Mississippi Litigation Review & Commentary : Mississippi Personal Injury Lawyer & Attorney : Phillip W. Thomas Law Firm : MS Litigation Review & Commentary

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Saturday’s Wall Street Journal had this article about life settlement investments, which are also known as viatical settlements. The investors buy life insurance policies and pay the premiums until death. The sooner the insured dies the better the investment return. If the insures lives longer than expected, it's the investor who gets killed.

The article pointed out that in an industry full of scam artists, even investors who may not have been scammed can end up taking a bath on the investments.

One example:

Carol Tonzi, a court reporter in Palmyra, N.Y., sank $51,700 into partial ownership of a $5 million policy in 2003 from the now-defunct Mutual Benefits Corp. of Fort Lauderdale, Fla. She says her tax preparer touted the investment as "safe and secure" and said her money in five years would grow to $82,720, a 60% increase.

But Ms. Tonzi, 52, is still waiting for the policyholder, now 89, to pass away. Over the past three years, she says she has shelled out an additional $15,000 in premium payments. She is suing the tax preparer, Richard H. Nichols, in state court in New York, alleging negligent advice. "It's a mess," she says. "If I wanted to gamble, I would have left the money in the stock market."

Prudence is the key for people thinking of investing in life settlements:

Only people with ample financial assets should venture here. Much as with hedge funds, a Life Partners investor must have an annual income of at least $200,000 ($300,000 for a couple) and a net worth of $1 million or more.

"This is not a place for amateurs," says Doug Head, executive director of the Orlando, Fla.-based Life Insurance Settlement Association. "It's a high-risk investment that requires considerable sophistication."

One worrisome issue: fraud. Between January 2004 and July 2009, Conning says, the Securities and Exchange Commission took legal action against 27 U.S. life-settlement funds and advisers. It isn't clear just how many of them there are, but life settlements make the top-10 list of "investor traps," says the North American Securities Administrators Association.

In some instances, the industry has been a magnet for shady operators. California financier Danny Pang died in September battling SEC allegations that his Private Equity Management Group misrepresented hundreds of millions of dollars of investments, including life-insurance policies. When those didn't generate enough profit to cover the cost of the premiums and deliver returns, the SEC alleges, he used money from new investors to cover the shortfall. Ponzi operators who deal in life settlements have also surfaced in Idaho, New Jersey and Texas.

Texas? Adley Wahab and A&O Life anyone?

My advice to someone who has been approached about investing in a life settlement is to be very careful. If the person pitching the investment to you is a life insurance agent, then you probably need to run. Not only should you invest in life settlements only if you have a high net worth, but you should also only invest a fraction of your net worth—say 10% or less. Do not be one of these people who gets talked into investing their whole life savings in any one investment—particularly one as risky as life settlements. As with all investing, diversifying your investments is a key to reducing the risks of investing. 

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The big news in the A&O debacle last week was this Complaint that the A&O bankruptcy trustee Patrick Collins filed against Adley Abdulwahab, Brent Oncale, Russell Mackert, Christian Allmedinger, Shepard Capital Management (Mackert’s company) and A&O. The Complaint alleges that the defendants stole the A&O investors' money. A while back I asked where did the investors’ money go and stated:

There, as in the bankruptcy proceeding, A&O and Mackert claim that Physician's Trust LLC bought A&O, asked Mackert to manage it and then disappeared. Literally. The supposed owner of A&O paid millions for the company to Adley Wahab and his partners and then disappeared without a trace? And they can't be found? That makes no sense and just defies all credibility. I don't believe it. No one believes it. I suspect that one day the truth will emerge, and I can't wait to hear it.

 The Complaint alleges that the sale of A&O was an “illusion” in response to regulatory investigations in multiple states. “The sale was a sham” and Wahab, Oncale and Mackert maintained control over the A&O financial accounts. The Complaint alleges that at least $37 million was transfered to the A&O principals for their personal use. The Complaint seeks the recovery of these funds.

The Complaint refers to the sale of A&O to Physicians Trust and Blue Dymond as the purported sale of the A&O entities. The Complaint does not state whether Physicians Trust and Blue Dymond are legitimate companies separate and apart from Wahab et al. or whether RJ Stephenson is a real person. At this point, however, there is no credible evidence that Stephenson is a real person or that Physicians Trust and Blue Dymond are legitimate.

No observers of the A&O debacle are surprised by these new allegations. But the allegations raise new questions about the veracity of A&O front man Russell Mackert and whether he committed perjury in connection with affidavits that A&O filed in the Colson litigation in Mississippi.

In this affidavit Mackert testified that the A&O principles sold the company to Physicians Trust and Blue Dymond, whose principal was RJ Stephens. According the Mackert, Stephens then disappeared into thin air like Keyser Söze in the movie The Usual Suspects. As pointed out by wikepedia: “the… use of the name in popular culture is a shorthand reference to being fooled by the actual bad guy into believing in a bad guy that doesn't exist.”

According to the trustees’ Complaint, the A&O sale was a sham—and Mackert knew it. If this allegation is true, then Mackert may have committed perjury in his affidavits filed in Mississippi.

Perjury is lying under oath in a judicial proceeding. An affidavit is sworn testimony under oath in a judicial proceeding. Was Mackert’s affidavit perjury? The United States Attorney’s Office for the Southern District of Mississippi may want to know.

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Forbes has released a new A&O related article, this one focusing on Adley Abdulwahab. Here is a link to the article, which includes a photograph of Wahab.

The article begins with a recounting of the October raid of Wahab’s home, but quickly begins taking shots at A&O investors:

Armed officers from the U.S. Marshals Service swarmed into an elaborately decorated $1.5 million home in Spring, Tex. early one Saturday morning in October. Inside they found Adley Abdulwahab, 34, and his family. The Abdulwahabs were allowed to gather a few personal belongings and then escorted out the door. The house was seized and became part of a tussle among hundreds of victims desperate to recoup anything they can from Abdulwahab's investment scams--ruses so brash and, in retrospect, so unbelievable as to raise doubts about the sanity of investors.

The article suggests that Wahab and A&O front man Russell Mackert funneled the missing investor’s money to Wahab’s off-shore bank accounts:

Where did the other tens of millions of dollars that are missing from A&O and W Financial go? Starting in the summer of 2007 Abdulwahab transferred $12.6 million to an account controlled by Mackert, court documents say. Mackert then funneled millions to Abdulwahab's own offshore accounts, according to these documents. The Securities & Exchange Commission sued Abdulwahab, claiming he fraudulently sold securities through W Financial, and obtained a $15 million judgment against him in October.

The article concludes by calling A&O investors “gullible” for believing that the company would deliver guaranteed returns of 12%.

I disagree with this assessment. How many A&O investors dealt with Wahab? My guess is close to zero. A&O used life insurance agents from across the country who had long standing relationships with clients to sell the "investments.” The investments were not sold by boiler room salesman who were cold-calling suckers. They typically were sold to people who knew and trusted the salesman based on a long-standing relationship.

Many life insurance agents also hold themselves out as investment advisers. Many are licensed to broker sales of securities. This makes the agents even more trustworthy when they reccommend an investment to a long-time client.

I would agree that investors were gullible if they believed in a guaranteed 50% or more, but 12%? That’s not a crazy high number. Particularly when sold by someone who an investor knew and trusted. The agents who sold these policies are much more responsible for the losses than investors, but the Forbes article places no blame on the sales agents.  

Were Bernie Madoff’s investors gullible suckers? Were the Stanford Financial investors suckers? What about investors in WorldCom and Enron?

Or are the SEC and state regulatory systems not doing enough to police investment fraud and protect investors? Isn't that their job?  Did they do their job here in a timely fashion?             

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Here is the bankruptcy trustee's initial report in the A&O debacle. It details irregularities and problems that observers of A&O have come to expect. Some of the noted problems include:

• many of the A&O policies have lapsed.
• there are ownership disputes with many of the policies that haven't lapsed. This means that A&O may not really own the policies.
• Provident Capital probably is not going to pay on the bonds that were supposed to back up the policies.
• there was a bait and switch pulled on investors: they were told that they were getting one type of investment, but actually got something else.

The trustee's website is a great A&O resource and there is not much that I can add from an information standpoint.

From an opinion and commentary standpoint, I am impressed with the efforts of the trustee. If I was an investor I would support the current trustee based on the information that I have seen.

As far as blame, do not buy into Russell Mackert and A&O's attempt to blame this debacle on Prestige Title and Stephen Colson. They are using Prestige and Colson as scapegoats. All indications are that the interpleader case that froze Prestige's funds accelerated A&O's demise rather than caused it. All you really need to know about A&O is that the founder (Adley Abdulwahab) lied about his education in touting A&O as a legitimate enterprise. If this is not evidence of a con man, then I do not know what is.

If I were an investor who has not yet hired an attorney, I would be looking for an attorney who is willing to file suit against the agent who sold me the investment. I continue to believe that agents' errors and omissions policies are the best hope for recovery. In addition, if the government prosecutes and recovers funds in the case, then there could be an avenue for the victims to recover losses from the government. Finally, Russell Mackert and any insurance coverage that he carries could also be a potential target if, as expected, it turns out that the A&O sale to Blue Dymond turns out to be a sham.

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After Judge Ozerden dismissed the two pending Colson cases because the federal court no longer had jurisdiction, the cases were re-filed or transferred to the Harrison County Chancery Court. All the local chancery court judges recused themselves from the case, which is common when a lawyer is a party in the case. The Mississippi Supreme Court appointed Judge Frank McKenzie of Laurel to preside over the case. It's my understanding that not much has happened since the case moved to state court.

One of the most interesting aspects of the Colson litigation was the emergence of the A&O Life companies, their manager, Russell Mackert and Adley Wahab. A&O claimed some of the Colson funds interpleaded in the Wachovia interpleader action. A&O is a controversial company that I previously characterized as "shady" in my opinion. Adley Wahab is a defendant in a civil lawsuit filed by the SEC in Texas. The lawsuit raises serious allegations against Wahab and his associates. Here is a brief filed by the SEC that gives a flavor of the SEC's allegations. The SEC alleges that in the summer of 2007 Wahab became aware of the SEC investigation and began transferring millions of dollars in assests with the assistance of Mackert. During this same period, Wahab sold A&O to Blue Dymond, which was not mentioned in the SEC brief. According to affidavits filed by Mackert, who is now managing A&O, he does not know who owns Blue Dymond. Hopefully, the SEC will look into this at some point.     

I have also been in communication with A&O investors in Texas and New York. According to some of these investors, A&O is not re-paying its investors as promised. It's hard to reconcile the SEC's allegations with a legitimate company that pays investors as represented. I encourage concerned A&O investors to contact an attorney to discuss their legal rights. I believe that there may be a litigation path that would allow A&O investors to recoup their money. If there are any attorneys who are pursuing litigation against A&O or its principals who would like me to publish their contact information for investors to contact, I would be happy to do so.