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New York Charges Fraud in Life Settlement Industry

October 27, 2006

• New York Targets Health Insurers • Travelers Insurance Settles Bid-Rigging Charges • Connecticut Derails Title Insurance Kickback Scheme • MBIA Settles Fraud Charges for $100 Million • Wells Fargo, Acordia Sued for Fraud • New York Charges Fraud in Life Settlement Industry • Title Insurance Fraud on the Upswing • Florida Insurance Scam Hits Seniors • Pennsylvania Recovers Another $9 Million from Summit Life Case --- • More about Insurance ...

The state of New York is suing a leading financial services company on charges that it orchestrated a broad scheme to defraud owners of life insurance.

The lawsuit targets the fast-growing "life settlements" industry, where investors buy life insurance policies from policy owners, make premium payments as they come due, and then collect death benefits when the insured person dies.

The industry has tripled in size during the last three years and now accounts for more than $6 billion in revenues, according to industry analysts.

"People in the life settlement industry like to think that they are providing a wonderful new service that bridges the gap between the insurance industry and capital markets," Attorney General Eliot Spitzer said. "But the reality is that too many industry players are cheating policy owners to maximize profits for themselves and their firms."

The investigation began in 2005 after the AG's office got a tip that life settlement brokers were accepting secret commissions that unfairly reduced the amounts owners received for the policies.

Such brokers are supposed to represent the interests of policy owners and obtain the highest price possible for their clients' policies through competitive bidding.

The civil complaint contends that the industry leader, Coventry First LLC, based in Philadelphia, made secret payments, dubbed "co-brokering fees," to life settlement brokers. The suit also alleges that, in exchange for these payments, the brokers suppressed competitive bids from other life settlement companies.

It further asserts antitrust violations, fraud, and other state law claims and cites e-mail and other evidence showing that industry executives were well aware of their illegal conduct.

Among the typical examples of the bid-rigging scheme:

• In mid-2003, a 79 year-old widower living in Hawaii decided to sell his $400,000 life insurance policy. A Florida-based broker representing the widower had an offer from one of Coventry's competitors.

In a March 5, 2003 e-mail, a senior employee at Coventry wrote to Coventry's Executive Vice-President, Reid Buerger: "[The broker] said he spoke with you a while back about co-brokering the . . . case. He is frustrated that we have not gotten it accepted. He said he is sitting on a [a competitive offer] and can probably get more."

Later, in exchange for a co-brokering fee from Coventry, the broker refrained from presenting the widower with the other offer.

• In 2004, a New York trust decided to sell a $4.9 million policy insuring the life of an 80 year-old woman. Coventry offered $705,000. When Coventry officials learned that a broker had a higher offer from another life settlement buyer, they contacted that broker's President to work out a deal.

An internal e-mail by a senior Coventry employee reported: "[The broker's President] claims he would go well over $1M. He asked for 1.5 pts. I offered .5 pt. do we want to do that much?"

Ultimately, Coventry and the broker worked out a deal. In exchange for a secret payment of $49,000 (or 1 point) from Coventry, the broker never presented the trust with the higher offer from Coventry's competitor.

In addition to the co-brokering fees, the lawsuit claims Coventry routinely induced brokers to violate their fiduciary duties to policy owners through so-called "gross offers," which provided a separate financial incentive for brokers to convince their clients to take as little as possible for their insurance policies.

As a result of the incentives created by gross offers, policy owners routinely, but unknowingly, paid brokers extraordinarily high commissions. To date, the investigation has uncovered more than 200 Coventry cases nationwide where brokers were paid undisclosed commissions of 50 percent or more of what the seller received.

Spitzer said the conduct outlined in the complaint showed a dramatic lack of ethical standards in the new industry.

"It is not a defense to claim that even with corrupt practices clients are still getting more through life settlements than if they surrendered their policies to their original insurers for cash," the Attorney General said. "The situation cries out for both greater regulatory scrutiny and serious soul-searching by the industry and its advocates."

The lawsuit suit seeks injunctive relief from the court, restitution and appropriate damages from Coventry.

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