Michael Abraham

Michael Abraham

Michael Abraham has spent the last 28 years in Financial Services pioneering new approaches to investment and bringing new products to market.  His current focus is on opening up the US Life Settlement market to lower value policies and devising new investment models.  This wealth of expertise has not been gained without challenges, challenges which have helped drive and inform his innovative and entrepreneurial approach to the industry.

Mr. Abraham first became involved in the Traded Endowment Policy (“TEP”) market in the UK in 1990 and went on to co-found the Shepherds Group in 1995.  Shepherds became one of the first companies to buy TEPs over the phone and online, and the major provider of individual TEP portfolios.  Shepherds also produced the first mutual fund based on Life Settlements to be made available worldwide through financial advisers.   However Shepherds went on to encounter difficulties surrounding the sourcing of policies for the fund from Mutual Benefits Corporation (“MBC”), which ultimately led to the closure of the company.  MBC was a Florida based regulated provider of Life Settlements and had over 29,000 investors.

In considering the issues that surround the Shepherds Select Fund and its involvement with MBC it is important to understand how the Fund was set up and run:
-    The Shepherds Select Fund was formed in the Isle of Man.
-    The documentation for the fund was written by a UK Barrister resident on the Isle of Man, who was also a director of the fund.
-    Although the fund was unregulated it was reviewed and passed by the Financial Services Commission (“FSC”) in line with their normal procedures.
-    The administrator was an FSC regulated fund manager and administrator.
-    The custodian was RBS on the island.

MBC was closed by the Securities and Exchange Commission in May 2004.  Various charges were brought against the company and some of its employees, including that of acting fraudulently.  Consequently the Shepherds Select Fund, which invested in fractionalised policies supplied by MBC, was forced to suspend its activities almost immediately as it was unable to value the portfolio with any certainty.  The Isle of Man appointed PricewaterhouseCoopers (“PwC”) as the receiver in February 2005.  This closure of the fund ultimately led to the demise of Shepherds Financial Ltd, which went into liquidation in March 2005.

At the time of closure approximately $40m had been invested in the fund. So far PwC on the Isle of Man has been unable to quantify whether there has been or will be any loss to the investors as there are policies in the fund that have yet to mature.

Investigations were carried out by regulators in the UK and on the Isle of Man, where the fund was registered.  In a public notice on March 12, 2007 the FSC stated that it was investigating the administrator:

‘Separately, and mindful that the administrator was licensed by the FSC, the Commission has been investigating some aspects of the arrangements of certain of the funds. The investigation is ongoing and includes a consideration of whether there was any shortfall against key regulatory requirements.’

As with any investigation of this type, these enquiries will be ongoing until the liquidation of the fund is complete.  PwC stated in their letter to shareholders dated June 8, 2007:

Investigations

‘My investigations into the way in which the Company and its related companies were run prior to my appointment and the conduct of its service providers are continuing.  This is the one area of the liquidation which it is very difficult to discuss with you for potential legal reasons, however I repeat my promise to do so as soon as I am able to.’

However in their subsequent letter dated November 29, 2007 PwC reported that:

Investigations

‘My investigations are continuing into the way in which the Company and its related companies were run prior to my appointment.  I am in the process of taking advice on various legal issues which will determine whether I am able to take action against any of the parties involved.  However, since I last wrote to you, both UK Financial Services Authority and the UK Insolvency Service have both chosen to take no action against any of the relevant parties.’

In subsequent letters from PWC the subject of Investigations has been dropped.

As is evident from the statements above Mr. Abraham is not specifically identified as being under investigation, though as a service provider it is implied.

When the FSC states, ‘the Commission has been investigating some aspects of the arrangements of certain of the funds’, it could therefore be surmised that they are investigating the performance of all regulated individuals. Mr. Abraham points out that for the Isle of Man this fund closure was a highly public affair, and the need to be seen to be doing something for the investors was paramount.  However, it is a fact that at no time has Mr. Abraham been accused of any wrongdoing nor has he been questioned or received requests for information since the closure of the fund over 5 years ago.

As is the normal course of events when a company such as Shepherds goes in to liquidation, both the company and Mr. Abraham were investigated by the Financial Services Authority (“FSA”) and the Insolvency service in the UK.  PWC confirm in their letter dated November 29, 2007 that both organisations decided to take no action against either party.

Mr. Abraham had been an FSA regulated individual for many years.  He resigned from the FSA in April 2005 because he had not been a resident of the UK since 2003 and had no business interests in the UK.  Upon receipt of his resignation, the FSA carried out an in-depth investigation prior to accepting it in July 2005. This is reported on the FSA website as public information:

http://www.fsa.gov.uk/register/indivSearchForm.do (Search for Michael Abraham) or follow this link: http://www.fsa.gov.uk/register/indivHistory.do?sid=313217 and click on “Disciplinary history”.

The FSA website shows that Mr. Abraham had previously been of approved status (Director, Investment Adviser, Apportionment and Oversight), that this status ended on July 22, 2005, and that there had been no disciplinary action against him.

Mr. Abraham states categorically that having been involved in financial services since January 1980, most of which was under regulation, he has had no complaints made against him.

Questions & Answers

Did Mr. Abraham have any financial interest in the arrangements with MBC?

When Mr. Abraham moved to an offshore location in 2003, it quickly became clear that receiving commissions from MBC into a UK company, which then paid him and the offshore Investment Manager, was an inefficient strategy for tax management.  Consequently Mr. Abraham set up a Gibraltar based company to receive those commissions; the average being just over 10%.  From that 10%, 7% was paid to the offshore Investment Manager, Shepherds Investment Ltd (a Cayman Islands registered company).  The balance was held by the Gibraltar based company and used to fund Mr. Abraham’s business and personal interests.  To counterbalance this he took no further income from any of the Shepherds Group companies.

Did Shepherds ignore a due diligence report which recommended that the Shepherds Select Fund stop investing new assets with MBC and start seeking new sources of policies?

Mr. Abraham himself actually commissioned a review of the US Life Settlement market.  He employed a legal assistant on a 6 month contract to assist in the strategy of moving away from the purchase of fractionalised policies to whole ones. During the investigation of other suppliers there were criticisms made against MBC.  These had been previously reported and were almost all available on the internet. These criticisms had also been investigated and reasonable answers had been provided.  All of these issues were reported to financial advisors in a Q & A along with the relevant explanations.  In this way the advisers were given the information so that they might make their own decisions.

As is well known, the US is a litigious and critical society and though there had been a number of legal cases and criticisms against MBC they had in the main been defended successfully or penalties had been satisfied.  However, and not withstanding this, from a regulatory perspective MBC held a current license in one of the most regulated states in the US. It also had more than 29,000 investors.  Consequently though the decision to purchase from other suppliers was made in August 2003 there seemed no immediate need to move away from MBC. With the benefit of hindsight, Mr. Abraham feels that the company should have moved more quickly to buy policies from alternative suppliers.  However, it should be understood that this would have done nothing to protect investors as the fund would still have carried MBC sourced policies and therefore would still have been suspended.

A former director has stated that he and three colleagues left Shepherds because the company was unwilling to make any changes following the delivery of the due diligence report

Mr. Abraham states that this is untrue. In the High Court in London, a prosecution was brought against four former directors of Shepherds. These directors were proven to have begun work on their own fund in March 2003 even before the due diligence report was commissioned.  Three of the four directors were found guilty of a breach of fiduciary duties and obligation of loyalty. The fourth director settled out of court prior to the start of the trial.

It has been suggested that Mr. Abraham acted fraudulently.

It is true that certain individuals continue to make these allegations. Even in 2009, some five years after the MBC closure, an employee of an offshore regulatory authority has indeed made such an accusation.  Mr. Abraham’s lawyers took this up with the authority’s director  and received the following response –

“…..On behalf of (regulator), I can confirm that the (regulator) is not presently aware of any grounds for believing that Mr. Abraham has been guilty of fraudulent conduct of any kind.’

At no point has a complaint been made, nor an action been taken, against Mr. Abraham in his 28 years of involvement in Financial Services.

About Michael Abraham – Background Information

New research⁽¹⁾ from investment management company Managing Partners Limited (MPL) has revealed a sharp rise in the level of discontent among with profits policyholders over the last year.

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