U.S. Securities and Exchange Commission
Litigation Release No. 21818 / January 19, 2011
Securities and Exchange Commission v. Provident Capital Indemnity, Ltd.,Minor Vargas Calvo, Jorge L. Castillo, and Relief Defendant Desarrollos Comerciales Ronim, S.A., Civil Action No. 3:11-cv-045 (E.D. Va. Jan. 19, 2011)
SEC CHARGES OFFSHORE COMPANY WITH MASSIVE LIFE SETTLEMENT BONDING FRAUD
U.S. Attorney and DOJ File Simultaneous Criminal Action
The Commission today filed an enforcement action against Provident Capital Indemnity, Ltd. ("PCI"), its president Minor Vargas Calvo ("Vargas"), and its purported outside auditor, Jorge L. Castillo ("Castillo") seeking to halt a massive, ongoing fraud by PCI, an offshore company located in Costa Rica that provides financial guarantee bonds on life settlements and claims to protect investors' interests in life insurance policies by promising to pay the death benefit if the insured lives beyond his or her estimated life expectancy. According to the complaint, 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 $670 million.
According to the complaint, the PCI bonds were a material component of numerous third-party life settlement offerings in the United States and abroad. Without a bond, a life settlement investment is illiquid and open-ended because the investment's pay-out date and return are dependent upon the date of the insured's death. 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 complaint alleges that the defendants misrepresented PCI's ability to satisfy its obligations under its bonds by making material misrepresentations about:
Specifically, since at least 2003, PCI, Vargas and Castillo represented to life settlement issuers, and in turn, the investing public, that Castillo had audited PCI's financial statements in accordance with generally accepted accounting standards. Contrary to their representations, however, the complaint alleges that Castillo never conducted an audit of PCI and instead issued clean audit reports at Vargas's bidding, thereby supporting the illusion that PCI had materially larger assets and greater financial wherewithal to support its obligations under the life settlement bonds. According to the complaint, PCI's "audited" financial statements reflect what appears to be a fictitious "Long Term Asset" that has comprised some 70% to 80% of PCI's total reported assets from at least 2003 to the present.
The complaint alleges that PCI's "audited" financial statements were provided to Dun & Bradstreet ("D&B"), which issued PCI a favorable rating of "5 A/S," based exclusively on PCI's reported net worth. 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 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 when, in fact, PCI had no reinsurance coverage.
The Commission charged the defendants with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)], and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5] and alternatively charged Castillo with aiding and abetting PCI's and Vargas's violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Exchange Act Rule 10b-5. The Commission also named Desarrollos Comerciales Ronim S.A., PCI's managing general agent, as a relief defendant.
The Office of Investor Education and Advocacy issued an update to its Investor Alert on life settlement investments. The Commission's Alert was published following the release of the Commission's Life Settlements Task Force on July 22, 2010. The Investor Alert is accessible through this link: http://www.sec.gov/investor/alerts/lifesettlements-bulletin.htm.
The United States Attorney's Office for the Eastern District of Virginia and the Fraud Section of the Department of Justice's Criminal Division also announced simultaneously a parallel criminal action against the defendants.
The Commission thanks the United States Attorney for the Eastern District of Virginia, the Fraud Section of the Department of Justice's Criminal Division, Virginia Financial and Securities Fraud Task Force, the United States Postal Inspection Service, The Federal Bureau of Investigation, the Internal Revenue Service Criminal Investigation Division, the Costa Rican Unidad de Analisis Financiero, the Ontario Securities Commission, the Gibraltar Financial Services Commission, the Texas State Securities Board, The Texas Department of Insurance, and the New Jersey Bureau of Securities.
The Commission's investigation in this matter is ongoing.