Michael Abraham

A private bank is cautioning clients against investing in life settlement funds, saying longer life expectancies eat into projected re-turns, and the funds carry more risk than disclosed.

Arbuthnot Latham issued a recent report highlighting what it called the “structural pitfalls” of these funds, which contain US life insurance policies sold on before the holder dies. The UK private bank said certain of these funds failed to recognise that people are living longer each year and the rich outlive the poor, which further diminishes the returns of funds holding life insurance policies worth more than $1m.

While the report did not name the funds it criticised, it did say they were being heavily marketed to UK independent financial advisers. These advisers may not be aware of the contentious valuation methods or the risks, such as using cash from new subscribers to meet monthly premiums on the policies they hold.

“Although many of these life settlement funds retain recognised accountancy firms to audit their numbers, after reading the fine print, one learns that the valuation process is ‘the sole responsibility of the directors/management’ of the fund”, the report says.

Ned Cazalet, independent analyst, said investors must pay close attention to how funds account for life expectancy. “The key question is what are your assumptions and how much slack have you built in to allow for people living longer?”

Professor David Blake, director of the Pensions Institute at the Cass Business School, said the industry had a “vested interest” in inflating the values of policies, giving more money to the policyholders and to the providers and brokers receiving cuts worth up to half of the total return.

“If you told investors that policyholders are going to die in five years instead of two, that undercuts returns and the premise that investors would get paid back quickly, and that’s why the industry is discredited”, he said. “But these models can be improved and it can be a valid asset class in future.”

Copyright The Financial Times Limited 2011. By: Sara Silver.

Commentary by Michael Abraham:

for once I must agree with Ned Cazalet as anyone who has taken any notice of what I have been saying since 2004 they will know I am in complete agreement. Furthermore the ‘slack he wants built in’ is not just through LE’s but through the valuation methodology.  This is where the reserves should be built in to allow for people living longer.  Professor Blake is however out of touch with today’s market the transparency now demanded ensures that the gargantuan fees are not charged to the new funds. The ‘vested interest’ comment is naive.

Adley Abdulwahab, an owner of A&O Resource Management, was convicted of a life settlements marketing scheme that defrauded more than 800 investors out of $100 million.

The 35-year-old Houston man was convicted Friday by a federal court in Richmond, Va., on one count of conspiracy to commit mail fraud, five counts of mail fraud, one count of conspiracy to commit money laundering, five counts of money laundering and three counts of securities fraud.

Abdulwahab faces up to 20 years in prison on each count except the securities fraud charges for which he faces up to five years in prison, according to the U.S. Attorney’s Office for the Eastern District of Virginia.

A sentencing date has not been set.

Commentary by Michael Abraham:

An out and out crook by the look of it and good riddance to him!

Eide Bailly, a previous auditor for Life Partners Holdings, said that its audit for the fiscal year ended Feb. 28, 2009 can no longer can be relied upon, Life Partners said in a filing with the Securities and Exchange Commission.

Eide Bailly notified Life Partners’ Audit Committee Chairman Tad Ballantyne Tuesday that based upon disclosures by Ernst & Young, the firm’s most recent auditor, that it believed its audit for 2009 “may have material misstatements related to improper revenue recognition.”

Eide Bailly said that until an analysis has been done on Life Partners’ revenue-recognition policy, the report on the firm’s financial statements and effectiveness of its internal controls over its financial reporting can no longer be relied upon.

Ernst & Young resigned as Life Partners’ auditor on June 3 after Life Partners chief executive Brian Pardo threatened to take action against the firm and the SEC unless Life Partners’ annual report for the last fiscal year was approved soon. Pardo made the threat in a memo to Life Partners’ sales network and investors. It was published by The Life Settlements Report June 2.

In its resignation letter, Ernst & Young said that Life Partners should revise its revenue-recognition policy because it recognizes income when an agreement had been reached to buy a policy. It would be better to recognize revenues at the final closing of escrowed funds, Ernst & Young said.

Neither Pardo nor Scott Peden, general counsel for parent company Life Partners Holdings and president of provider Life Partners, responded to a call or email from The Life Settlements Wire seeking comment.

In his letter to his sales network and investors, Pardo opposed changing the revenue recognition policy. “Restating for any period, for any reason is viewed by the market as an implicit admission that prior quarters were probably misstated, which they were not,” he wrote.

“There is no reason to restate because any proposed adjustment is immaterial under GAAP [generally accepted accounting principles] guidelines,” Pardo stated. “E&Y signed off on our revenue recognition criteria policy last year and every other audit firm has as well since we went public in 2000.”

Liz Stabenow, director of communication for Eide Bailly in Fargo, N.D., declined to comment, stating that it’s the firm’s policy not to comment on current or past clients.

Source: SEC Filing

Commentary by Michael Abraham:

Having been closely involved and damaged by the collapse of MBC I still can’t quite understand how a company run on almost the exact same model as MBC has traded a further 7 years since MBC was closed.  However, having said that what one can see is the wolves gathering and the institutions ‘running for the hills’. 

Pardo seems to be quite formidable and I for one wish him luck in managing his way out of this situation because the main losers if the ‘wolves’ get their way is that close on 30,000 will end up losing most if not all of their investment.  And the industry take another knock!

U.K.-based Centurion Fund Managers said it has suspended redemptions from the Argent Fund to protect investors in the fund, according to the International Adviser.

The story said Centurion sent a letter to investors last week after several large investors asked to withdraw their money.

Centurion blamed a liquidity imbalance in the fund to the increase in the expected discount rate on purchase of policies and lower number of maturities in the fund.

In the June, 5, 2008, issue of The Life Settlements Report, Centurion said it had listed the $85 million Argent Fund on the Euro Multi Lateral Trading Facility in Luxembourg. It said that Argent is a fund of funds.

Commentary by Michael Abraham:

This will always be a problem for small funds in illiquid assets and gating the fund is the right thing to do.  Large investors are normally professional investors and are well aware of the issues when investing in such a fund.  Any fund manager worth his salt would agree phased redemption with such investors at the time of investment but of course it depends on how desperately the manager wants that investment and how concerned he is for his shareholders.

A lawsuit was filed earlier this month in federal court against the board of Life Partners, alleging breaches of fiduciary duty resulting from “gross and reckless mismanagement.”

The plaintiff, Life Partners shareholder Harriet Goldstein, filed suit June 9 in U.S. District Court in Waco, Texas. She named Brian Pardo, Scott Peden, Fred Dewald, Tad Ballantyne and Harald Rafuse.

Goldstein also alleged that Pardo, chief executive of Life Partners Holdings, the parent company of Waco, Texas, provider Life Partners, and Peden, general counsel of the parent company, benefited from “insider-selling” non-public information when they sold artificially inflated shares of stock in the firm between 2007 and 2009.

The suit said Pardo sold 368,807 shares in the Pardo family trust for $7.5 million and Peden sold 19,531 shares for $301,270.

The suit alleges derivative claims of breach of fiduciary duty, breach of fiduciary duty for failing to oversee the company and maintain internal controls, gross mismanagement and unjust enrichment.

Commentary by Michael Abraham:

I wonder which liquidator is supporting this action!

A federal judge said a counterclaim against a Prudential Life Insurance Co. of America subsidiary for negligent misrepresentation can proceed because the insurer told provider Coventry First that a $10 million policy was valid.

Fort Lauderdale, Fla., U.S. District Court Judge James Cohn said yesterday that Wells Fargo can go forward on the counterclaim.

The case was brought by Pruco Life Insurance Co. against Steven Brasner, a producer with Infinity Financial Group; Mark Tarshis; Infinity Financial Group; and Wells Fargo Bank.

Pruco sued in July 2010 alleging that a $10 million policy issued April 2006 on Arlene Berger was a stranger-originated life insurance (STOLI). The carrier said if it had known the policy was fraudulent, it would not have issued it. Pruco said the policy lacked insurable interest and should be voided.

Cohn said after the court denied Wells Fargo’s motion to dismiss the insurable-interest claim, the bank filed its counterclaim charging negligent misrepresentation against Pruco.

Wells Fargo alleged that Pruco raised red flags during the underwriting process when it reviewed the policy application that it could possibly be a STOLI, but still went ahead and issued the policy.

After the contestability period ended, Pruco supplied verification of coverage to Coventry, which then sold the policy to Wells Fargo’s client in December 2008.

Steven Sklaver, a life settlement attorney with the law firm Susman Godfrey in Los Angeles who is not involved in the case, said in an email that the decision is a “very good result for investors.”

He said that they now know, at least in Florida, that if they buy a policy after contestability and the carrier affirms its validity and then later changes its mind and tries to rescind, the carrier could be forced to return acquisition costs and premiums to investors.

In April 2010, a Florida prosecutor filed a 22-count criminal complaint against Brasner, charging him with fraud in connection with a STOLI scheme involving $78 million in death benefits. This was believed to be the first criminal case brought against a STOLI perpetrator.

Commentary by Michael Abraham:

The greed exhibited by all parties is really quite sickly.  The whole concept of manufactured policies is flawed but while you have executives in the carriers seeing a way of swelling their end of year numbers (affecting their bonuses) and advisers interested in large front end commissions these things will go on.  The problem is that the industry has and is suffering for it and the genuine sellers can’t find a buyer!

Andy Castro, who was purportedly Lincoln National Life Insurance Co.‘s agent of the year, was sued for allegedly falsifying information on insurance applications for $3 million policies for a California couple.

Miriam and Herman Russell sued Lincoln and Castro in San Diego Superior Court on July 26, 2010. Lincoln got the case moved to federal court June 28.

The Russells alleged insurance bad faith, fraud and financial elder abuse in their complaint.

The Russells say they were contacted by Castro, a Nevada resident, in June 2006 to buy Lincoln policies at no cost to them. At that time, they say Castro had been named Lincoln’s agent of the year.

The couple’s suit said that Castro told them Lincoln would issue policies and that the premiums would be paid by investors such as Deutsche Bank, Bank of America and Wilshire Hathaway.

They claimed that Castro told them that after two years the beneficial interest in the policies would be sold and they would be paid 1% to 3% of the face value of the policies.

The lawsuit alleges that two $3 million policies were issued May 2007 on the Russells, but that the applications for the coverage contained untrue statements about their net worth and falsely said they had not been involved in any sale of the policies.

Both said their signatures also had been forged on the applications.

They were later told that Joel Kalkstein and Meridian were taking over sale of the policies, but they became suspicious about the deals in November 2008 and contacted Lincoln.

They then asked for the policies to be rescinded. Lincoln went to U.S. District Court for the Southern District of California seeking rescission in February 2009. The Russells then claimed that premiums should be returned to them, but Lincoln refused, the suit said.

The couple’s lawsuit says Lincoln contends that the policies were canceled for failure to pay premiums. The couple says they are subject to paying for financing of the policies and that they are entitled to receive $269,040 from Lincoln.

Lincoln said the policy was a stranger-originated life insurance (STOLI) scheme, in a response to the court Tuesday.

Commentary by Michael Abraham:

Here you are again – manufactured policies and commissions.  Life insurance sales are fuelled by front end commission and if they weren’t it’s likely that sales would not be made and then the genuine buyers who need the life cover would suffer.  It’s a vicious circle!

The Financial Services Compensation Scheme (FSCS), a U.K. governmental entity that helps cover investor losses, has agreed to loan Lifemark $10 million to prevent the Luxembourg entity from collapsing, IFAonline says.

The publication said Monday that Eric Collard of KPMG, administrator of Lifemark, arranged the loan last week in a visit to the FSCS in London.

Ultimately, the FSCS is expected to offer Lifemark $30 million to keep it afloat. The Lifemark life settlement portfolio faced collapse as early as August.

Commentary by Michael Abraham:

At last someone in authority understanding and taking the correct action.. The assets are their manage them out and though investors may not get the promised returns there is a good chance they will get some!

Kiesling, Porter, Kiesling & Free, a New Braunfels, Texas, law firm, has agreed to pay $710,000 to settle its role in the Retirement Value case, the San Antonio Express-News says.

The law firm acted as Retirement Value’s escrow agent, according to Eduardo Espinosa, receiver for Retirement Value and an attorney with K&L Gates in Dallas.

He said there was a disagreement between investors and the law firm over its role. The investors believed that Kiesling also owed them a fiduciary duty while Kiesling contended it only owed a duty to Retirement Value.

Espinosa told The Life Settlements Report he supported the preliminary settlement because of the uncertainty of the outcome over continued litigation. In addition, he said the settlement payment will cover premiums of 48 policies remaining in the portfolio for almost a quarter of a year.

The Texas State Securities Board issued a cease-and-desist order against Retirement Value and two of its executives for alleged securities fraud in March 2010.

Commentary by Michael Abraham:

Sounds fine but what it appears to say is that the premiums on the 48 policies are in excess of $3m per annum – where is the balance to come from?  This will be interesting to watch will a sensible solution be found as appears to be the case with the FSCS and LifeMark?

07143 Summary:

BILL NO    A07143
SAME AS    Same as S 4427
SPONSOR    Morelle
COSPNSR
MLTSPNSR
Amd SS7803, 7807, 7811, 7814 & 7819, rpld S7811 13, subS (c) 3, Ins L
Relates to licensure of life settlement providers and certain reporting and disclosure requirements.

A07143 Memo:

BILL NUMBER:A7143
TITLE  OF BILL:  An act to amend the insurance law, in relation to the licensure and reporting requirements  of  life  settlement  providers, certain  disclosures  of life settlement providers and life settlement brokers, and scope of law for life settlement contracts; and to repeal certain provisions of such law relating thereto.
PURPOSE:
The purpose of  this  legislation  is  to  amend  the  New  York  Life Settlement Act of 2009 to clarify provisions related to implementation of that act for licensees and life settlement contract transactions,
SUMMARY OF PROVISIONS:
Section  1  of the bill amends S7803(c)(2)(F) to clarify the authority of the Superintendent to require  applicants  for  a  life  settlement provider   license   to  submit  any  information  the  Superintendent requires, provided such  information  will  be  “to  verify  that  the applicant  qualifies  as  a  life  settlement  provider  and determine compliance with any applicable state  law,”  This  amendment  conforms with   the  Superintendent’s  authority  to  require  information  for applicants for a life settlement intermediary  registration,  pursuant to  S7804(d)(1).  This  section  also  adds  a  new  paragraph  (G) to establish that the Superintendent shall not require  an  applicant  to provide any individual transaction data regarding the business of life settlements,  consistent with the limitation of such a requirement for licensees.<
Section 2 of the bill amends S7807(a)(1) to clarify  that  the  annual statement  required  to  be  submitted  by  licensed  life  settlement providers shall include only statutorily mandated information and that the  information  shall  not  include  individual  transaction  data regarding the business of life settlements, Section   3  of  the  bill  deletes  S7811(a)(13)  and  renumbers  the subsequent subdivisions accordingly to eliminate  the  provision  that requires  a  life  settlement  provider to disclose to the seller of a policy “any affiliations or contractual arrangements  with  any  other life  settlement  provider,  life  settlement  broker, life settlement intermediary or party financing the transaction”.
Section 4 of the bill deletes S7811(c)(3) and renumbers the subsequent subdivisions accordingly to eliminate the provision  that  requires  a life  settlement broker to disclose to the seller “any affiliations or contractual arrangements with any life settlement provider, other life settlement broker,  life  settlement  intermediary  or  any  financing entity.”
Section 5 of the bill makes a conforming amendment to S7814(a)(6).
Section  6  of the bill amends S7819(a) and (c)(2) to clarify that the provisions of Article 78 shall apply to any life  settlement  contract entered into with an owner whose principal residence is in this state, or with a bust that is sited in New York.
Section 7 of the bill sets forth the effective date of the law.
EXISTING LAW:
Article 78 of the Insurance Law, The New York Life Settlement Act, was enacted  pursuant  to Chapter 499 of the Laws of 2009, to regulate them modern life settlement market in New York State.
JUSTIFICATION:
Since article 78 was  enacted  in  2009,  concerns  have  been  raised regarding  the  application  of  various provisions of the law. First, there is a  concern  about  the  State  Insurance  Department’s  (SID) requirement  that  applicants  for  a life settlement provider license submit individual transaction data,  individual  transaction  data  on non-New  York  transactions  and an applicant’s past revenues received from matured policies. As such, the bill places reasonable limitations on the extent to which the department can require  the  disclosure  of individual  transaction data from an application for a life settlement provider license.
Additional concerns have been raised regarding SID’s interpretation of S 7811(c)(3) to require that  a  broker  must  disclose  any  and  all affiliations  with  providers,  brokers,  intermediaries  or financing entities even though such person or entity is not involved in the life settlement transaction and even though such person or  entity  is  not licensed  or  registered  in New York. Similarly, SID also applied the same conclusion with  respect  to  S  7811(a)(13),  as  the  “Required Disclosures  to  Policy Owner” form issued by SID requires that a life settlement provider provide the  seller  “about  any  affiliations  or contractual arrangements with any other life settlement provider, life settlement broker, life settlement intermediary or party financing the transaction.”
SID  partially  modified  this  position in OGC Op. No. 11-02-07, with respect to disclosures by  life  settlement  providers,  stating  that “Insurance  Law  S  7811(a)(13)  is  not  intended  to  require a life settlement provider to disclose to a life insurance policy owner every agreement that the provider  has  with  unaffiliated  life  settlement brokers”  but  only  “when  the  agreements have the same boiler-plate language governing the manner in which the  provider  and  the  broker will  conduct  business  if  the  provider  agrees  to  pursue  a life settlement application submitted by the life  settlement  broker,  and the  life  settlement  brokers  are  not  actually engaged in the life settlement transaction.”
However, this new SID OGC Opinion  does  not  address  disclosures  by brokers,  disclosure of “affiliations”, or disclosures of a provider’s contractual relationships or  affiliations  with  financing  entities. There  are  still  concerns  that  this  will  result  in  brokers and providers inundating sellers with several  hundred  names  of  parties that  the  broker  or provider has relationships throughout the United States and the world that have no relationship, no involvement with or even knowledge of  the  life  settlement  transaction  involving  that owner. This may result in additional and unnecessary confusion for the owner of the policy.
Further,  consumers  are  already  receiving comprehensive information related to the settlement transaction, including specific  information about  relationships between the broker and provider and other persons or  entities  directly  involved  in   the   settlement   transaction, Specifically, S 7811(a)(8) requires that the seller be advised of “the name  of  each  life  settlement broker, life settlement intermediary, insurance producer or insurance consultant that will be compensated by the life settlement provider, or any affiliate, parent corporation, or subsidiary  of  the  life  settlement  provider;  and  the  amount  of compensation that the life  settlement  provider,  or  any  affiliate, parent  corporation  or  subsidiary  of  the life settlement provider, shall  provide  to  a  life   settlement   broker,   life   settlement intermediary,  insurance  producer  or  insurance  consultant,  or any affiliate,  parent  corporation  or   subsidiary   of   such   broker, intermediary, producer, or consultant, pursuant to the life settlement contract.”
Also,  S 7811(c)(4) has a similar requirement that the broker disclose “the amount of compensation to be paid to the life  settlement  broker pursuant  to  the  life settlement contract, and the name of such life settlement broker.” Section 7811(a)(12) requires the policy  owner  be advised  of  “any affiliations or contractual arrangements between the life settlement provider and the issuer of the policy to be  settled.”
Other  provisions  ensure  that  the  seller be advised of the contact information  of  the  escrow   agent,   the   broker   and   provider.
Furthermore,  in  addition  to  the  many  provisions in the Act which protect sellers against self-dealing or fraud, S  7814(a)  establishes numerous  prohibited  practices  that  ensure  the transparency to the seller about relationships of brokers and provider that  are  relevant to the settlement transaction.
Finally, it should be noted that the new opinion creates a fair amount of  uncertainty for brokers and providers as there is no definition or understanding as  to  what  is  a  “boiler-plate  agreement”,  or  the condition  that  such  agreements  govern  the  “maimer  in  which the provider will conduct business if the provider agrees to purse a  life settlement  application  submitted  by the life settlement broker, and the life settlement brokers are  not  actually  engaged  in  the  life settlement transaction.”
An  additional  concern  pertains to the current S7919 of the New York Life Settlement Act, which provides that New York law applies  in  any instance  where  the  settlement  is  proposed to be made or where the owner has a residence in New  York.  In  other  words,  New  York  law currently  governs  in  situations  where  there is a conflict of law.
This legislation clarifies that New York law applies  only  where  the contract is entered into with an owner whose principal residence is in New  York.  The  legislation further clarifies that, with respect to a trust, New York law will apply only where the owner of a policy  is  a New York-based trust.
LEGISLATIVE HISTORY:
New bill.
FISCAL IMPLICATIONS:
None.
EFFECTIVE DATE:
Immediately.
http://assembly.state.ny.us/leg/?default_fld=&bn=A07143%09%09&Summary=Y&Memo=Y

Commentary by Michael Abraham :

At one of the many conferences in May I was privileged to hear … Morelle speak and later spoke with him, he is open minded and appears to be doing a good job in balancing the various issues, however, one interesting point is that he was not aware of how few NEW licences had been granted in New York. I made the point that while he was advocating choice he had actually drastically reduced it as a large number of those providers who have historically done business in New York  were now no longer able to do so.  And as only 5 new (as distinct from those that were ‘grandfathered in’) licences had been granted in almost a year this situation was not going to change quickly.  Let’s hope matters improve.