Securities Lawyer Blog | Victim of Fraud?

TAG | STOLI

Mar/12

7

Lincoln National Life Insurance Co. Ordered to Pay in Stoli Case

In an InvestmentNews.com article from March 6, 2012, Darla Mercado writes that the Lincoln National Life Insurance Co. will pay $5 million in death benefits  for a life insurance policy the insurer had contended was fraudulent.

The jury in the U.S. District Court for the Southern District of Florida on Friday found in favor of plaintiff Steven A. Sciarretta, a trustee of the Barton Cotton Irrevocable Trust and owner of a $5 million life insurance policy on the life of the late Mr. Cotton, in a case against Lincoln National.

Mercado writes that Mr. Sciarretta took the insurer to court last April because Lincoln would not pay the death benefit proceeds, even though Mr. Cotton had died after the two-year contestability period in which carriers can refute claims had expired. Lincoln countersued and alleged Mr. Cotton’s policy was void from the start because he had indicated falsely on the policy application that he had no intent to sell the coverage on the secondary market or to assign a beneficial interest in the policy to a trust.

Lincoln National, the insurer, claimed the policy was issued at the behest of so-called stoli promoters. Stoli, or stranger-originated life insurance, involves buyers’ purchasing life insurance coverage they don’t need for the express purpose of selling the death benefits to investors.

The InvestmentNews.com article goes on to say that the jury found the trust had indeed made false statements on the life insurance application. But the panel also stated that it believed Mr. Cotton had not intended at the moment of purchase to transfer the policy to another party with no insurable interest in his life. The jury also found that Lincoln itself was not harmed by these misrepresentations, according to the verdict.

Mercado adds that Mr. Sciarretta benefited from Florida’s insurable interest law, which contains an implicit “good faith” requirement, which requires the insurer to prove that the policy was purchased with the sole intent to sell it to a stranger who doesn’t have an insurable interest in the life of the insured person. In this situation, however, Mr. Cotton’s family members testified that he had intended for the insurance to benefit them. Because the policy was issued in good faith, the trust will end up collecting on the full $5 million.

If you or a family member have become alleged victims of life insurance fraud, contact an insurance fraud attorney for a free consultation on how to recover your investment losses. To speak with an attorney, call 888-760-6552, or visit securitieslawyer.com. Lars K. Soreide will stand up and fight for the rights of consumers.

Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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Oct/11

17

Insured’s “Intent” Is Not an Issue in Pa. Life Settlements Case

It was announced that a federal court decision in Pennsylvania has given a win for life settlement investors, deflating carriers’ argument that it is permissible for an insured person to apply for a life settlement with the express intent to sell it to a third party, writes Darla Mercado in an InvestmenNews.com article from October 12, 2011.

This suit filed by Principal Life Insurance Co. against brothers Matthew and Mark DeRose, trustees of their mother’s family trust, Judge Christopher C. Conner of the U.S. District Court for the Middle District of Pennsylvania in Harrisburg ruled that under state statute, insurable interest is determined solely based on the relationship between the insured person and the policy beneficiary.

Finding on “intent” is similar to recent rulings made in Delaware State Supreme Court (PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust) and in the New York Court of Appeals (Alice Kramer vs. Phoenix Life Insurance Co., Lincoln Life & Annuity Co. of New York). State laws don’t refer to the “intent of the parties” at the time coverage begins, nor does it require that the transfer of a policy must be in “good faith,” the judge wrote in his Oct. 5 ruling.

Mercado goes on to say that the fact that several courts have already rejected the “intent” argument could shape the outcome of other stranger-originated-life-insurance lawsuits filed by carriers which claim that an insured person applied for a policy with a plan to sell it to an investor in the secondary market, lawyers say.

The article points out that the Principal-DeRose case concerns JoAnn DeRose, who in 2006 applied for three policies with a total of $35 million in death benefits. The JoAnn DeRose Family Trust was the intended owner and beneficiary of the policy, and Ms. DeRose’s sons Matthew and Mark were beneficiaries of the trust, according to court documents. The policies were funded through non-recourse premium financing provided by First Priority Bank, and the $1.51 million loan to cover the premiums was secured by the policies.

The credit approval memorandum from First Priority stated that the principal source of repayment for the loan is “the sale of the three assigned life insurance policies in the secondary market, via a life settlement transaction,” according to court documents.

The InvestmentNews.com article points out that Principal subsequently filed an instant declaratory judgment action against the DeRose brothers, claiming they bought the policies as part of a Stoli scheme and hid their use of non-recourse financing on the application for the policies. The insurer sought to have the policies voided because they lacked insurable interest at inception and the application documents had material misrepresentations. Principal also sought to retain the premiums to offset its expenses.

Then Judge Conner set aside the DeRoses’ alleged intent to sell the policies in the secondary market, and instead based insurable interest on the fact that Ms. DeRose’s sons were the beneficiaries of the trust, which in turn was the beneficiary of the insurance policies. Indeed, a parent-child relationship forms the basis for insurable interest, he wrote.

Judge Conner is allowing Principal to move forward with claims aiming to void the policies based on misrepresentations on the application. He is also permitting the carrier to seek retention of the premiums to offset the costs related to issuing the policies.

“While we can’t comment on pending litigation, The Principal does not support any form of investor-initiated life insurance where individuals or investors purchase insurance solely to bet on the early demise of an insured,” spokeswoman Joelle Kirchoff wrote in an e-mail. “We closely monitor our business for these types of policies. In policies where investor-initiated life insurance is suspected, lawsuits have been filed.”

If you or a family member have become alleged victims of life insurance fraud, contact an insurance fraud attorney for a free consultation on how to recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit securitieslawyer.com

We stand up and fight for the rights of consumers. Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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Aug/11

22

Should ‘Life Settlements’ be Defined as ‘Securities?’

It was reported that on July 22, 2011, the Securities and Exchange Commission (SEC) released a report from its Life Settlements Task Force which recommended that the SEC urge Congress to amend the federal securities laws to include life settlements as securities. The SEC report also recommended that the SEC monitor brokers and providers to assure that legal standards of conduct are being met.

This report raises a key policy question about life settlements, in which a policyholder sells the policy to someone else, who then assumes responsibility for paying the premiums. In exchange, the insured person 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.

The SEC proposal to define life settlements as securities is both wise public policy and the only solution that would give all participants the confidence to create a sustainable secondary market for life policies.

This 43-page report and its 40 pages of exhibits are the product of a joint task force that conducted an extensive review of existing law, litigation and enforcement actions. The task force also interviewed all major market participants, making the study the most comprehensive look at this complex issue to date.

Securities Lawyer, Lars Soreide, feels that ‘life settlements’ should be considered ‘securities.’ Lars Soreide says, “It is a gray area when a financial advisor takes off his securities hat and puts on his insurance hat to sell you a life settlement, which can leave many customers confused as to whether they are dealing with  insurance products or securities. Furthermore, by not classifying life settlements as securities it makes it more difficult on investors, who were burned by their advisors, to pursue legal action. By not classifying life settlements as securities, investors may not be able to pursue these claims in the Financial Industry Regulatory Authority (FINRA) forum and have to sue in state or federal court which is a longer, more expensive process, unless all parties agree to arbitrate before FINRA.”

The courts and regulators have found investments in life settlements to be securities. The SEC report, in fact, points to 25 SEC enforcement actions and 13 enforcement actions brought by the Financial Industry Regulatory Authority Inc. that rest on this conclusion, as well as numerous other cases.

If the definition of a security under the securities laws were amended specifically to include life settlements under the NASAA model the definition would preserve a place for state regulation of legitimate life settlements. At the same time, it would close the door to many abusive transactions, including almost all forms of stranger-originated life insurance.

If life settlements were defined as securities, many of the abusive practices that have spawned more than 300 lawsuits and loss of much personal wealth would have been avoided. Few of these litigated cases involved variable policies, which come under the purview of securities regulation and demonstrate the relative effectiveness of Finra regulation and enforcement.

The SEC proposal to define life settlements as securities may be just what is needed to boost investors’ confidence and encourage them to buy, which would make the market more liquid.

Securities regulation would create full, fair and adequate disclosure of all material facts, and the discipline of Finra oversight would afford policyholders consistent protection in all U.S. jurisdictions. This would make it harder for abusers to sidestep the law.

If you or a family member have become alleged victims of life insurance fraud, contact an insurance fraud attorney for a free consultation on how to recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit securitieslawyer.com

We stand up and fight for the rights of consumers. Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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