Die, Already!
Lawsuit exposes latest life insurance scheme
By: Corey Pein 11/17/2009
When it comes to high finance, New Mexico is still the Wild West. Shady characters come from all over to take big risks in a casino-like, almost lawless market.
One such story is told in a lawsuit filed late last month in the 1st Judicial District Court in Santa Fe. It begins in 2006, when five wealthy, elderly Texans came here to form the Austin Crude Holding Company. One of the men, John Brown, had a stake in oil and gas leases in Louisiana that could produce 25 million barrels of oil. But to drill, the oilmen needed money.
Enter Lance J Thayer, a Texas-based financial planner then doing business in New Mexico. Thayer allegedly suggested the men take out life insurance policies, then have him sell the policies for cash.
Who would buy a stranger’s life insurance?
Investors smelling money on the men’s eventual deaths. It’s commonplace in the growing, loosely regulated “life settlement” business. According to the National Association of Insurance Commissioners, this morbid secondary market has grown to $4 billion a year.
Four partners in Austin Crude—Donald E Higgins, Vernon K Patterson, Fred Sams and Royce L Vernon—purchased a total of $80 million worth of life insurance, expecting to sell the policies for $2.4 million. They paid nothing up front because Thayer secured a loan to cover the premiums.
According to the complaint, Thayer got Institutional Marketing Consultants of Colorado to enlist First National Bank of Santa Fe as “insurance manager” for the scheme. However, IMC’s employee never provided the bank with proof of her authority to act on behalf of Austin Crude, and the bank never asked for such proof. (Jennifer Lind, senior vice president and marketing director at First National, didn’t return SFR’s call by press time.)
IMC then found Dinero Corp., a Santa Fe company set up by Connecticut insurance executive Michael Krasnerman, to provide financing for the premium payments at 18 percent interest, with the policies as collateral.
“The transaction is structured so the loan is very impracticable to pay off,” Stephen Royce, Austin Crude’s attorney, says.
Krasnerman’s attorney, Dan Goldman, tells SFR the Austin Crude claim is “frivolous.” Krasnerman played a part in a scam pursued by former New York Attorney General Eliot Spitzer in 2006. According to Spitzer’s lawsuit and The New York Times, Krasnerman took bribes from another life settlement company in a plot to defraud policyholders.
The New Mexico lawsuit says Thayer colluded with Krasnerman, IMC and First National to profit from a series of transactions that left Austin Crude holding the bag. “Everybody else is making money,” Royce says.
Thayer allegedly delayed the sale of the policies by promising the men more money—up to $16 million—“if they just hang in there.” Now, the men owe more than $13.5 million to Krasnerman, who has sued them for damages—and the right to sell the $80 million policies—in federal court.
New Mexico is one of 20 states that doesn’t regulate life settlements. A decade-old state law covers “viatical” settlements, which are similar, but intended for people with life-threatening illnesses. By contrast, life settlements allow any elderly, wealthy person to “go out and buy a policy and flip it,” Royce says.
The National Association of Insurance Commissioners has raised concerns over abuse like that alleged by Austin Crude. On Sept. 24, NAIC Vice President Commissioner Susan Voss told a congressional committee that “stranger-owned life insurance” policies were being repackaged and sold as investment securities, “much as securitization of mortgages helped dramatically expand that marketplace.”
As early as 2002, experts called life settlements an “invitation to skullduggery.” In an article for the American Academy of Actuaries, retired Indiana University professor Joseph Belth writes that viatical and life settlements create “an incentive for murder.”
A Google search for “life settlement” and “New Mexico” returns 14,200 results, many promising quick cash by becoming a policyholder—or a broker.
New Mexico Superintendent of Insurance Morris J Chavez didn’t return a message by press time. “We are looking into this,” New Mexico attorney general spokeswoman Lynn Southard tells SFR in an email.
Comments (2)
You describe a STOLI – Stranger Originated Life Insurance transaction. The Life Insurance Settlement Association is against such practices. It violates insurable interest laws.
Studying the settlement industry would reveal that legislation has been passed in 38 states. The laws, rules and regulations in place are for life settlement activity is extensive, more so than in any other insurance line of business. Certain aspects of settlement transactions are regulated by the SEC, FINRA, and state securities administrators.
Life settlements are for situations where a policy owner no longer wants, needs, or can afford their existing life insurance policy covering an insured over 65 who is NOT terminally ill. The contractual personal property recognized in 1911 by the U. S. Supreme Court allows for owners to receive economic value when lapsing for zero value or surrendering for minimal value is a serious consideration. Reportedly settlements allow policy owners to receive 3 – 5 times more than upon surrender.
Life Insurance Agent Originated Life Insurance (LIAOLI) is caused by life insurance agents finding methods bypassing their home office underwriting policies and procedures. Insurance policies pay out commissions of 50-100%+ in first year commissions to agents. Home offices price policies believing most policies will lapse in 5-7 years. So insurance companies put policies in place knowing they are not likely to pay a claim. Upon lapse consumers get nothing. Sounds profitable.
Life companies do not allow unapproved or undisclosed premium financing plans to be used by their agents to originate policies. Premium financiers were engaging in the same type of sloppy loan origination practices reported about in the mortgage industry recently. So where are the New Mexico banking regulators, banking managers and supervisors? Who is going to be held accountable for allowing such a loan to take place without proper documentation? Sounds to me like these were New Mexico residents not outsiders.
How did Dinero Corp., a Santa Fe company, get set up in New Mexico? Does your state not have a secretary of state department? Dinero, isn’t that Spanish for money?
A loan was approved that was “structured so [it was] very impracticable to pay off” and had an 18% charge when fully collateralized? Sounds profitable. Nobody in New Mexico did a background check on Krasnerman Dinero was set up? A Google search should have turned up something.
What you did not say is the rest of the testimony in front of the house subcommittee refuted the hysteria the NAIC, Ms. Voss, and the media conjured up about securitization. In her written testimony she stated that it would be better for her state residents to let their policies lapse worthless rather than receive the economic value that life settlements offer truly exposing her allegiance with insurers rather than with her resident consumers. Imagine that.
How retired Indiana University Professor Joseph Belth could write that viatical and life settlements create “an incentive for murder” is both stunning and woefully inaccurate. Let’s examine two scenarios - #1 currently there are life insurance policies in force that have spouses, children, business partners, etc. who all can enrich themselves upon the “accelerated mortality experience” of the life insurance policy’s insured. There have been television shows, movies, books, etc. where the first question the detective asks is “was there a life insurance policy recently purchased.” So how much of this is going on? #2 if criminals or those who were laundering money by buying life insurance policies in order to enrich themselves were to buy the policy with the immediate intent to kill the insured to increase their rate of return do you really think that the criminal would want to shine such a bright light on such an activity or sit by the way side and let nature take its course? I propose it is the latter not the former. It just seems to make good business sense.
You indicate that “a Google search for “life settlement” and “New Mexico” returns 14,200 results, many promising quick cash by becoming a policyholder—or a broker. The state of New Mexico has an insurance department, a securities department, and an attorney general last I saw. New Mexico has rules and regulations regarding advertisements. This should be very easy to identify, track down, and prosecute those who are in violation of your state laws, rules and regulations.
So Corey, it is that the outsiders are simply bad actors or is it the case that New Mexico is asleep at the switch? Maybe you ought to do some research on that, you think?