SEC CHARGES COMPANY AND OWNER WITH FRAUD IN RELATED TO SALE OF "LIFE SETTLEMENT" INVESTMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

04/07/2015 04:30 PM EDT

The Securities and Exchange Commission charged Los Angeles-based Pacific West Capital Group Inc. and its owner Andrew B. Calhoun IV with fraud in the sale of “life settlement” investments.

Life settlements are securities structured around when life insurance policies “mature” after the insured individual dies and benefits are paid.  Life settlement investors purchase an interest in a life insurance policy and in exchange receive a share of the death benefit.

The SEC’s complaint alleges that since 2004, Pacific West and Calhoun, a Beverly Hills-based life insurance agent, have raised nearly $100 million from life settlement investors.  Since at least 2012, Pacific West and Calhoun allegedly defrauded investors by using proceeds from the sale of new life settlements to continue funding life settlement investments sold years earlier.  Pacific West and Calhoun did not disclose this practice to investors and undertook it to make life settlement investments appear successful when, in fact, Pacific West had used up the primary reserves to pay premiums on those policies.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Pacific West and Calhoun made false and misleading statements about the risks of investing in life settlements, including the risk of investors having to make increased premium payments as insured individuals lived longer than Pacific West and Calhoun anticipated.  Pacific West and Calhoun also allegedly misled investors about annual returns and have falsely represented to investors that their investments had nothing to do with Pacific West’s efforts and fortunes.

“Investors are entitled to fair disclosures about the risks associated with their investments,” said Michele Wein Layne, Director of SEC’s Los Angeles Regional Office.  “We allege that Pacific West and Calhoun did the opposite here by hiding and minimizing those risks in order to sell more life settlements.”

The SEC’s complaint charges Pacific West and Calhoun with violating the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws.  Also named as defendants are Ohio-based PWCG Trust, which held and serviced the insurance policies, and five sales agents of Pacific West: Brenda C. Barry of Issaquah, Wash., and her company BAK West, Andrew B. Calhoun Jr. of Anderson, S.C., Eric C. Cannon of Lakewood, Calif., and his company Century Point, and Michael W. Dotta and Caleb A. Moody, both of Los Angeles.

PWCG Trust and the sales agents are charged with violating the securities registration provisions, and the sales agents also are charged with broker-dealer registration violations.  The SEC’s complaint seeks permanent injunctions against all defendants and the return of allegedly ill-gotten gains with interest and penalties from Pacific West, Calhoun, and the sales agents.

The SEC’s investigation was conducted by Todd Brilliant, Dora Zaldivar, Kelly Bowers, and Robert Conrrad.  The SEC’s litigation will be led by John Bulgozdy and Kristin Escalante.

COMPANY AND EXECUTIVES CHARGED BY SEC OVER DISCLOSURES INVOLVING LIFE SETTLEMENTS

 The following excerpt is from the SEC website:

Jan. 3, 2012 

“Washington, D.C., — The Securities and Exchange Commission today charged Texas-based financial services firm Life Partners Holdings Inc. and three of its senior executives for their involvement in a fraudulent disclosure and accounting scheme involving life settlements.

The SEC alleges that Life Partners chairman and CEO Brian Pardo, president and general counsel Scott Peden, and chief financial officer David Martin misled shareholders by failing to disclose a significant risk to Life Partners’ business: the company was systematically and materially underestimating the life expectancy estimates it used to price transactions. Life expectancy estimates are a critical factor impacting the company’s revenues and profit margins as well as the company’s ability to generate profits for its shareholders.

The SEC alleges that Life Partners and the three executives were involved in disclosure violations and improper accounting that Life Partners used to overvalue assets held on the company’s books and create the appearance of a steady stream of earnings from brokering life settlement transactions. The SEC further charged Pardo and Peden with insider trading in their shares of Life Partners stock while in possession of material, non-public information indicating that the company had systematically and materially underestimated life expectancy estimates.

“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life expectancy estimates to the underlying insurance policies,” said Robert Khuzami, Director of the SEC's Division of Enforcement. “This deception misled shareholders into thinking that the company's revenue model was sustainable when in fact it was illusory.”

David Woodcock, Director of the SEC’s Fort Worth Regional Office, added, “The senior-most executives at Life Partners concealed significant risks to the business, manipulated financial statements with improper accounting, and knowingly profited from their misconduct by executing insider trades based on information that was not available to the public.”

Life Partners is a Nasdaq-traded company that generates virtually all of its revenues from brokering life settlements. Life settlements involve the purchase and sale of fractional interests of life insurance policies in the secondary market. In life settlement transactions, life insurance policy owners sell their policies to investors in exchange for a lump-sum payment. The dollar amount offered by the investor takes into account the insured’s life expectancy and the terms and conditions of the insurance policy.

According to the SEC’s complaint filed in federal district court in Waco, Texas, Life Partners misrepresented and failed to disclose in public filings with the SEC that the company’s systematic use of materially underestimated life expectancy estimates constituted a material risk to the company’s revenues. Beginning in 1999, the company used life expectancy estimates provided by Dr. Donald T. Cassidy, a Reno, Nev.-based doctor with no actuarial training or prior experience rendering life expectancy estimates. The SEC alleges that Life Partners and Pardo failed to conduct any meaningful due diligence on Cassidy’s qualification to act as a life expectancy underwriter and instructed the doctor to use a life expectancy methodology that was created by the company’s former underwriter, a part-owner of Life Partners. Pardo, Peden, and Martin were aware that the Cassidy-rendered life expectancy estimates were systematically and materially short.

The SEC alleges that Life Partners materially misstated net income from fiscal year 2007 through the third quarter of fiscal year 2011 by prematurely recognizing revenues and understating impairment expense related to its investments in life settlements. Life Partners improperly accelerated revenue recognition from the closing date to the date it obtained a non-binding agreement with the policy owner to sell a life settlement. Life Partners use of Cassidy’s life expectancy estimates as part of its impairment calculations caused the company to understate millions of dollars in impairment expense.

The SEC further alleges that during this time, Pardo and Peden sold approximately $11.5 million and $300,000 respectively of Life Partners stock at inflated prices while in possession of material non-public information about the company’s dependency on short life expectancy estimates to generate revenues.

In addition to the alleged violations of the antifraud and reporting provisions of the federal securities laws by Life Partners, Pardo, Peden and Martin, the SEC’s complaint also seeks repayment to the company of stock sales profits and bonuses received by Pardo and Martin pursuant to Section 304 of the Sarbanes Oxley Act of 2002.”

SEC OBTAINS COURT ORDER TO HALT ALLEGED INVESTMENT SCHEME IN THE LIFE SETTLEMENT BUSINESS

The following excerpt is from the SEC website; “Washington, D.C., Sept. 2, 2011 – The Securities and Exchange Commission today announced that it has obtained an emergency court order to halt an alleged $4.5 million investment scheme by a Los Angeles-based company that purports to broker life settlements. The SEC alleges that Daniel C.S. Powell and his company Christian Stanley Inc. have spent the past seven years creating the illusion that it was a legitimate company involved in the life settlement industry. Contrary to what investors were told, Christian Stanley has never purchased or generated any revenue as a result of brokering the sale of a single life settlement, and has barely derived any revenue from any of its purported business ventures. Instead, Powell has simply used the Christian Stanley name as a vehicle to raise at least $4.5 million in an unregistered offering of debenture notes, and spent most of the money for purposes unrelated to its ostensible business operations. Powell misused investor funds to finance his stays at luxury hotels, visits to nightclubs and restaurants, and purchases of high-end vehicles. The Honorable George H. King for the U.S. District Court for the Central District of California yesterday granted the SEC’s request for a temporary restraining order and asset freeze against Powell and his companies. The court appointed Robb Evans & Associates LLC as temporary receiver over the entities. “Powell and Christian Stanley created the façade of an actual business when in reality they have virtually no revenue,” said Rosalind Tyson, Director of the SEC’s Los Angeles Office. “Most of the money raised from investors has been used to finance Powell’s extravagant lifestyle and for other purposes that have not been disclosed to investors.” A life settlement is a transaction in which an individual with a life insurance policy sells that policy to another person, who then assumes responsibility for paying the premiums. Typically, the seller no longer wants the policy or can no longer afford to pay the premiums. In exchange, the insured party typically receives a lump sum payment that exceeds the policy’s cash surrender value, but is less than the expected payout in the event of death. According to the SEC’s complaint, Powell raised funds from at least 50 investors nationwide in the fraudulent debenture offering, promising investors fixed interest returns ranging from 5 to 15.5 percent annually for five-year terms. Powell claimed the notes were backed by assets such as a gold mine in Nevada and a coal mine in Kentucky that he said held coal deposits valued at $11.8 billion. The SEC alleges that instead of using investor money to purchase life settlements or develop the coal and gold mines, Powell and Christian Stanley instead used investors’ money for such unrelated purposes as sales commissions and Ponzi-like payments to existing note holders. Among Powell’s other personal expenditures with investor funds were $21,000 toward his school loans, more than $5,000 for cowboy boots, and nearly $5,000 to register for a dating service. The SEC’s investigation was conducted by Lucee Kirka, Peter Del Greco, and Marc Blau and the litigation will be led by Spencer Bendell of the Los Angeles Regional Office. Judge King has scheduled a court hearing for Sept. 15, 2011, on the SEC’s motion for a preliminary injunction.”

5 GO TO PRISON FOR A@O RESOURSE MANAGEMENT LTD. FRAUD SCHEME

The following case is an excerpt from the Department of Justice website: July 22, 2011 "WASHINGTON – Five employees for A&O Resource Management Ltd. and various related entities – including two executives – were sentenced today for their roles in a $100 million fraud scheme with more than 800 victims across the United States and Canada. The sentences were announced by U.S. Attorney for the Eastern District of Virginia Neil H. MacBride and Assistant Attorney General Lanny A. Breuer of the Criminal Division. The five individuals were sentenced by U.S. District Judge Robert E. Payne. Russell E. Mackert, 52, general counsel for A&O, was sentenced to 188 months in prison; Brent Oncale, 36, former owner and founder of A&O, was sentenced to 120 months in prison; David White, 41, the former president of A&O, was sentenced to 60 months in prison; Eric M. Kurz, 47, a wholesaler of A&O investment products, was sentenced to 60 months in prison; and Tomme Bromseth, 69, an A&O sales agent in the Richmond area, was sentenced to 36 months in prison. “The impact of this massive fraud on many of A&O’s investor victims has been disastrous,” said U.S. Attorney MacBride. “Hundreds of elderly investors invested their life savings with A&O and saw it all vanish in an instant. These investors were not looking for quick cash, just a safe alternative to invest their retirement funds. The safety, security, and no-risk nature of the investment was critical to the sales pitch, and it was all a big fat lie.” “Brent Oncale and his co-conspirators operated a sham investment company that turned fraud and deceit into a business model,” said Assistant Attorney General Breuer. “They stole millions from hundreds of unsuspecting investors, pocketing huge sums for themselves. Today’s sentences reflect the severity of these cowardly and costly crimes.” All five men pleaded guilty in the fall of 2010 and early 2011 for their roles in the fraud scheme at A&O, which falsely marketed life settlement products to investors, many of whom were elderly. The conspirators at A&O defrauded investors by making misrepresentations about A&O’s prior success, its size and office locations, its number of employees, the risks of its investment offerings, and its safekeeping and use of investor funds. When state regulators began to scrutinize A&O’s investment products, conspirators manufactured a sham sales transaction to “sell” A&O to an offshore shell corporate entity named Blue Dymond and later to another offshore shell corporate entity named Physician’s Trust. However, A&O and Physician’s Trust was still secretly controlled by A&O principals and their conspirators. On June 6, 2011, the hedge fund manager of A&O, Adley H. Abdulwahab, 35, of Houston, was convicted by a jury in Richmond, Va., of one count of conspiracy to commit mail fraud, five counts of mail fraud, one count of conspiracy to commit money laundering, five counts of money laundering and three counts of securities fraud. A founder of A&O, Christian Allmendinger, 39, was convicted by a jury on March 23, 2011, of one count of conspiracy to commit mail fraud, two counts of mail fraud, one count of conspiracy to commit money laundering, two counts of money laundering and one count of securities fraud. Abdulwahab is scheduled to be sentenced on Sept. 28, 2011, and Allmendinger is scheduled to be sentenced on Aug. 14, 2011. They face up to 20 years in prison on each count except the securities fraud counts, on which they face up to five years in prison. This investigation was conducted by the U.S. Postal Inspection Service, Internal Revenue Service, and FBI, with significant assistance from the Texas State Securities Board and the Virginia Corporation Commission. These cases are being prosecuted by Assistant U.S. Attorneys Michael S. Dry and Jessica Aber Brumberg from the Eastern District of Virginia and Trial Attorney Albert B. Stieglitz Jr., of the Criminal Division’s Fraud Section. The investigation has been coordinated by the Virginia Financial and Securities Fraud Task Force, an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases in the nation and in Virginia. The task force is an investigative arm of the President’s Financial Fraud Enforcement Task Force, an interagency national task force."

SEC TALKS ABOUT LIFE SETTLEMENTS

The following information has been excerpted from the SEC web site:

“The Office of Investor Education and Advocacy is issuing this Investor Bulletin to highlight information about life settlements and some of the risks these types of transactions may pose for investors. Individual investors considering a life settlement transaction may wish to keep the following points in mind and seek guidance from an unbiased financial professional who will not receive a commission or any other financial benefit from the transaction.
What is a life settlement?
In a “life settlement” transaction, a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The amount of the payment from the investor to the policy owner is generally less than the death benefit on the policy, but more than its cash surrender value. The dollar amount offered by the investor usually takes into account the insured’s life expectancy (age and health) and the terms and conditions of the insurance policy.
Why would a policy owner wish to sell a life insurance policy?
Due to changed family or other circumstances, a life insurance policy owner may no longer need the insurance provided by the policy. A spouse may have died, children may have grown up, or a company with life insurance on a key officer may have been sold or gone out of business. Other policy owners may have difficulty making premium payments or simply need cash. In such circumstances, many policy owners surrender their policies or let their policies lapse by ceasing to make premium payments. Selling a policy to an investor may be another alternative. Such sales may be made through life settlement brokers who charge commissions.
How does a life settlement take place and who are the parties involved?
A policy owner may discuss a possible settlement with his or her insurance agent or financial adviser, who then contacts a life settlement broker. In some cases, the policy owner may be solicited directly by a life settlement broker. Life settlement brokers may also be life insurance agents or securities brokers. Depending on the requirements of the states in which they do business, life settlement brokers may be licensed.
The life settlement broker obtains the insured’s authorization to release medical records and forwards the policy owner’s application and medical information to one or more companies known as life settlement providers. Many, but not all, states regulate life settlement providers, who also charge a commission.
The life settlement provider obtains life expectancy estimates on the insured and bids on the application. Life expectancy underwriters (who are not the insured’s personal physician) evaluate the risk of mortality of the insured based on his or her personal characteristics. If the life settlement provider’s bid is accepted, the provider may add that policy to a large group of policies, interests in which may be offered to investors. Institutional investors analyze the information provided by the life settlement provider, often obtaining their own life expectancy estimates. Retail investors, on the other hand, may have to rely on life settlement personnel or other investment professionals to assess the advantages and disadvantages of the transaction. In either case, the investor makes a cash payment to the policy owner or policy owners and continues to pay premiums necessary to keep the policy or policies in effect. Upon the insured’s death, the investor receives the death benefit.
Considerations for investors in life settlements
Before investing in a life settlement, investors may wish to keep the following points in mind.
The return on a life settlement depends on the insured’s life expectancy and the date of the insured’s death. As a result, the accuracy of a life expectancy estimate is essential. If the insured dies before his or her estimated life expectancy, the investor may receive a higher return. If the insured lives longer than expected, the investor’s return will be lower. If the insured lives long enough or if life expectancy is miscalculated, additional premiums may need to be paid and the cost of the investment could be greater than anticipated.
In response to investors’ concerns about the uncertainty of life expectancy estimates, some companies have incorporated purported life expectancy guarantee bonds into their offerings. These companies claim that if the insured does not die by the life expectancy date, they will pay investors the amount they would have received had the insured died by that date. Investors should be aware that the Commission has recently brought enforcement action against a company alleging that it made fraudulent claims about these bonds.

Under certain circumstances, the investor may not receive the death benefit. For example, the life insurance company that issued the policy may refuse to pay out the death benefit if it believes the policy was sold under fraudulent circumstances. In addition, the heirs of the insured may challenge the life settlement or the insurance company may go out of business.

The competence of a life expectancy underwriter and the accuracy of the life expectancy estimate are critical to the return on a life settlement. For the most part, life expectancy underwriters are not licensed or registered by state insurance regulators, and information about the methodologies and review procedures that life expectancy underwriters use is not generally disclosed.

Life settlements can give rise to privacy issues. Insured individuals generally wish to keep their medical records and personal information confidential. Investors, on the other hand, want access to the insured’s medical and other personal information to assess the advisability of their investment and to monitor it on a continuing basis.”