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 Washington Post ran this story today that warned of the risks in life settlement investments, such as those sold by A&O Life Funds. The article states:

The latest growing exotic investment promotion is in what are called "life settlements" or "senior settlements" or "viatical settlements." They're ghoulish products by any name.

Although they can be marketed and sold legally, the products are so complex and opaque that they are prone to fraud, including: Ponzi schemes; phony life expectancy evaluations; inadequate premium reserves that increase investor costs; and false promises of large profits with minimal risk, according to the North American Securities Administrators Association, which represents state securities regulators.

Life settlements made it to the association's most recent list of the top 10 investor traps.

If you're an individual investor and you've received a pitch to invest in life settlements, there's much to beware. Head and Leimberg said life settlements are not appropriate for individual investors.

"It's pretty darn speculative if you are going to be able to collect on that individual policy," Head said.

Leimberg added that only highly sophisticated investment groups such as hedge funds or pension funds should be buying this investment product.

The problem, he said, is the insured may live longer than expected, significantly reducing investors' expected returns. And the person could live so long that investors are left having to pay the insurance premiums for years just to maintain the policy.

Click the link above to read the entire article.

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On July 31, 2009 Russell Mackert of Shepherd Capital Management sent a letter to some investors in A&O Life Funds. Here is a copy of the letter. The news is bad. According to Mackert, the company (Provident Capital Indemnity) which issued the payment bonds backing the maturity date of the investment is not paying the investors. This is what happens when a company buys its payment bond from a little known company in Costa Rica. Incidentally, I have heard from investors who have not been paid. The letter does not mention Adley Wahab, but does refer to Prestige Title misappropriating A&O funds.

Mackert goes on to state that the policy backing the investment is in full force and effect, but that premiums are being paid from cash values built up in the policies. In other words, A&O is not paying the premiums. Although Mackert does not explain this, paying the premiums from cash values can be really bad for the policy and can lead to huge premium payments down the road because all cash values have been exhausted. This is particularly true in policies insuring the lives of elderly people, because the premiums on a life insurance policy get more expensive as we age due to shorter life expectancies. It can be sort of like when an adjustable rate mortgage resets at a higher interest rate. I believe that most or all of the A&O policies insure lives of elderly individuals.

Mackert gives the investors 3 options:

1. investors pay a pro rata share of the premiums on the polices (on the policy in this letter the premium is $29,015 every 3 months)
2. sell the policy on the secondary market
3. do nothing and lose the entire investment.

None of the options involve A&O or the related companies paying the premiums: "the company does not have the funds to pay for such premium needs."   

Many, if not all, A&O investors bought the investment from a securities broker or agent. If I were an A&O investor I would be talking to the SEC and other federal authorities, questioning the person who sold me the policy on what was his commission and what due diligence did he do, and trying to hire an attorney. 

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I discussed the controversy surrounding viatical settlements in this earlier post. For anyone interested in the viatical settlement business, here was the headline and excerpts from a 2007 Business Week article :

Profiting From Mortality
Death bonds may be the most macabre investment scheme ever devised by Wall Street.

"Life settlements" are arrangements that offer people the chance to sell their policies to investors, who keep paying the premiums until the sellers die and then collect the payout. For the investors it's a ghoulish actuarial gamble: The quicker the death, the more profit is reaped. Most of the transactions are done by small local firms called life settlement providers, which in the past have typically sold the policies to hedge funds. Now, Wall Street sees huge profits in buying policies, throwing them into a pool, dividing the pool into bonds, and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.

BUT THE INVESTMENT BANKS are wading into murky waters. The life settlements industry increasingly finds itself in the grip of dubious characters devising audacious and in some cases illegal schemes to make money. Many are targeting elderly people with deceptive sales pitches—so many that the National Association of Securities Dealers has issued a warning about abusive practices. Others are promising investors unrealistic returns or misleading them about the risks. Some are doing both.

 The complete article is worth the read.

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The Colson litigation now involves a $3 million claim involving viatical settlements by A&O Bonded Assets and related entites. Looks like I picked the wrong week to stop sniffing  glue.

In viatical settlements an owner of a life insurance policy sells his future death benfit to an "investor" for a lump sum payment. The "investor" then pays the premiums until the insured dies, and collects the death benefit at death. Unlike the life insurance company, which would just as soon the insured live forever, the "investor" is cheering for death, since it allows him to earn the return on his investment. Needless to say, viatical settments are controversial and are rife for abuse by the "investors", since many life insurance owners are not financially sophisticated enough to know whether the payout is fair. In addition, viatical settlements arguably defeat the purpose of life insurance, but that is a topic for another day.

Here is A&O's Motion to Intervene in the Lawyer's Title case, supporting memorandum and supporting affidavit of Russell Mackert. The affidavit does not describe Mackert's relationship to A&O, but the results of a Google search indicate that Mackert is a Houston, TX area lawyer. It appears that Mackert is a front man for the real investors: the hedge fund A&O Life Funds.  A&O Life either does not want anyone to know much about it, or it has the worst web site designer in the world.

The memo provides a more detailed explanation of the claim than the motion. In 2008 A&O Bonded Life Assets Management LLC and related entities entered into a Escrow Management Services Agreement with Prestige Title. A&O deposited $4.6 million with Prestige Title that Prestige was to use to pay the premiums on the policies. In return for Prestige's services, A&O paid Prestige $150,000 annually. A&O claims that its $4.6 million was comingled with other Colson entity firms and then sequested as a part of the Lawyers Title case and Wachovia intepleader action. It looks like Prestige paid the premiums for a while and that A&O's real loss is approximately $3 million.

A&O also claims that Prestige has not been paying the premiums on the policies and that some of the policies will lapse soon unless the premiums are paid. A&O places the value on the policies where a lapse is imminent at $29 million. The total value of the policies at issue is $179 million. Here is a partial list of the policies, which have huge face amounts. Obviously, A&O is not going to let these policies lapse and will cover the premiums if Prestige does not pay. A&O is trying to cut its losses by recovering money in the ongoing litigation. It's hard to imagine a less sympathetic party in this litigation. A&O's attorney is former Mississippi Bar President Don Dornan, so at least it has a respected attorney.

In another Colson development I have learned that Colson is suing Tedd Martin, who is his partner in Prestige, in state court. State court pleadings are public record, but are not accessible on-line. I do not know what Colson alleges in the action.