SEC Charges Offshore Company in Massive Life Settlement Bonding Fraud

FOR IMMEDIATE RELEASE
2011-15

U.S. Attorney and DOJ Announce Arrests in Simultaneous Criminal Action

Washington, D.C., Jan. 19, 2011 — The Securities and Exchange Commission today charged Provident Capital Indemnity Ltd. (PCI), its president, and its purported outside auditor with conducting a massive life settlement bonding fraud.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Virginia, PCI is 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. From at least 2004 to 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. The PCI bonds were a material component of numerous third-party life settlement offerings in the U.S. and abroad.

The SEC alleges that PCI, its president Minor Vargas Calvo (Vargas), and purported outside auditor Jorge L. Castillo misrepresented PCI’s ability to satisfy its obligations under its bonds. They made material misrepresentations about the assets that backed PCI’s bonds, PCI’s credit rating, the availability of reinsurance to cover claims on PCI’s bonds, and whether PCI’s financial statements had been audited.

The U.S. 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 and the arrests of Vargas and Castillo.

“PCI’s bonds helped market investments in insurance policies, but neither PCI’s word nor its bond could be trusted,” said Stephen L. Cohen, an Associate Director in the SEC’s Division of Enforcement. “Accountants who let companies use their audit reports as a rubber stamp can expect to be held accountable.”

According to the SEC’s complaint, a life settlement investment is illiquid and open-ended without a bond because the investment’s payout 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 SEC alleges that 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. 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. PCI’s “audited” financial statements reflect what appears to be a fictitious “Long Term Asset” that has comprised some 70 percent to 80 percent of PCI’s total reported assets from at least 2003 to present.

The SEC’s 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 SEC’s 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. PCI did not have that bouquet of reinsurance.

Last summer, an SEC Life Settlement Task Force established by Chairman Mary Schapiro released a report noting that the market for life settlements has grown over the past decade and calling for greater regulatory coordination and investor protection. The SEC’s Office of Investor Education and Advocacy today issued an update to its Investor Bulletin on life settlement investments that was originally published following the release of that report.

The SEC charged the defendants with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 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.

Mika Donlon, Michael Fuchs and Josh Felker together with accountants Regina Barrett and Deborah Russell conducted the Commission’s investigation, which is continuing. The SEC’s litigation effort will be led by Suzanne J. Romajas.

The SEC thanks the U.S. Attorney for the Eastern District of Virginia, the Fraud Section of the U.S. Department of Justice's Criminal Division, the 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 for their assistance.

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For more information about this enforcement action, contact:

Stephen L. Cohen
Associate Director, SEC Division of Enforcement
202-551-4472

C. Joshua Felker
Assistant Director, SEC Division of Enforcement
202-551-4960

Suzanne J. Romajas
Assistant Chief Litigation Counsel, SEC Division of Enforcement
202-551-4473

http://www.sec.gov/news/press/2011/2011-15.htm