparity in voting rights, the status quo before SB 14 was enacted, the Texas photo identification law, the method and result of passing SB 14, challenges to photo ID laws, discussion, and the remedy. Berman referred to the Ramos opinion as "searing." Here are its three opening paragraphs:
The right to vote: It defines our nation as a democracy. It is the key to what Abraham Lincoln so famously extolled as a "government of the people, by the people, [and] for the people." The Supreme Court of the United States, placing the power of the right to vote in context, explained [in 1964]: "Especially since the right to exercise the franchise in a free and unimpaired manner is preservative of other basic civil and political rights, any alleged infringement of the right of citizens to vote must be carefully and meticulously scrutinized."
In this lawsuit, the Court consolidated four actions challenging Texas Senate Bill 14 (SB 14), which was signed into law on May 27, 2011. The Plaintiffs and Intervenors (collectively "Plaintiffs") claim that SB 14, which requires voters to display one of a very limited number of qualified photo identifications (IDs) to vote, creates a substantial burden on the fundamental right to vote, has a discriminatory effect and purpose, and constitutes a poll tax. Defendants contend that SB 14 is an appropriate measure to combat voter fraud, and that it does not burden the right to vote, but rather improves public confidence in elections and, consequently, increases participation.
The case proceeded to a bench trial, which concluded on September 22, 2014. Pursuant to [Section 52(a) of the Federal Rules of Civil Procedure], after hearing and carefully considering all the evidence, the Court issues this Opinion as its findings of fact and conclusions of law. The Court holds that SB 14 creates an unconstitutional burden on the right to vote, has an impermissible discriminatory effect against Hispanics and African-Americans, and was imposed with an unconstitutional discriminatory purpose. The Court further holds that SB 14 constitutes an unconstitutional poll tax.
The Appeals
The defendants appealed to the Fifth Circuit to stay the injunction. On October 14, 2014, a Fifth Circuit panel granted the stay primarily because the injunction was imposed less than a month before the 2014 election. The 12-page judgment was written by Judge Edith Brown Clement (a George W. Bush appointee), and a one-page concurrence was written by Judge Gregg Costa (an Obama appointee). Judge Catharina Haynes (a George W. Bush appointee) also concurred. (See Veasey v. Perry, U.S. Court of Appeals, Fifth Circuit, No. 14-41127.)

The plaintiffs appealed to the U.S. Supreme Court to vacate the stay. On October 18, 2014, without explanation, the Supreme Court denied the appeal. Justice Ruth Bader Ginsburg (a Clinton appointee) wrote a seven-page dissent. Justice Elena Kagan (an Obama appointee) and Justice Sonia Sotomayor (an Obama appointee) concurred in the dissent. (See Veasey v. Perry, U.S. Supreme Court, No. 14A393.)

In August 2015 a partly different Fifth Circuit panel issued a 53-page judgment written by Judge Haynes of the previous panel. She vacated and remanded the plaintiffs' discriminatory purpose claim for further consideration; she affirmed the district court's finding that SB 14 has a discriminatory effect in violation of the VRA, and remanded for consideration of the proper remedy; she vacated the district court's holding that SB 14 is a poll tax; she vacated the district court's finding that SB 14 unconstitutionally burdens the right to vote; and therefore she dismissed the plaintiffs' constitutional claims. Chief Judge Carl E. Stewart (a Clinton appointee) concurred. District Judge Nannette Jolivette Brown of the Eastern District of Louisiana (an Obama appointee), sitting by designation, also concurred. (See Veasey v. Abbott, U.S. Court of Appeals, Fifth Circuit, No. 14-41127.)

General Observations
Immigrants, African-Americans, Hispanics, young people, and low-income people tend to vote Democratic, and large voter turnouts favor Democratic candidates. The objective of efforts to undermine the VRA is to shrink the size of the electorate so as to favor Republican candidates. Opponents of the VRA have not produced evidence to support any of their arguments, such as the need to protect against voter fraud. The Berman book is required reading for those interested in the subject of voting rights. The Ramos opinion is also required reading.

Available Material
I am offering a complimentary 220-page PDF consisting of the 147-page October 2014 Ramos opinion, the 13-page October 2014 Fifth Circuit ruling, the 7-page Ginsburg dissent to the October 2014 U.S. Supreme Court ruling, and the 53-page August 2015 Fifth Circuit ruling. E-mail and ask for the package relating to the Veasey case.


Friday, September 11, 2015

No. 115: Annuity Factoring Companies in the Crosshairs

The August 2011 and October 2011 issues of The Insurance Forum contain major articles critical of factoring companies that pay cash to annuitants and in exchange receive the annuitants' annuity payments. The articles generated almost no feedback. I thought perhaps I was whistling in the wind, but a recent lawsuit causes me to think otherwise.

The CFPB/DFS Complaint
On August 20, 2015, the federal Consumer Financial Protection Bureau (CFPB) and the acting superintendent of the New York State Department of Financial Services (DFS) filed a lawsuit against two annuity factoring companies and three individuals. The plaintiffs are represented by several CFPB attorneys and an assistant attorney general of New York. The case was assigned to U.S. District Judge Josephine L. Staton and Magistrate Judge Jay C. Gandhi. (See CFPB v. Pension Funding, U.S. District Court, Central District of California, Case No. 8:15-cv-1329.)

Defendants Pension Funding LLC and Pension Income LLC are related companies that extend consumer credit, service consumer loans, and transmit money in connection with their loan business. They are at the same address in Huntington Beach, California. Steven Covey, Edwin Lichtig, and Rex Hofelter are associated with the defendants, which together are a successor to Structured Investments Co. LLC. The latter company was mentioned in my October 2011 article. Here is a lightly edited version of some of the allegations in the complaint:

  • Defendants said they transacted pension buyouts and advanced the cash when needed. They said a pension buyout was not a pension loan but rather was a pension lump sum.
  • Defendants denied their product was a loan, and they did not disclose fees or interest rates.
  • Defendants claimed the cost to consumers could be as little as 13 percent and contrasted their product with credit cards charging 18 to 24 percent or more per year in compound interest.
  • Defendants said their product was not a loan and there was no interest rate.
  • Defendants said that there was no interest because their program was not a loan, and that their "range" was a cost of money rate or a discount rate.
  • Defendants compared the discount rate to a typical mortgage and claimed participants paid approximately the same or less than credit card rates and not the highest rates.
  • The complaint says that the transactions on average had an effective annual interest rate of 28.56 percent, and that the transactions with New York consumers consistently had nominal annual interest rates in excess of both the New York civil usury cap of 16 percent and the New York criminal usury cap of 25 percent.

The seven counts in the complaint are unfair acts or practices in violation of the federal Consumer Financial Protection Act of 2010 (CFPA), deceptive acts or practices in violation of CFPA, abusive acts or practices in violation of CFPA, usury, false and misleading advertising of loans, intentional misrepresentation of a material fact regarding a financial product, and unlicensed money transmitting. The plaintiffs seek injunctive relief, damages, redress to harmed consumers, disgorgement, civil monetary penalties, and costs.

General Observations
In my 2011 articles, I deplored the lack of disclosure of vital information to the annuitant, especially what I called the "crucial disclosure" of the annual interest rate or annual percentage rate associated with the transaction. I also mentioned the absurd argument that paying cash to an annuitant in exchange for receiving the annuitant's annuity payments does not constitute a loan to the annuitant. As shown above, the defendants said such a transaction was not a loan and there was no interest, but also mentioned interest and understated the interest rate.

Available Material
I am offering a complimentary 29-page PDF consisting of the 24-page CFPB/DFS complaint, my three-page August 2011 article, and my two-page October 2011 article. Send an e-mail to and ask for the package relating to the CFPB/DFS lawsuit against two annuity factoring companies.


Monday, August 31, 2015

No. 114: AIG's War Against Coventry and the Buergers Goes to Trial

In No. 67 (posted September 16, 2014) entitled "AIG Declares War against Coventry and the Buergers," I discussed a lawsuit by Lavastone Capital, a unit of American International Group (AIG), against Coventry First (Fort Washington, PA), an intermediary in the secondary market for life insurance. In that posting, I offered the 151-page text of the Lavastone complaint. Here I summarize the complaint briefly and mention some subsequent developments. (See Lavastone v. Coventry, U.S. District Court, Southern District of New York, Case No. 1:14-cv-7139.)

The Complaint
Lavastone filed its complaint on September 5, 2014. The defendants were Coventry; four firms affiliated with Coventry (including the "LST Entities"); Alan Buerger, chief executive officer of Coventry; Constance Buerger, wife of Alan Buerger; Reid Buerger, son of Alan Buerger; and Krista Buerger, wife of Reid Buerger. The case was assigned to U.S. District Judge Jed S. Rakoff.

Over a period of more than ten years, Coventry became a major player in the secondary market by acquiring thousands of policies and passing them along to Lavastone pursuant to the parties' agreements. In its complaint Lavastone made 13 claims and sought, among other items, compensatory damages, punitive damages, treble damages, injunctive relief, declaratory judgments, disgorgement, attorney fees, and prejudgment interest.

On November 4, 2014, Coventry filed a motion to dismiss the complaint. On February 3, 2015, Judge Rakoff denied the motion. He also dismissed three of Lavastone's claims. The remaining ten claims were violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act, conspiracy to violate RICO, fraud, fraudulent inducement, breach of contract, breach of implied covenant of good faith and fair dealing, negligent misrepresentation, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment.

Recently Filed Documents
On May 18, 2015, Lavastone and Coventry filed cross motions for summary judgment. On the same day, Constance Buerger filed a separate motion for summary judgment.

On July 10, Judge Rakoff issued an Order, and on July 30 he issued a Memorandum explaining the reasoning behind the Order. He granted Lavastone's motion for summary judgment relating to breach of contract, but left for trial the matter of damages. He also said there were several other matters that needed to be resolved at trial. He denied Coventry's motion for summary judgment, granted Constance Buerger's motion for summary judgment, and dismissed her from the case.

On August 13, Coventry filed a motion for clarification, or, in the alternative, reconsideration, of Judge Rakoff's July 10 Order and July 30 Memorandum. Judge Rakoff denied the motion.

On August 20, Lavastone and Coventry jointly filed a Pretrial Consent Order. The document includes, among other things, a joint overview of the case, statements of the parties' claims and defenses, facts on which the parties agree, the plaintiff's statement of the relief sought, and the names of witnesses the parties intend to call at the trial. Attached to the document are lists of exhibits the parties intend to introduce at the trial. Two amendments to the document were filed later.

The Parties' Statements
The first paragraph below shows, from the Pretrial Consent Order, the plaintiff's statement prepared without input from the defendants. The second paragraph below shows the defendants' statement prepared without input from the plaintiff.
Plaintiff alleges that, over the course of the parties' relationship, Defendants exploited Lavastone's trust and confidence, violated the parties' agreements, and executed a scheme to defraud Lavastone, by, inter alia, systematically misusing Lavastone's proprietary and confidential information, including its maximum purchase price; misrepresenting the underlying purchase price and broker's fees incurred in the acquisition of Life Policies; artificially inflating the price of Life Policies; charging Lavastone for broker's fees that were not actually paid by Defendants to Life Policy brokers; laundering the Life Policies through affiliates to conceal the underlying purchase price; diverting irrevocable beneficiary interests that benefitted the Defendants and diminished the value of the Life Policies; and reselling Life Policies to Lavastone with hidden mark-ups. Defendants induced Lavastone to pay over $150 million in markups and broker's fee overcharges, in addition to the $1 billion in origination, incentive, and other fees Lavastone paid to Coventry First for its expertise and assistance in identifying, negotiating, and acquiring Life Policies in the secondary market. Defendants' conduct violated federal and state law.
Defendants contend that Lavastone's claims and factual allegations are without merit. In particular, Defendants believed that the Origination Agreements permitted Coventry First and the LST Entities to sell Life Policies that were not subject to the exclusivity provisions of the contracts ("nonexclusive Life Policies") to Lavastone at a price greater than acquisition cost, without restriction, and the parties' repeated course of conduct confirmed that belief. Defendants made numerous disclosures to Lavastone of the existence and amount of gains on nonexclusive Life Policy sales, and Lavastone never claimed that such claims breached the contracts or suggested that they were fraudulent. Moreover, Lavastone indicated to Defendants, both by its actions and words, that it and its senior executives believed the contracts permitted these gains on sale. Lavastone—through Defendants' disclosures, its ordinary business activities, and its own formal audits of Coventry First and Lavastone's fiscal agents—knew and approved of Coventry First or its affiliates selling Lavastone nonexclusive Life Policies at prices higher than acquisition cost. Lavastone concedes that Coventry First or its affiliates properly sold Lavastone hundreds of Life Policies at greater than acquisition cost. Similarly, Lavastone approved of Coventry First in certain instances reimbursing broker compensation on an aggregate basis across Life Policy sales, as well as Coventry First's decision to place irrevocable beneficiary interests on certain Life Policies. Lavastone has incurred no damages as a result of any conduct by Defendants.
The Trial
The trial began on August 27. Judge Rakoff is presiding, and there is no jury. The parties estimate that the trial will take 10 to 15 full court days, which probably will translate into a calendar month or more. It is my understanding that the first day consisted of opening statements and some testimony from David Fields, who is the first witness called by Lavastone, that the second day consisted of further testimony by Fields, and that the trial will resume after Labor Day.

General Observations
The Lavastone/Coventry case may be one of the most important in the history of the secondary market for life insurance, and should be followed by persons interested in that market. An eventual result adverse to Coventry could have devastating consequences for the firm, which has long been a major player in the market. I plan to report the results of the trial when Judge Rakoff hands down his decision.

David Fields headed the team that initiated AIG's entry into the secondary market in 2001, despite reservations expressed by Maurice "Hank" Greenberg, then chief executive officer of AIG. That incident is discussed in the August 2005 issue of The Insurance Forum, in an appendix to my article about the lawsuit filed against AIG, Greenberg, and Howard Smith by then New York Attorney General Eliot Spitzer and then New York Superintendent of Insurance Howard Mills.

Another possible witness during the trial is Reid Buerger, who repeatedly invoked the Fifth Amendment during an investigation of Coventry by Spitzer. I discussed that incident in the January/February 2007 issue of The Insurance Forum, where I discussed Spitzer's investigation.

Available Material
I am offering a complimentary 55-page PDF consisting of Judge Rakoff's 3-page July 10 Order, his 22-page July 30 Memorandum, and the 30-page Lavastone/Coventry August 20 joint Pretrial Consent Order (not including attachments and amendments). E-mail and ask for the July/August 2015 Lavastone/Coventry package.


Thursday, August 20, 2015

No. 113: Consulting Physicians—Their Role in Denying Disability Insurance Claims

In the June 2010 issue of The Insurance Forum, in an article entitled "How a Medical Reviewer Helped Reliance Standard Deny Disability Claims," I described the work of a physician who served as a consultant to an insurance company and helped the company deny many disability insurance claims. A recent Sixth Circuit decision in a disability case prompts me to revisit the subject of consulting physicians who are retained by parties seeking to deny claims, have a conflict of interest because of the compensation they receive from those parties, do not see the claimants, and render their opinions based solely on reviews of medical records.

The Shaw Case
Raymond Shaw, a 39-year-old customer service representative for Michigan Bell, stopped working in August 2009 because of chronic neck pain. He was covered under a disability program (Plan) administered by Sedgwick Claims Management Services, Inc. He received short-term disability benefits for one year, but his application for long-term disability (LTD) benefits was denied. His appeal to the Plan was also denied.

In March 2013 Shaw filed a lawsuit against the Plan alleging that he was wrongly denied LTD benefits. In July 2013 Shaw filed an amended complaint. In September 2013 the Plan answered the amended complaint. In February 2014 both parties filed motions for judgment on the record. In September 2014, the district court granted the Plan's motion and denied Shaw's motion. Two weeks later Shaw filed a notice of appeal. (See Shaw v. AT&T Umbrella Benefit Plan No. 1, U.S. District Court, Eastern District of Michigan, Case No. 5:13-cv-11461.)

On July 29, 2015, a three-judge appellate panel reversed the district court's ruling. The reversal was in an 18-page opinion by Chief Judge Ransey Guy Cole, Jr. and joined by Senior Judge Ronald Lee Gilman. They ruled that "the Plan acted arbitrarily and capriciously in denying Shaw LTD benefits." They not only remanded the case but also ordered the district court to enter an order awarding LTD benefits to Shaw.

A perfunctory two-paragraph dissent was filed by Judge Raymond M. Kethledge. He said the Plan's denial was not arbitrary and capricious because Shaw failed to provide "objective medical documentation," and because the Plan relied on the opinions of specialists who reviewed Shaw's medical records. (See Shaw v. AT&T Umbrella Benefit Plan No. 1, U.S. Court of Appeals, Sixth Circuit, Case No. 14-2224).

The Consulting Physicians
In dealing with Shaw's initial appeal of the Plan's denial of LTD benefits, Sedgwick sent Shaw's medical records to Dr. Imad M. Shahhal, a neurosurgeon, and to Dr. Jamie Lee Lewis, a specialist in physical medicine and rehabilitation and pain medicine. Each called Shaw's treating physicians and asked them to call back within 24 hours or the reports would be "based on available medical information." The treating physicians did not meet the deadline and the consulting physicians promptly concluded that Shaw was "not disabled from any occupation."

The two appellate judges who reversed the district court ruling apparently were outraged by the imposition of a 24-hour deadline on busy physicians. Also, the two judges said that "Dr. Lewis's conclusions have been questioned in numerous federal cases, in all of which he was hired by Sedgwick." They cited details from four such cases. In one of them, Dr. Lewis was described as having submitted a review that "ignored or misstated evidence by treating physicians."

My June 2010 Article
As indicated at the outset, an article about insurance company use of consulting physicians was in the June 2010 issue of The Insurance Forum. It focused on Dr. William S. Hauptman, a specialist in gastroenterology and internal medicine, who had a contract with Reliance Standard Life Insurance Company. Over three years he conducted 446 reviews for the company and received compensation of about $400,000.

Dr. Hauptman's work has been mentioned in numerous lawsuits. My June 2010 article described two cases in some detail. In one of them, the court illustrated the bias in his reports by citing his use of boldface type and underlining to emphasize his points supporting denial of the claim.

In the article I said the use of a consulting physician creates a serious conflict of interest for the physician because he or she knows that the insurance company wants support for an adverse claim decision, that he or she will be paid generously for providing that support, and that failing to provide that support will discourage the company from using the physician. I suggested that it might be helpful to disclose publicly the number and percentage of cases handled by a consulting physician where he or she recommended denial of a claim.

Available Material
I am offering a complimentary 22-page PDF consisting of the appellate ruling, the brief dissent, and my June 2010 article. E-mail and ask for the package relating to the Shaw case.


Monday, August 10, 2015

No. 112: Shadow Insurance—Confidential Documents Dated 2003 Are Now in the Public Domain

Readers of this blog know I have been trying without success to obtain documents associated with shadow insurance transactions between insurance companies and their wholly owned reinsurance subsidiaries. In the Ross case discussed in No. 111 (posted August 3, 2015), certain 2003 documents are now available in court filings. Despite their age, the documents shed light on the subject. (See Ross v. AXA Equitable Life, U.S. District Court, Southern District of New York, Case No. 1:14-cv-2904.)

The Exhibits
The exhibits mentioned here were filed in the Ross case on April 27, 2015. Exhibit 8 is an automatic level term reinsurance agreement between The Equitable Life Assurance Society of the United States (Equitable), which later became AXA Equitable Life, and AXA Financial (Bermuda) Ltd., a wholly owned reinsurance subsidiary of Equitable. The agreement was signed by the parties on December 22 and 29, 2003.

Exhibit 9 is an automatic lapse protection rider reinsurance agreement between the same parties. The agreement was signed by the parties on December 22 and 29, 2003.

Exhibit 10 consists of two standby letters of credit. The first, for $60 million, was issued by National Australia Bank (New York, NY) to AXA Financial (Bermuda) Ltd., was dated December 22, 2003, and expired December 21, 2004. Equitable was the beneficiary. The second, for $40 million, was issued by ABN Amro Bank N.V. (Chicago, IL) to AXA Financial (Bermuda) Ltd., was dated December 30, 2003, and expired December 21, 2004. Equitable was the beneficiary.

Exhibit 11 consists of a letter dated November 7, 2003 to the New York Department of Insurance (Department) from Equitable, and two proposed inter-company service agreements between Equitable and Athena Reinsurance, Ltd. (Bermuda). At the time Athena was being formed as a wholly owned reinsurance subsidiary of AXA Financial, Inc.

Exhibit 14 is a letter dated December 19, 2003 to Equitable from the Department. The Department expressed "no objection" to the agreements submitted with Equitable's November 7, 2003 letter.

The Freedom of Information Law
I have experience with New York State's Freedom of Information Law (FOIL). Equitable's November 7, 2003 letter to the Department referred to the FOIL exemption for trade secrets. The company requested confidential treatment for the letter and the agreements, and said the information was "provided with the express understanding that the confidentiality of such information will be safeguarded pursuant to all applicable provisions of the law . . . ."

Here is my understanding of what the above request means. If the Department had received a FOIL request for the material, the Department would have notified the company and asked the company to justify confidential treatment, with the burden of proof on the company.

If the company had submitted justification, and if the Department had agreed with the company, the Department would have denied the FOIL request. The requester could then have submitted to the Department an administrative appeal of the denial. If the Department had denied the appeal, the requester could have sought court review of the denial. If the Department had granted the appeal, the company could have sought a court order preventing the Department from releasing the material.

On the other hand, if the Department had disagreed with the company's justification, the company could have submitted to the Department an administrative appeal of the determination. If the Department had denied the appeal, the company could have sought court review of the determination. If the Department had granted the appeal, the requester could have sought court review of the determination.

The above is an oversimplified and incomplete description of the procedures associated with a FOIL request. Suffice it to say that going through the exercise can consume months or years. I was involved in such an exercise a few years ago when I sought documents filed with the Department by Phoenix Companies, Inc. relating to its cost-of-insurance increases on universal life policies used in stranger-originated life insurance transactions. The struggle went on for more than a year and was never fully resolved. However, I was able to announce in No. 26 (posted January 29, 2014) a judge's unsealing of several documents that had been filed initially under seal in lawsuits against Phoenix.

Available Material
I am offering a complimentary 88-page PDF consisting of the 19-page Exhibit 8, the 20-page Exhibit 9, the seven-page Exhibit 10, the 40-page Exhibit 11, and the two-page Exhibit 14. E-mail and ask for the five exhibits in the case of Ross v. AXA Equitable Life.


Monday, August 3, 2015

No. 111: Shadow Insurance—A Legal Setback in the Struggle against the Life Insurance Shell Game

On July 21, 2015, U.S. District Judge Jesse M. Furman issued an Opinion and Order dismissing for lack of jurisdiction a class action lawsuit relating to the use of shadow insurance. He ruled the plaintiffs had failed to show they suffered a "concrete injury-in-fact," as required to establish standing under the U.S. Constitution. He dismissed the complaint, and he denied the plaintiffs' motion for class certification as moot. (See Ross v. AXA Equitable Life, U.S. District Court, Southern District of New York, Case No. 1:14-cv-2904.)

The Ross (Yale) Lawsuit
The initial complaint was filed in April 2014. At that time, the lead plaintiff was Andrew Yale. On February 24, 2015, the judge granted Yale's unopposed motion to substitute—"due to family medical issues"—Jonathan Ross and David Levin as lead plaintiffs. Two days later they filed an amended complaint. On March 24 they filed a second amended complaint. On April 1 they filed a motion to certify the class. On April 14 AXA filed a motion to dismiss the complaint. On May 5 the plaintiffs filed an opposition to the motion to dismiss. On May 12 the defendant replied to the plaintiffs' opposition. Here, with citations omitted, are the two concluding paragraphs of Judge Furman's July 21 Opinion and Order (NYDFS is the New York Department of Financial Services):
For the reasons stated above, the Court concludes that Plaintiffs fail to demonstrate an injury sufficient to "satisfy the strictures of constitutional standing," and that the Complaint must therefore be dismissed for lack of subject-matter jurisdiction. In light of that conclusion, the Court need not and will not address Defendant's other grounds for dismissal. Further, Plaintiffs' motion for class certification must be and is denied as moot.
The Court does not arrive at its conclusion lightly. The pervasiveness of shadow insurance in New York—and AXA's alleged failure to disclose details of those transactions—may well pose a threat to the stability and reliability of the state's insurance system, as NYDFS suggested. Nevertheless, the Court cannot address the legality or propriety of AXA's conduct without the constitutional authority to do so. The absence of "a substantial controversy ... of sufficient immediacy and reality to justify judicial resolution" does not, of course, mean that Plaintiffs—or life insurance policyholders more generally—are without recourse. To the contrary, one of the purposes of the injury-in-fact requirement is to ensure that generalized claims of this nature are "committed ... ultimately to the political process." Notably, it appears that that process has at least partially served its purpose in this case: As plaintiffs themselves concede, the NYDFS promulgated a new regulation after its investigation "explicitly requiring disclosure of additional information regarding shadow insurance transactions." Ultimately, having to establish an injury-in-fact worthy of federal judicial intervention, it is those political channels (or, perhaps, state court) through (or in) which plaintiffs must seek to resolve their grievances.
Other Shadow Insurance Lawsuits
Several shadow insurance lawsuits have been filed in federal courts. Aside from the cases discussed in Nos. 107 (June 30, 2015) and 110 (July 17, 2015), and in addition to Ross, other cases have been consolidated under Senior District Judge Denise L. Cote in the same court as the Ross case. Among those other cases are two lawsuits against Metropolitan Life Insurance Company. (See Robainas v. Metropolitan Life and Intoccia v. Metropolitan Life, U.S. District Court, Southern District of New York, Case Nos. 1:15-cv-3061 and 1:14-cv-9926.)

On July 22, the day after Judge Furman issued his ruling, an attorney for Metropolitan Life sent a letter to Judge Cote about Judge Furman's "well reasoned" decision in the "nearly identical" Ross case. The attorney "wanted to be sure the Court had the benefit of Judge Furman's thinking as it considers [Metropolitan Life's] motion to dismiss" the Robainas complaint, and he attached Judge Furman's decision "for the Court's convenience."

On July 23 an attorney for Ross sent a courtesy letter to Judge Furman and attached a copy of a letter sent to Judge Cote in response to the above mentioned July 22 letter. In the letter to Judge Cote the attorney for Ross said: "Plaintiffs intend to appeal Judge Furman's decision and respectfully submit that it would be error for this Court to adopt the reasoning of that opinion in the MetLife cases." He described the analysis in Judge Furman's ruling as "flawed for several independent reasons," and he identified those reasons. Presumably the appeal will be filed in the U.S. Court of Appeals for the Second Circuit.

My Open Records Law Request in Iowa
In No. 109 (July 13, 2015) I discussed the May 2015 independent auditor reports filed by the eight "limited purpose subsidiaries" (LPSs) domiciled in Iowa. I mentioned dubious assets carried by the LPSs in their financial statements as of the end of 2014. Six of the LPSs carry as assets items that are not allowed under generally accepted accounting principles (GAAP) and are not allowed under statutory accounting practices. The other two LPSs carry as assets items that are not allowed under GAAP.

On July 24, pursuant to the Iowa Open Records Law, I requested copies of the documents associated with each of those dubious assets, including documents reflecting the Iowa Insurance Division's approval of those assets. The Division denied my request. I now plan to appeal the denial to Nick Gerhart, the Iowa insurance commissioner.

Available Material
I am offering a complimentary 28-page PDF consisting of three items: the 23-page July 21 Opinion and Order by Judge Furman, the two-page July 22 letter to Judge Cote from an attorney for Metropolitan Life, and the three-page July 23 letter to Judge Cote from an attorney for Ross. Email and ask for the package relating to the case of Ross v. AXA Equitable Life.