A Costa Rican guarantee bond issuer has been charged with a “massive” life settlement bond fraud, according to the U.S. Securities and Exchange Commission, Washington.
On January 19, Provident Capital Indemnity Ltd. (PCI); its president Minor Vargas Calvo; and its purported outside auditor, Jorge L. Castillo, were charged with fraud.
The SEC complaint, filed in U.S. District Court for the Eastern District of Virginia, states that PCI offers financial guarantee bonds on life settlements that promise to pay the death benefit if the insured lives beyond his or her estimated life expectancy. From at least 2004 through March 2010, PCI issued approximately 197 bonds “backstopping numerous bonded offerings of investments in life insurance policies with a face value of more than $679 million.
The complaint alleges that PCI misrepresented its ability to satisfy its obligations under its bonds. Alleged misrepresentations, according to the SEC, included the assets that backed PCI’s bonds, PCI’s credit rating, the availability of reinsurance to cover claims on PCI’s bonds, and whether PCI’s financial statements had been audited.
In conjunction with this complaint, the Fraud section of the U.S. Department of Justice’s Criminal division announced a parallel criminal action against the defendants and the arrests of Vargas and Castillo.
The liquidity of a life settlement depends on several factors including the lifespan of the insured; the accuracy of life expectancy reports (LEs); and how closely the insured’s life tracks those LEs. PCI’s bonds offered a fixed maturity date for the investments because PCI’s bond obligated PCI to pay investors (directly or indirectly through the life settlement issuer) the face value of the underlying insurance policy by a date certain if the insured lived past his life expectancy date.
The SEC alleges that PCI’s financial statements were presented as audited statements in accordance with generally accepted accounting principles when, in fact, they were never audited. The company’s statements reflect a “fictitious” long-term asset that has comprised some 70 percent to 80 percent of PCI’s total assets from at least 2003 to present, according to the SEC.
The complaint also alleges that the financial statements were provided to Dun & Bradstreet, which in turn issued PCI a favorable rating of “5 A/S” based exclusively on PCI’s reported net worth. The SEC says that PCI then misleadingly represented in its marketing materials that D&B’s rating is a reflection of “successful customer satisfaction” and “the ability to maintain one of the insurance industry’s lowest loss ratios.” According to the SEC’s complaint, PCI and Vargas also have represented that PCI was backed by a “bouquet” of reputable reinsurers that would backstop PCI’s obligations under its life settlement bonds. PCI did not have that bouquet of reinsurance.
The complaint tells the story of how Castillo and Vargas allegedly tried to cover up when they suspected that regulators were turning up the heat. It reads that “In February 2010, fearful that regulators would learn of his misconduct, Castillo urged Vargas to destroy his emails and other documents, telling Vargas in an email that their “best option is to prepare for the worst.” Castillo then attempted to create backdated audit work papers that would evidence his purported audits of PCI’s financial statements, in one instance asking Vargas, “DO YOU HAVE ANY REAL ACCOUNTING?” After working with Vargas to review some of PCI’s business records – years after his purported audits – Castillo described the exercise as the “first time we’ve had the opportunity to analyze everything . . . better late than never.”
The SEC complaint states that the 197 bond offerings were “sold in the United States, the Netherlands, Belgium, and in other countries, and include life settlement offerings issued by A&O Resources Management, Ltd. (“A&O”) and American Settlement Associates LLC (“ASA”).”
The complaint adds that “PCI has also bonded life insurance policies underlying life settlements sold by the following U.S.- and Canada-based issuers, among others: Acclivity Financial, LLC; American Pegasus LDG, LLC; Assured Benefits Corporation; Bonded Life Fund, LLC; Consolidated Wealth Holdings, Inc.; Granite Financial, Inc.; Fox Life, Inc.; Hill Country Funding, LLC; Ceres Life Cycle AG & Co.; Standard Clearing Inc.; Libertas American Inc.; and Universal Settlements International, Inc. It has also bonded life settlements issued outside of the United States, including a Netherlands-based life settlements issuer.