Regulators Rein In Murky STOLI Life Policies
Source: Wall Street Journal - June 22, 2010
The life-insurance business was good to Steven M. Brasner for much of the past decade, so good that he and his wife named their motor yachts after it. Their first, a 34-footer, they christened "Preferred Risk." Its 50-foot replacement: "STOLI on the Docks."
While it rings of vodka, STOLI also stands for "Stranger-Originated Life Insurance"—controversial policies that older people take out and then sell to investors. The investors pay the premiums and collect proceeds when the original owner dies. Mr. Brasner was a sales agent who specialized in such policies. In the years before the financial crisis, he connected aging retirees in need of money with cash-flush hedge funds eager for offbeat investments.
Times are different now. In April, Florida authorities arrested Mr. Brasner on 22 counts of alleged grand theft, fraud and other offenses tied to $78 million of policies that earned him nearly $2 million in commissions. The state accuses him of lying to insurers about applicants' financial status and their reasons for buying the coverage. If convicted, the 44-year-old could land in jail for decades.
Mr. Brasner has pleaded not guilty and will "zealously defend" against the allegations, says Mark Eiglarsh, his attorney. The agent "passionately maintains his innocence" and "eagerly awaits his opportunity" to present his side in court, he says. Mr. Brasner declined to comment.
Meanwhile, the Florida agent is a defendant in civil suits filed by insurers seeking to void many of the policies, and by investors who allege they lost money buying now-worthless policies. The litigation has taken a financial toll: Last year, the Brasners surrendered their 50-foot yacht to a lender. And the agent is acting as his own lawyer in some of the civil suits, in which he denies the allegations.
Mr. Brasner's reversal of fortune is part of a post-bubble crackdown by state authorities, aimed at the middlemen who played a crucial role in filling the pipeline for stranger-originated policies. In a frenzy that bears some similarities to the subprime-mortgage debacle, billions of dollars of stranger-originated life insurance was sold to senior citizens between 2004 and 2008 with the intention of selling the policies to investors. The investors thought they spotted an opportunity in policies that seemed underpriced; some funds accumulated hundreds of such policies.
The practice was legal in many states during the prior decade, though disliked by regulators because it skirted the intent of "insurable interest" laws. Those laws prohibit taking out a policy on someone without having a stake in the person's well-being. When hedge funds moved into this area around 2004, however, many insurers did little double-checking of the financial information provided on applications and didn't drill down deeply about buyer's intentions in taking out the policies; they focused on medical underwriting, and some initially welcomed the influx in business, according to insurance-industry executives.
State authorities have charged that some agents, in their haste to earn fat commissions, stepped over the line, committing fraud to dupe insurers into issuing the multimillion-dollar policies favored by investors. The most common charge: that agents inflated applicants' wealth to mislead insurers. Insurers typically ask questions about annual income and net worth, in part, to ensure that buyers can afford the premiums.
In March, Ohio regulators revoked the license of an agent who allegedly promised a 74-year-old Cleveland woman $8,000 to let him take out $9 million of insurance on her life. The application to Prudential Financial Inc. indicated she had a net worth of $12.5 million. In reality, she and her husband had a net worth of just $2,000 and combined monthly income of $950, according to Ohio officials and Prudential. The agent didn't contest the action and didn't show up at the hearing, according to a spokeswoman for the state's insurance department.
Minnesota regulators in December penalized an agent who had secured 44 policies totaling $127.8 million on the life of one man. They revoked the agent's license and levied a $250,000 fine. Regulators maintain he misrepresented the total amount of insurance outstanding as the client applied for additional coverage over a several-year stretch. The agent signed a consent order, neither admitting nor denying the allegations.
Allegations of wrongdoing by agents and brokers also are common in the more than 200 civil lawsuits filed by insurers around the U.S. involving alleged stranger-originated policies. "It is astounding the extent to which the fraud pervaded" this case, California state Judge John Meyer said last year as he allowed a unit of Lincoln National Corp. to void two policies totaling $20 million that had yielded nearly $900,000 in commissions to several agents.
The judge cited a forged signature on the application and a fake letter, purportedly signed by the applicant's long-time accountant, to verify the applicant's net worth at $44 million when it actually was about $100,000.
The son of a Wall Street trader, Mr. Brasner graduated from Long Island University in the late 1980s and soon was selling insurance on Long Island. After the Sept. 11, 2001, terrorist attacks, his wife, a lawyer on Wall Street, wanted to move from the area, says Mr. Eiglarsh, Mr. Brasner's lawyer. They settled on Florida, where they had family.
They moved into a new home, a $1 million Mediterranean-style villa in Davie, Fla., near Fort Lauderdale. In 2006, they added an oceanfront getaway, a $565,000 condo on Hutchinson Island, which became home to the yachts.
Mr. Brasner initially sold life insurance for a financial-planning firm in Boynton Beach, then in 2005 opened Infinity Financial Group in the same town. He decorated his office in a New York Yankees theme, including posters of old-timers, jerseys and autographed baseballs, according to Mr. Eiglarsh.
Mr. Brasner raised his profile by serving as an occasional spokesman for a Boca Raton weight-loss center that pitched eating a certain type of cookie to suppress hunger. He boasted in a television commercial he lost 115 pounds in six months. In another promotion, he noted that the cookies could be packed into his "hectic business schedule" and had helped transform him from uninsurable to "a preferred risk."
He found customers through a low-cost tax preparer who worked in the same office, according to an affidavit filed by Florida authorities in the criminal case.
Mr. Brasner also drew at least one acquaintance of his widowed mother in Boynton Beach. "He was very nice. I trusted him," says Elaine Gelch, a Boynton Beach neighbor who took out a $5 million policy in 2006 through Mr. Brasner. She is one of six former clients to give statements to Florida officials for their case.
According to an affidavit filed by Florida prosecutors, Mr. Brasner's pitch was that seniors, with no out-of-pocket expense, could make money by taking out, then selling the policies. Mr. Brasner said they would receive 3% to 5% of the face value of the insurance once it sold on the secondary market, which would happen when the policy was two years old and could no longer be contested by the insurer, the affidavit said. In Florida and elsewhere, other agents pushing stranger-originated life insurance were offering various financial inducements to retirees during that period.
The problem, however, was that Mr. Brasner's customers only partially filled out applications, and then, unbeknownst to them, Mr. Brasner inserted falsehoods about their wealth and other items into the final applications, according to the affidavit.
Suits filed against Mr. Brasner by insurers and investors in federal and state courts in Florida and other states make additional allegations. In several instances, ownership of the policies in short order was changed to insurance trusts. Such trusts are commonly used by wealthy people in estate planning involving life-insurance policies to minimize taxes. But here, the trusts were used to transfer control of the policies to investors while keeping the insurance companies in the dark, according to suits filed by the insurers.
It is unclear how many of Mr. Brasner's clients earned money. One policyholder, whose experience is described in court papers, says she received $150,000 up front. But for others, the alleged scheme was interrupted before the expected pay day, when the insurers sued Mr. Brasner, as well as the investors and some original policyholders for alleged fraud and other wrongdoing. Those suits were filed in 2008 and 2009 after insurers became alarmed about the surge in stranger-originated life insurance, and insurance regulators in Florida and other states warned that dubious schemes were proliferating.
"I was devastated," recalls Carol Sciolino, 74, of Boynton Beach, of the fraud allegations in a suit brought by a unit of AXA SA, in federal court in West Palm Beach. "I wouldn't even steal a piece of gum. To have this happen, it was terrible."
Ms. Sciolino, who took out a $3 million policy through Mr. Brasner in late 2006, has given statements to both Florida officials and AXA. In visits to the agent's office, she said in the AXA statement, he had put documents before her, and said, "'This covers such and such, and you just have to sign here.' " In an interview, she recalls saying to him: Getting paid to take out life insurance "sounds too good to be true. Are you sure if I sign these papers, I won't go to jail?" She says she came to believe the strategy of selling her policy to an investor was legal. Ms. Sciolino says she "never received one cent" from the transaction.
Whether or not stranger-originated life insurance was legal is a focus of some of the civil litigation now pending between insurers and investors in the policies; Florida's criminal action against Mr. Brasner focuses on the alleged misrepresentations in the application process.
The application materials submitted by Mr. Brasner's office falsely answered "no" to a question of whether Ms. Sciolino intended to sell the policy, according to AXA. The materials also falsely stated that she would pay the premiums herself, when in fact the premiums were financed with a loan taken out by "The Carol Sciolino 2006 Life Insurance Trust," according to the insurer's court filings. Ms. Sciolino told AXA she signed papers to transfer the ownership of the policy to the trust. She said in the AXA deposition that she was merely following Mr. Brasner's directions.
Ms. Sciolino says she didn't provide false information to Mr. Brasner and that she wasn't aware it had been submitted to AXA until she was sued.
The application materials listed the retiree's net worth as $5.9 million, the filings show, more than six times what Ms. Sciolino says is the accurate amount. Mr. Brasner's attorney declined to comment on any allegations about individual policies.
In February, AXA reached a settlement with Ms. Sciolino, the other senior citizens and the investors, dismissing them as defendants and voiding their policies. AXA's still has claims against Mr. Brasner and other insurance brokers involved in the sales.
According to court records, investors as far apart as Texas and Germany bought control of policies initiated by Mr. Brasner, including a Deutsche Bank AG investing entity named GIII Accumulation Trust.
In March, the GIII trust filed for a judgment against Mr. Brasner to cover damages of at least $4.9 million that it said it suffered tied to its purchase of "now entirely worthless" rights to $30 million of AXA policies that had been voided. GIII said it had relied on Mr. Brasner's certification that the application materials were accurate.
In a court response, Mr. Brasner denied knowingly providing any false financial information to AXA, and contended GIII "had the expertise" and opportunity "to conduct due diligence" prior to buying the ownership interests.
Mr. Brasner's arrest came April 22, when three detectives arrived at his office in Boca Raton. He was at Palm Beach County Jail for eight hours as he awaited release on bail, during which prison staff had to call his doctors to stabilize his blood pressure, Mr. Eiglarsh says.
Lately, he has spent many afternoons poolside at the Hutchinson Island condo, following medical advice to rest, the lawyer says.
Stranger Owned Life Insurance...Make Informed Decisions.
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Publisher posted on Saturday, June 26, 2010
Tags: Life Settlements, Life Insurance, Viatical
Posted in: Site News, Senior Citizens
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