U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18698 / May 6, 2004
Securities and Exchange Commission v. Mutual Benefits Corp., et al., Case No. 04-60573-CIV-MORENO (S.D. Fla.) (May 4, 2004)
SEC OBTAINS EMERGENCY ORDERS SHUTTING DOWN MUTUAL BENEFITS CORP., ALLEGES FRAUD AND CONTEMPT OF PRIOR INJUNCTION IN CONNECTION WITH SALE OF VIATICAL SECURITIES
STATE OF FLORIDA OFFICE OF INSURANCE REGULATION AND OFFICE OF STATEWIDE PROSECUTION FILE SIMULTANEOUS ACTIONS
The Securities and Exchange Commission ("SEC") announced that on May 3, 2004, it filed an emergency federal civil action seeking to halt an alleged billion dollar fraudulent securities offering affecting 29,000 investors worldwide. This action was filed against defendants Mutual Benefits Corp. ("MBC"), Joel Steinger, his brother, Leslie Steinger, and Peter Lombardi (collectively the "defendants"). MBC is headquartered in Ft. Lauderdale, Florida. The SEC's action includes a civil complaint and also a contempt motion against the Steingers. In 1998, the Steingers were enjoined from violating the federal securities laws in connection with their activities at MBC.
On May 4, 2004, the Honorable Federico A. Moreno, United States District Judge for the Southern District of Florida, entered, among other things, a temporary restraining order, a freeze of the defendants' assets and an order appointing a receiver over MBC.
The SEC's complaint alleges that the defendants raised over $1 billion from more than 29,000 investors through a fraudulent, unregistered offering of securities in the form fractionalized interests in viatical and life settlements. A viatical or life settlement is the sale of a life insurance policy by a terminally-ill person or senior citizen (the viator) at a price discounted from the face value of the policy. Investors pay the premiums and receive the face value of the life insurance policy when the insured, or viator, dies. In turn, the viator receives a portion of the proceeds of his life insurance policy as a lump sum.
According to the SEC's complaint, MBC promised investors fixed returns ranging from 12% to 72%, depending upon the term of investment chosen by the investor. The life expectancy figure determined for each viator was a key factor in determining the maturity date of the investment, the rates of return to investors and the amount of funds needed to be escrowed for payment of future premiums on the policies.
In its complaint, the SEC alleges that in raising money for its enterprise, MBC falsely represented to numerous investors that its life expectancy figures were the product of a review by an independent physician. The SEC further alleges that MBC failed to disclose that about 65% of its outstanding life insurance policies were sold to investors using fraudulent life expectancy figures generated by MBC. Moreover, the SEC alleges that MBC omitted to tell investors that more than 90% of its policies have already surpassed their assigned life expectancy. According to the SEC's complaint, as a result of the failure of these older policies to mature, shortfalls in escrowed premium funds have forced MBC to effectuate a premium payment scheme similar to traditional "Ponzi" schemes, whereby the company is paying premium obligations of specific investors with monies escrowed for future obligations of other investors.
The SEC's complaint also contends that the defendants failed to disclose to investors that Joel Steinger and Leslie Steinger both played key roles in the management of MBC's operations and its securities offering. Furthermore, the complaint alleges that investors were not being told that at least $26 million in funds collected in MBC's offering was paid to the Steingers and their relatives in the form of "consulting fees."
The SEC's complaint charges the defendants with violating the anti-fraud and registration provisions of the federal securities laws. Specifically, the Commission alleges that defendants MBC, Joel Steinger, Leslie Steinger and Peter Lombardi violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, thereunder. The Commission also alleges that defendants Joel Steinger and Leslie Steinger, as control persons of MBC, violated Section 10(b) of the Exchange Act and Rule 10b-5, thereunder. In addition to the emergency relief described above, the complaint seeks permanent injunctions prohibiting future violations of the securities laws, disgorgement, and civil penalties.
Also named in the SEC's action as relief defendants are Viatical Benefactors, LLC, Viatical Services, Inc., Kensington Management, Inc., Rainy Consulting Corp., Twin Groves Investments, Inc., P.J.L. Consulting, Inc, SKS Consulting, Inc. and Camden Consulting, Inc.
In addition to its civil complaint, the SEC filed an emergency contempt action against defendants Joel Steinger and Leslie Steinger for disobeying a prior final judgment of permanent injunction entered against them on May 6, 1998 in SEC v. Joel Steinger and Leslie Steinger, Civil Action 98-6442-CIV-MIDDLEBROOKS (S.D.Fla. 1998). In that previous action, the SEC charged defendants Joel Steinger and Leslie Steinger with fraud and securities violations arising out of their roles in MBC's offering as it stood at that time. In that case, the Steingers were permanently enjoined from violating the registration and anti-fraud provisions of the federal securities laws and paid $850,000 in disgorgement, plus prejudgment interest, and $50,000 each in civil money penalties.
In simultaneous filings, the State of Florida's Department of Financial Services-Office of Insurance Regulation filed an emergency cease-and-desist order against MBC suspending MBC's license to operate as a viatical settlement provider in and from the state of Florida, and the State of Florida's Office of Statewide Prosecution issued a 16 count criminal information against MBC.
The SEC acknowledges the assistance of the following federal and state agencies: the State of Florida's Department of Financial Services-Office of Insurance Regulation, the U.S. Department of Homeland Security's Bureau of Immigration and Customs Enforcement, the State of Florida's Office of Statewide Prosecution, the North American Securities Administrators Association (NASAA), and the state securities regulatory agencies for Alabama, Alaska, Arizona, Colorado, Indiana, Iowa, Kansas, Ohio, Pennsylvania, Vermont and Virginia.
SEC Complaint in this matter
MUTUAL BENEFITS CORPORATION REPORT
On 6th May 2004 the U.S. Securities and Exchange Commission secured a court order in Florida against Mutual Benefits Corporation alleging fraud and contempt of a prior injunction. The action alleged a billion dollar fraud and included a civil complaint and a contempt motion. Other defendants were Joel Steinger, Leslie Steinger and Peter Lombardi (NB Stephen Steinger has now been added as a co-defendant). The action related back to a 1998 court order enjoining the Steinger brothers from violating federal securities laws in connection with MBC. The court made a temporary restraining order (TRO), froze the defendants’ assets and appointed a receiver over MBC.
The SEC's complaint alleges that since 1994 the defendants raised over $1.67 billion from more than 29,000 investors through a fraudulent, unregistered offering of securities in the form of fractionalized interests in viatical and life settlements.
Since late 1994, MBC has operated as a viatical and life settlement provider raising money from investors to purchase viatical and life settlement contracts. A viatical or
life settlement contract involves the sale of a life insurance policy by a terminally ill person or senior citizen (known within the industry as a “viator”) at a price discounted from the face value of the policy. Investors pay the premiums, and receive the face value of the life insurance policy when the insured, or viator, dies. In turn, the viator receives a portion of the proceeds of his life insurance policy as a lump sum. MBC has allocated investor funds to approximately 9,097 life insurance policies with an aggregate anticipated death benefit of approximately $1.451 billion. MBC promised investors guaranteed, fixed rates of return ranging from 12% to 72%, depending upon the term of investment chosen by the investor. The life expectancy of the viator as determined by MBC, in turn, determined the total rate of return. For example, MBC promised investors who select a policy insuring an individual with a one-year life expectancy a 12% return on the investment, investors who selected a policy insuring an individual with a two-year life expectancy a 28% return, and investors who selected a policy insuring an individual with a three-year life expectancy a 42% return.
MBC’s sales agents solicited potential investors through newspaper advertisements, direct mailings and sales seminars. MBC’s “compliance department”reviewed sales agents’ advertisements for approval before publication. For their role in marketing the offering, MBC’s sales agents received a percentage commission, generally from 6% to 12%, based on the total investment. MBC also offered its agents incentives for reaching sales goals, such as all-expense paid vacations.
MBC’s offering materials explained to investors that their rates of return are based on the estimated life expectancies of the viators. The materials represent that “a state-licensed physician reviews the patient’s history and medical records to evaluate the condition of the patient and projected life expectancy… [and] then confirms to MBC the insured’s diagnosis and estimated life expectancy.” The materials claim that an investor was assigned to a policy only after the licensed physician determined the insured’s life
expectancy. MBC further assured investors that “funds sufficient to make premium
payments for the estimated life expectancy will be paid or escrowed at the time of
MBC’s offering materials directed investors to make investment funds payable
to MBC’s designated escrow account. Investor monies were pooled in this interest bearing escrow account until such time as an insurance policy may be acquired and/or matched to the investor. Once investor funds were placed on a policy, in most cases, the policy was fractionalized to accommodate investments by multiple investors. MBC acquired viaticated insurance policies through viatical brokers. When a broker was contacted by a potential viator, the broker sought to obtain certain medical information, including any diagnosed illnesses and, when available, a life expectancy prognosis from the insured’s physician. Upon receipt of this information, the broker forwarded the viator’s medical information to MBC to solicit a bid.
In its bid solicitation process, MBC traditionally divided the viator files
into two general groups: Acquired Immune Deficiency Syndrome (AIDS) files, and non-AIDS files.
MBC’s bidding department issued a bid on an AIDS file immediately upon
receipt, prior to any independent medical evaluation. Once a viator accepted a bid, the AIDS file was forwarded to J. Steinger, who assigned fractional interests in the policy to investors awaiting placement. J. Steinger also determines the life expectancy that should be assigned to each viator. After the policy had been purchased and assigned to investors, MBC then forwarded the AIDS file to a medical physician engaged by the Company, ostensibly for a review and confirmation of the life expectancy of the viator.
In contrast to the AIDS files, prior to making a bid on non-AIDS files, MBC forwarded the medical records to MBC’s medical physician to determine the viator’s estimated life expectancy. Upon receipt of the final life expectancy estimate from the reviewing physician, MBC placed a bid on the policy. Once the viator accepted a bid, the
non-AIDS file was forwarded to J. Steinger who then assigned the investors to the policies. In at least 20% of these cases, J. Steinger rejected the life expectancy designation assigned by MBC’s physican and directed that a shorter life expectancy be assigned. From late 1996 to May 2001 Drs. Clark Mitchell and Edgar Escobar inter alia were employed by MBC to provide life expectancy forecasts for AIDS victims - usually of questionable accuracy as J. Steinger amended them at will or whim. The life expectancy estimates ‘certified’ by those two charlatans now represent 65% of MBC’s active policies. MBC also utilized the services of Dr. Anthony LaMarca for viators diagnosed with other terminal illnesses and his name crops up in Melvin Chilver’s documents. J.Steinger as a matter of policy would reject 20% of Lamarca’s evaluations which would be reissued according to Steiner’s specification to suit his purposes.
For both AIDS and non-AIDS files, investors were assigned to a particular policy only after MBC confirmed that the investors’ funds have been properly deposited in MBC’s escrow account. Payment was then forwarded to the viator. MBC distributed a ‘closing packag’ to each investor whose funds were placed on the policy. This closing package typically included a letter from Lombardi enclosing certain information identifying the policy on which the investor’s money has been placed and a copy of a letter or affidavit executed by an MBC medical physician purporting to confirm the viator’s diagnosis and life expectancy estimate.
After closing the transaction with the viatical broker, MBC distributed investor funds to various MBC-affiliated entities that had post-closing obligations including VSI, and a trustee appointed by MBC to administer the funds in its various premium escrow accounts, i.e., the funds set aside to make future premium payments on the policies on behalf of investors. A significant portion of investor funds were used to pay commissions to sales agents and, unbeknownst to investors, to various shell companies controlled by the individual Defendants and others in the form of’ ‘consulting fees’.
Through VSI, MBC monitored the health of viators and tracked insurance premium obligations. When an insurance premium obligation became due, VSI issued payment instructions to the trustee who, in turn, issued a check to pay the insurance premium.
According to the Security Exchange Commission's complaint, MBC promised investors fixed returns ranging from 12% to 72% (as mentioned above), depending upon the term of investment chosen by the investor. The life expectancy figure determined for each viator was a key factor in determining the maturity date of the investment, the rates of return to investors and the amount of funds needed to be escrowed for payment of future premiums on the policies.
In its complaint, the SEC alleges that in raising money for its enterprise, MBC falsely represented to numerous investors that its life expectancy figures were the product of a review by an independent physician. The SEC further alleges that MBC failed to disclose that about 65% of its outstanding life insurance policies were sold to investors using fraudulent life expectancy figures generated by MBC. Moreover, the SEC alleges that MBC omitted to tell investors that more than 90% of its policies have already surpassed their assigned life expectancy. According to the SEC's complaint, as a result of the failure of these older policies to mature, shortfalls in escrowed premium funds have forced MBC to effectuate a premium payment scheme similar to traditional ‘Ponzi’ schemes or scams, whereby the company is paying premium obligations of specific investors with monies escrowed for future obligations of other investors.
The SEC's complaint also contends that the Defendants failed to disclose to investors that Joel Steinger and Leslie Steinger both played key roles in the management of MBC's operations and its securities offering. Furthermore, the complaint alleges that investors were not being told that at least $33 million in funds collected in MBC's offering was paid to the Steingers and their relatives in the form of ‘consulting fees’.
Named in the SEC's action as relief defendants and receivers of largesse are Viatical Benefactors, LLC, Viatical Services, Inc., Kensington Management, Inc., Rainy Consulting Corp. paid $12.9 million in consulting fees, Twin Groves Investments, Inc. paid $1.2 million in consulting fees, P.J.L. Consulting, Inc paid $12.1 million in consulting fees, SKS Consulting, Inc. paid $3.8 million in consulting fees and Camden Consulting, Inc. paid $8.37 million in consulting fees. In essence these are group companies operated by the Steingers as money conduits.
In addition to its civil complaint, the SEC filed an emergency contempt action against defendants Joel Steinger and Leslie Steinger for disobeying a prior final judgment of permanent injunction entered against them on 6th May 1998. In that previous action, the SEC charged Joel Steinger and Leslie Steinger with fraud and securities violations arising out of their roles in MBC's offering as it stood at that time. In that case, the Steingers were permanently enjoined from violating the registration and anti-fraud provisions of the federal securities laws and ordered to pay $850,000 in disgorgement, plus prejudgment interest, and $50,000 each in civil money penalties. Surely any broker or financial adviser worth his salt would have picked up this information on the web?
In simultaneous filings by the SEC, the State of Florida's Department of Financial Services-Office of Insurance Regulation filed an emergency cease-and-desist order against MBC suspending MBC's license to operate as a viatical settlement provider in and from the state of Florida, and the State of Florida's Office of Statewide Prosecution issued a 16 count criminal information against MBC.
On November 10, 2004 a federal magistrate judge upheld findings by the SEC that Mutual Benefits Corporation engaged in violations of securities law and defrauded investors.
A Judge for the Federal District Court for the Southern District of Florida recommended granting the SEC's motion for preliminary injunction to stop MBC from continuing its operations.
On 15th June 2005 the Court agreed an application by Union Planters Bank, NA that the pre-escrow funds it held be distributed to the depositors, the funds being monies lodged before closure and not assigned to any policies. Those funds remained outside the Receivership.
MBC has failed to disclose to investors the existence of serious cash deficiencies in MBC’s premium escrow accounts and that these deficiencies may impair MBC’s ability to satisfy future premium obligations. As of 30th September 2003, more than 74% of MBC’s active policies had a zero (or negative) escrow balance. Cash flow projections for all of MBC’s escrow accounts established that some would be deficient by 30th September 2004 and all will be deficient by September 30, 2009.
Analysis of MBC’s premium escrow accounts also reveals that because of the shortfalls in its escrowed funds, MBC has effectuated a premium payment scheme similar to traditional ‘Ponzi’ schemes as mentioned above. For example, a total of approximately $3.6 million originally set aside to pay premiums on specific policies in one premium escrow account were used to pay premiums on other policies in that account whose premium escrows were exhausted. Moreover, as of 30th September 2003, approximately $4.5 million has been transferred from one of MBC’s premium escrow accounts to another premium escrow account in order to cover shortfalls in the latter account. Investors have not been told that their funds are being used to pay premiums on other policies.
Additionally, MBC’s representation that “funds sufficient to make premium payments for the estimated life expectancy will be paid or escrowed at the time of closing” are untrue for at least 61 policies. For each of these particular policies, MBC failed to set aside sufficient funds to cover the premium payments due during the life expectancy of the viator. These 61 policies have an aggregate face value of approximately $79 million and represent investments by about 1,300 investors.
MBC’s representations to investors and potential investors regarding its rates of returns were false and misleading. Because of the serious problems with the life expectancies assigned to some of MBC’s policies and the deficiencies in the Company’s premium escrow account, investors may be faced with the prospect of having to place additional funds with MBC in order to cover future premium payments. If this were to occur, it would result in a reduction of the returns that are being promised to investors.
While MBC’s offerings materials do state that, in the event the premium reserve is
exhausted, the investor “may be responsible for a payment of his/her pro rata share of any
unpaid premium,” the disclosure in materials on this point is inadequate given the gravity
of the situation at hand. Additionally, when investors enquired about the prospect of
paying additional funds, sales agents, at the direction of MBC, were told to downplay this possibility and mislead investors into believing that this rarely happens.
On at least one occasion Stephen Steiner assured a group of investors that most of
the policies matured on time or before their life expectancy date, and that the longest period an investor had to wait was two years.
The court appointed receiver filed a report as at 15th June 2005. Sums in hand with the receivership entities are:
Mutual Benefits Corporation $ 450,181
Viatical Services Inc $1,680,676
Viatical Benefactors LLC $ 158,402
The premium escrow account has a balance of $67,236,661 but at the time of liquidation contained $104 million because the Receiver continues to pay all life policy premiums and no policies have been allowed to lapse. The premiums for all policies are being paid out of the premium account at Regions Bank (f.k.a Union Planters Bank, N.A.). The receiver has to maintain the entities in Receivership and pay the life policy premiums out of these funds.
According to the Receiver’s latest report MBC and VSI monthly budgets are $95,000 and $94,000 respectively. MBC has $450,181 in the bank, which will be exhausted by November 2005. Average monthly premiums paid by the Receiver between 1st February and 31st May 2005 totalled $3,134,296, which will exhaust the cash balance of $67,236,661 in approximately 21 months.
I have taken information from an application made by the Receiver to the Court on 22nd April 2005 on which there has not yet been a ruling. The Receiver is requesting the court to approve a procedure for the disposition of policies, the distribution of proceeds of policies and treatment of premium funds. The Receiver says he has ‘’faithfully and diligently preserved the assets of the Receivership estate’’ and proposes ‘’liquidation of that estate, which must be accomplished expeditiously, because cash reserves are dwindling’’.
The Receiver is requesting an order confirming that policies and proceeds of matured policies subject to surcharge in Categories A1 and A2 and those in category A3 holding irrevocable beneficial interests belong to the record beneficiaries and owners, but that, subject to their consent, the Receiver can sell those interests, and that all other policies and their proceeds where they have matured can and should be liquidated by the Receiver with the net proceeds distributed pro rata for the benefit of all persons holding allowed claims against the Receivership entities. The Receiver is also requesting an order that all premium escrow funds in the Receiver’s control be similarly available to the Receiver for the benefit of all persons holding allowed claims against the Receivership entities.
Additionally and finally the Receiver asks for approval of what he calls ‘’specific disposition procedures’’. This is relevant because it involves the sale of the policy interests of owner/investors in Category A, or to the extent the owner/investors object to such sale, a process for distribution of those interests. The Receiver also proposes a process for the investors in those categories to continue to have policies serviced if those investors object to their interests being sold by the Receiver.
The Jeskell Holdings policies fall within Category A. I have asked the Receiver for information as to when it is thought the court will rule on this application.
The Receiver presently controls over 7,000 insurance policies (as categorized below), $5,885,295 in proceeds of policies that have ‘’matured’’ during his tenure, and $70,649,668 in funds held in escrow for payment of premiums.
The policies in the Receiver’s control fall into the following ownership categories:
Category A: Policies where record beneficial ownership is in the name of the investor.
Category A1: 160 Policies having a face value of $12,746,408, where both legal title and record beneficial ownership is in the name of the investor
Category A2: 67 Policies having a face value of $5,345,166 titled in the name of the insured where the record beneficial owners are the investor.
Category A3: 4,770 Policies having a face value of $528,483,849 in the name of nominee owners (e.g. Livoti) where the record beneficial owners are the investors.
Category B: Policies where the policies are titled in the names of Insiders 1, and the recorded beneficial interest is held by nominees.
Category B1: 13 Policies having a face value of $1,596,99937 where MBC is nominee beneficiary.
Category B2: 32 policies having a face value of $57,803,767 where Livoti is nominee beneficiary:
Category B3: 469 policies having a face value of $761,417,171 where there are institutional nominee beneficiaries (Union Planters or American Express)
Category C: Policies where MBC or an Insider is the record owner and record beneficiary, and the actual, not nominee, beneficiary or owner, or where no interest was assigned to a beneficiary.
Between the time when the TRO (Temporary Restraining Order) was entered, and entry of the Preliminary Injunction Order, the Receiver has, to the extent possible, maintained the status quo. Consistent with the directive of the OAR (as clarified and amended by subsequent orders), the Receiver has maintained all insurance policies and serviced and tracked all policies. This has included payment of all premiums, when required, to prevent policies from lapsing, and the collection of all death benefits for policies that have matured since entry of the TRO.
As the Receiver has previously advised the court, it is no longer possible to maintain the status quo. The funds the Receiver is holding will be exhausted in the near future, as detailed in the Receiver’s Fourth Report. Furthermore, the Receiver has now been able to develop a database analysis of the legal and beneficial titles to the policies, a copy of which is attached as Exhibit A to this Motion (which might be attached hereto but if not check it out on the Receiver’s web site), and the Receiver is now in a position to make a recommendation regarding the disposition of the policies, the proceeds of those policies, and the treatment of the funds held in ‘’premium escrow accounts’’, the financial circumstances require that the disposition begin as soon as possible.
The Receiver argues that ‘’tracing’’ of funds should not apply under the rules of equity because ‘’in instances where tracing places one party in a superior position over another victim, equity dictates tracing rules be suspended’’. In the quoted case the Court found that tracing was not feasible in that there was cross funding of premiums. In essence the investment monies that were supposed to go into clearly defined escrow accounts all went into a general melting pot so it is impossible to ascertain whose money is which and where.
The Receiver has submitted that equity dictates that all policies other than those for which actual legal and beneficial title is held in the name of irrevocable beneficiaries and non-Insiders, should be liquidated for the benefit of all investors, and that all funds remaining in the premium fund account similarly be used for the benefit of all investors. He ends by stating ‘’that to do otherwise would be to prefer one set of victims over another’’.
The Asset Analysis
The database reflects that the policies fall into the following ownership categories:
Category A1: Investor Holds Legal and Beneficial Title
There are many policies where the investor is both the legal owner and the record beneficial owner. Under applicable law, these policies are not assets of the receivership entities, or assets that the Receiver can liquidate for the benefit of all investors, but rather assets of the beneficial and legal owners as their rights appear under applicable law.
Category A2: Insured Holds Legal Title; Investor Holds Beneficial Title
There are some instances, in the case of group policies, where the owner o9f record continues to be the insured. The record beneficial ownership of these sixty-seven (67) policies is held in the name of the insured, and these beneficial interests are irrevocable. These policies are administered in the same way as other policies. Under applicable law, these policies are assets of the record beneficial and legal owners as their rights appear under applicable law.
Category A3: Insider Holds Legal Title; Investor Holds Beneficial Title
This group consists of policies owned of record by Livoti, MBC, VBLLC, or Les Steinger It is the Receiver’s understanding that for every Livoti-owned policy there is a trust agreement (described in more detail below) between Livoti and the investors. The Receiver has not been able to locate any such agreement between investors and other Inside owners. However, the Receiver believes that the existence of the Trust Agreement doesn’t change the analysis, because Livoti is an Insider.
In those circumstances where the beneficial ownership in a particular policy is irrevocable, under applicable law the beneficial ownership resides in the investor. Conversely, in those instances where the beneficial interest is revocable, and an Insider is the owner, control of that beneficial interest resides with the Receiver, and, under applicable law those interests can and should be made available for the benefit of all investors.
Category A3 includes eight (8) policies owned by either Life Settlement Alliance or Dignity Partners. These policies have been administered through the receivership entities and VSI has been monitoring the premium payment obligations. The premiums of the LSA policies have been paid out of MBC operating funds. Based upon recent deposition testimony, the Receiver believes LSA is controlled by an Insider. Thus, policies in which LSA holds record ownership should be treated the same as other Insider-owned policies. If LSA disputes its Insider status then LSA must reimburse MBC for all premiums paid in connection with LSA policies and begin to pay VSI a servicing fee.
Apparently MBC purchased the Dignity Partners’ viatical portfolio of policies many years ago. The Receiver has not been able to determine why the policies are still titled in the name of Dignity Partners or its trustees/agents Bankers Trust Company or Deutsche Bank Trust Company Americas. Since MBC did not purchase these policies MBC should be considered the record owner.
Category B: Nominee Beneficiaries Hold Record Beneficial Ownership
Category B comprises policies in which the actual beneficiary is a nominee, whether it is Livoti, another Insider, Union Planters Bank, NA or American Express Tax and Business Services. There are 514 such policies, with a total face value of $821,817,875.
MBC is the beneficiary of 13 of these policies, with a combined face value of $1,596,937. Livoti is the named beneficiary of 32 of these policies, having a total face value of $57,803,767. Either Union Planters or American Express is the beneficiary on the remaining policies. In each instance where Union Planters or American Express is the beneficiary, the owner of the policy is Livoti. All of the beneficial interests of Union Planters and American Express are revocable interests.
Because the beneficial interests of Union Planters and American Express are revocable, the owner, Livoti, as trustee, has the ability to change the beneficial ownership of these policies. Thus, the authority to change the beneficial ownership on these policies, as well as those in which MBC and Livoti are nominee beneficiaries, now rests with the Receiver, which authority, equity dictates, should be used to liquidate the policies for the benefit of all investors.
The Database reflects that the Category B Policies fall into three sub-categories, based on the identity of the nominee:
Category B1: MBC is nominee
Category B2: Livoti is nominee
Category B3: Institutional nominee (Union Planters or American Express)
- Category B1: Policies where MBC is Nominee beneficiary
Case law clearly supports the Receiver’s position that the policies in which MBC is the nominee owner are assets for pro rata distribution because there is no agreement between MBC and the purchasers that MBC will act as the nominee beneficiary, thus MBC is the beneficiary under the policies.
- Category B2: Policies where Livoti is nominee beneficiary
Livoti serves as nominal beneficiary on 32 policies with a face value of approximately $58 million. The Receiver understands that Livoti has a trust agreement with the investor on each policy. However, the Livoti Trust Agreement does not alter the fact that Livoti held, and the Receiver now is the holder of, the beneficial interest in these policies.
The agreement between Livoti and MBC is a simple letter agreement dated 25th June 1996 and provides that Livoti will agree to ‘’act according to the Trust Agreement which will be executed by the beneficiaries, MBC and myself’’.
The court has already ruled that Livoti, as trustee, is a Receivership entity and the receiver controls Livoti’s role as trustee.
Category B3: MBC has virtually identical agreements with American Express and Union Planters Bank regarding obligations as nominee beneficiaries. As escrow agents their role was to deal with the insurance company on death of life assured, to gather in the policy proceeds and distribute them according to the fractionalized investment ownership. These two escrow agents issued to investors certificates undertaking to account to them for the proceeds of the policies on maturity. The Receiver requests that these policies be liquidated for the benefit of all investors.
Category C: Policies that are assets of MBC and Insiders which are Receivership assets and as such the Receiver has the right to sell them.
Proceeds of Matured Policies and Surcharge Rights
The analysis of the rights to proceeds of matured policies is the same as the analysis of the policies themselves. Accordingly, proceeds of matured policies that are currently being held by either the Receiver or the Court, together with any allocable interest earned on those proceeds, should be turned over to the investor holding the interest in the policy, if, in fact, the policy was one in which the investor held an irrevocable beneficial interest, but only after the Receiver has determined his surcharge against those particular proceeds. It is appropriate for the Receiver to seek to recoup from the proceeds of sale of a matured policy that portion that relates to the amount of funds used to pay the premiums that were not funds otherwise allocated to that policy at the time the policy was purchased. Should the Court approve the Receiver’s ability to seek such a surcharge, then, by separate motion, and notice to all affected investors, the receiver shall identify the amount of the appropriate surcharge and the manner in which such surcharge was calculated. The Receiver’s right to surcharge should extend to all proceeds of matured policies until the policies are sold or transferred, including proceeds currently being withheld by insurance companies. Proceeds of all other matured policies should be held by the Receiver for pro rata distribution to all investors.
THE PREMIUM FUNDS
The final asset subject to the Receivership administration is the funds held in the ‘premium escrow account’. The Receiver submits that these funds are assets that should be held for the benefit of all investors and available for administration of the receivership, the collection of other assets, including litigation, and ultimately pro rata distribution to all investors. Equity dictates that these remaining premium funds should not be subject to ‘tracing’ by investors who own policies that may not be ‘out of escrow’ yet. because to do otherwise would ‘prefer one set of victims over another’. The Receiver’s view is undisputedly supported by the law and facts and circumstances surrounding the deposit and use of these funds, and the contracts pursuant to which these accounts were created.
According to all the documentation and evidence, MBC used its funds to pay premiums, whether trough the artifice of ‘premium escrow accounts’ or directly from its operating account. The ‘’escrowed’’ funds were all commingled together with any funds that might have otherwise gone into the non-existent premium reserve account.
The Ponzi scheme was based on fraudulently understated life expectancies, and the ‘’premium escrow reserve’’ was at the heart of the scheme. The ability to continue to pay premiums depended upon generation of additional investor funds, and when the flow of investor funds ran dry, the commingled funds began to dry up as well.
While the investors had a contractual expectation the premiums would be paid (at least up to a point), the investors did not, and do not, have an ownership interest in the premium funds. Indeed there is no equitable way that these funds could be allocated. There is no possible way, since the funds were commingled, to determine what funds from what policies that had, in theory, premium funds still available, were used to fund premiums for policies whose premium funds either never existed or had been exhausted. This, together with the factors summarized below, overwhelmingly illustrate that, under applicable law, equity not only allows, but dictates, that these funds should be held for the benefit of all investors, to support administration of the Receivership, the Distribution Procedures, collection of additional assets for all investors, and ultimate distribution to all investors.
--- The funds were provided by MBC;
--- The use of the funds was directed by a Receivership entity (Livoti);
--- The funds were commingled;
--- The applicable documents expressly stated that the investors had no right whatsoever to these funds; and
--- This account has a direct relationship to the Ponzi scheme
Relevant Contractual Provisions of the MBC Purchase Agreement
The 5th May 2002 Purchase Agreement provided for MBC to ‘escrow with a trustee funds for future premium payments for a minimum of the projected life expectancy of the insured or longer at MBC’s discretion. There are provisions for ‘reserve’ funds but as all the accounts had been milked these are of academic interest only. If the money to pay premiums runs out ‘the Purchaser (investor) may be responsible for payment of his/her pro rata share of any unpaid premiums’.
As the Receiver confirms there were no premium reserve accounts and all premium escrow funds were commingled.
The Receiver claims legal authority to liquidate the assets of MBC despite the objections of Lombardi as nominal owner of MBC. This is legal argument for the court to decide which is probably what is taking it so long.
The Receiver recounts that there are 227 policies owned by investors or insureds of which all but 15 are AIDS policies. Only 5 out of 227 policies have more than 10 beneficiaries. There are 67 other policies where investors hold irrevocable beneficial interests. Expert opinion states that there is virtually no market for AIDS policies and they sell for between 4% -8% of face value.
The Receiver seeks to sell off these AIDS policies for what he can get. The Receiver submits that he has the authority to sell all the interests in all policies not owned by investors or the insured parties and which are not held by beneficiaries irrevocably.
The Receiver asks the court to approve his plan to sell off the policies he is able to for the benefit of investors.
There are various attachments I have endeavoured to append to this report but as the Receivership documents on the web site (http://www.mbcreceiver.com/) are in PDF form they are not supposed to be covered. Anybody could amend documents and send them out as real. Therefore it is necessary to visit the Receiver’s web site and to examine the accounts prepared by the Receiver and the notes qualifying them in the Receiver’s 5th report dated 20th June 2005 and the Receiver’s Motion to the Court dated 22nd April 2005.
I have sent this report to myself to check if the PDF documents have ‘stuck’ to it and found that if you wait a few minutes or left click on the blank pages hereafter they do come up.
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