Published on 10 Jul 2008
Michael Abraham has spent the last 30 years+ in Financial Services pioneering new approaches to investment and bringing new products to market. His current focus is on developing and marketing a new approach to alternative fund structures. He has been instrumental in developing a US regulated structure that can defer or avoid taxes such as withholding, UBTI, FIRPTA, capital gains and income. He has been retained to produce a life settlement fund using this approach for which his expertise is well suited. The wealth of expertise that he has was not 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 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:
‘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:
‘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.
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 in the same letter went on to say:
‘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.’
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.
As is evident from the statements above Mr. Abraham was 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 had Mr. Abraham been accused of any wrongdoing nor been questioned or received requests for information since the closure of the fund up until early 2010 when he received notice from the Isle of Man court that proceedings had been taken out against Mr Leach, Caledonian and him.
The basis of the complaint is that the Directors of the fund took commission from MBC. This is categorically denied.
The companies received commission from MBC the bulk of which was passed back to the investment Manager for support of fund activities. Directors were only ever paid fees or salaries. All of these matters are fully recorded in Shepherds audited account and the audited accounts of the Fund. They were also clearly declared in the documentation.
This, Mr Abraham feels is no more than the Receiver attempting to bully directors into settling an erroneous complaint and generating some extra cash. He also points out that the case was not brought until more than 5 years after the suspension of the fund. He questions this timing, why so long?
Furthermore, now, over three years after the proceedings were instigated he has not been approached or questioned by the Receiver or the court.