Phillip Bounsall

Securities Exchange Act of 1934
Release No. 48475 / September 11, 2003

Accounting and Auditing Enforcement
Release No. 1855 / September 11, 2003

Administrative Proceeding
File No. 3-11252


 
In the Matter of
 
PHILLIP BOUNSALL,     
 
Respondent
 


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ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AS TO PHILLIP BOUNSALL

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that ceast-and-desist proceedings be, and hereby are, instituted against Phillip Bounsall ("Bounsall") pursuant to Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act").

II.

In anticipation of the institution of these administrative proceedings, Bounsall has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's finding of jurisdiction over Bounsall and the subject matter of this proceeding, which Bounsall admits, Bounsall consents to the issuance of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 as to Phillip Bounsall ("Order") and to the entry of the findings and imposition of relief set forth below.

III.

On the basis of this Order and Bounsall's Offer, the Commission makes the following findings:1

Facts

(1) This case involves the improper use of a purported "insurance policy" to reduce a $29 million loss sustained in 1998 by Brightpoint, Inc. ("Brightpoint" or "the Company"), by $11.9 million in order to report a much smaller loss. Brightpoint is a public company in the business of distributing wireless voice and data products in the global wireless telecommunications industry. Bounsall was Brightpoint's chief financial officer and treasurer. He was ultimately responsible for the accuracy of Brightpoint's financial statements.

(2) As a result of Brightpoint's conduct, its 1998 financial statements, as reported in the 1998 Form 10-K, overstated Brightpoint's actual net income before taxes by 61 percent. The misrepresentation was subsequently republished in a registration statement filed in September 1999 and in Forms 10-K filed for 1999 and 2000.

Summary

(3) In October 1998, Brightpoint publicly announced that in the fourth quarter ending December 31, it would recognize a one-time charge, ranging from $13 million to $18 million, arising out of losses sustained by one of its divisions in the United Kingdom ("UK"). However, by December 1998, the UK losses had mushroomed to about $29 million, and Brightpoint's corporate controller, John Delaney ("Delaney"), and its director of risk management, Timothy Harcharik ("Harcharik"), devised a scheme to cover-up these additional, unanticipated losses, rather than disclose them. Bounsall was Delaney's immediate supervisor, and, as Brightpoint's Chief Financial Officer, Bounsall was ultimately responsible for the accounting for the UK losses.

(4) In December 1998, Delaney and Harcharik turned to the Loss Mitigation Unit ("LMU") of American International Group, Inc. ("AIG"), which offered so-called "insurance" products specifically designed to minimize the financial statement impact of losses sustained by AIG clients. Brightpoint and AIG fashioned a $15 million "retroactive" insurance policy (the "AIG Policy") that purported to cover all of the extra UK losses. The "cost" of this $15 million policy to Brightpoint was about $15 million, which Brightpoint was to pay in monthly "premiums" over the prospective three-year life of the policy. The AIG Policy, finalized in January 1999, enabled Brightpoint to record in 1998 an insurance receivable of $11.9 million, which Brightpoint netted against the total UK losses of about $29 million, bringing the net loss to within the previously disclosed $13 million to $18 million range.

(5) Following the October 1998 press release, Delaney kept Bounsall apprised of the increasing magnitude of estimated UK losses. Delaney also informed Bounsall that (i) he and Harcharik were negotiating with AIG for the AIG Policy; (ii) the AIG Policy was primarily intended to cover the UK losses on a retroactive basis; and (iii) Delaney wanted to use anticipated insurance recoveries under the retroactive AIG Policy to reduce the UK losses for accounting purposes. Bounsall knew that the policy premium was very substantial. Without reviewing any written documentation or examining the binder or any drafts of the binder, Bounsall authorized Brightpoint's purchase of the AIG Policy, and he knew Delaney intended to account for the AIG Policy by allowing Brightpoint to net the $11.9 million "insurance" receivable against the UK losses.

(6) The retroactive portion of the AIG Policy in fact was not insurance. It was only a mechanism for Brightpoint to deposit money with AIG - in the form of monthly "premiums" - which AIG was then to refund to Brightpoint as purported "insurance claim payments." In drafting the AIG Policy, Delaney and Harcharik took pains to ensure that the "policy" raised no "red flags" for Brightpoint's auditors (the "Auditors"). Moreover, once the AIG Policy was finalized, Delaney and Harcharik worked with AIG to devise a letter to the Auditors falsely stating that there would be an "insurance" recovery under the AIG Policy, when they knew that was not the case.

(7) In October 2001, after an inquiry from the Commission's staff, the Auditors began looking more closely at the AIG Policy and determined that it was not traditional insurance. Although the Auditors questioned whether the policy was insurance at all, they decided at the very least that the policy provided retroactive coverage and, therefore, that all premium expense associated with it should have been recorded in 1998. On November 13, 2001, Brightpoint announced a restatement, which treated the AIG Policy as real, but retroactive, insurance (the "First Restatement"). The First Restatement expensed the full policy "premium" in the fourth quarter of 1998, amounting to $15.3 million.

(8) On January 31, 2002, Brightpoint announced that it would further restate its financial statements to reflect that the AIG Policy "premiums" were nothing but deposits with AIG. This second restatement came about when the Auditors learned that one day before the Company announced the first restatement, it had "cancelled" the AIG Policy and obtained from AIG a refund in the full amount of premiums Brightpoint had paid over and above the "insurance claim payments" made to it by AIG with respect to the retroactive portion of the policy. The cancellation transaction exposed the true nature of the AIG Policy. As a result of the conduct summarized below, Bounsall violated Section 13(b)(2)(B) and Rule 13b2-1 of the Exchange Act.

The Respondent

(9) Bounsall, age 42, resides in Carmel, Indiana. Bounsall served as Brightpoint's executive vice president, chief financial officer, and treasurer from October 1996. In April 2002, Bounsall resigned from these positions at Brightpoint. Prior to joining Brightpoint, Bounsall worked as an auditor at an accounting firm for twelve years. Bounsall is a CPA and was licensed by the State of Illinois from 1983 to 1986.

Other Relevant Individuals and Entities

(10) Brightpoint is a Delaware corporation headquartered in Plainfield, Indiana. Brightpoint provides outsourced services such as distribution, fulfillment, customized packaging, prepaid and e-business solutions, and inventory management in the wireless telecommunications and data industry. Brightpoint's securities are registered pursuant to Section 12(g) of the Exchange Act and its common stock is listed on NASDAQ's National Market under the symbol CELL.

(11) AIG is a Delaware corporation with its principle corporate offices located in New York, New York. AIG is a holding company that, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities in the United States and abroad. AIG's primary activities include both general and life insurance operations. LMU is part of National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union"), one of AIG's principal general insurance company subsidiaries. AIG's securities are registered pursuant to Section 12(b) of the Exchange Act and are listed on the New York Stock Exchange.

Discussion

Brightpoint's UK Losses and the Genesis of the AIG Policy

(12) In the spring of 1998, Brightpoint became aware that its UK operation had suffered certain losses related to the loss or devaluation of product within the Company's trading division.2 Bounsall tasked Delaney with supervising an investigation to determine the amount of the UK loss and evaluate the possible insurance recoveries available under the policies Brightpoint had at the time (the "Brightpoint Policies"). Based on the information gathered during the investigation, Delaney initially estimated the UK losses to total between $13 million and $18 million.

(13) By the end of September 1998, given all of its problems and its unprofitable history, Brightpoint decided to close the trading division in the UK. Brightpoint's Board of Directors approved the closure on October 1, 1998, and the Company issued a press release on October 2, 1998 announcing that it was eliminating the division and that the Company would recognize in the fourth quarter of 1998 a one-time charge expected to range from $13 million to $18 million relating to the closure ("One-Time Charge"). Bounsall prepared the initial draft of this press release based on the information provided to him by Delaney. After October 2, 1998, Delaney and Harcharik continued to investigate the UK losses and to gather documentation for the purpose of making claims under the Brightpoint Policies.

(14) As the investigation proceeded, Delaney kept Bounsall informed about the mounting UK losses and that Brightpoint's insurers were disputing coverage under the Brightpoint Policies. In December 1998, Bounsall prepared various financial analyses of Brightpoint's 1998 fourth quarter results, each explicitly assuming a sizable insurance receivable sufficient to bring the One-Time Charge within the previously announced $13 million to $18 million range. In mid-December 1998, it was clear to Bounsall that the amount of the One-Time Charge was much greater than the original estimate and that it was very uncertain that there would be sufficient insurance recoveries from Brightpoint's insurers to offset these losses. At this point, Brightpoint was faced with the prospect of recording a much larger loss in the fourth quarter than it had previously disclosed.

(15) In mid-December, Harcharik and Delaney initiated contact with AIG. From the very first discussion, they presented Brightpoint's predicament to AIG in stark terms: That Brightpoint had issued a press release in October announcing a very specific range for the estimated loss and was now faced with a much larger loss that it did not want to disclose. In the transaction eventually consummated, AIG bore no insurance risk for retroactive losses covered under the policy; every dollar Brightpoint paid to AIG was Brightpoint's money to be returned upon its demand.

Overview of Relevant Accounting Principles

(16) Under generally accepted accounting principles ("GAAP"), when it is "probable" that an insured will recover from "insurance" a certain amount against a specified loss, the insured is entitled to record a receivable on its balance sheet in the amount of the probable recovery and, for income statement purposes, net the amount of probable recovery against the loss, thereby reducing the loss.3

(17) The recovery must be "probable." If recovery is only possible, the insured must recognize the loss to its full extent, without regard to insurance. Moreover, the recovery must be an "insurance" recovery. A recovery is not an "insurance" recovery for accounting purposes unless the insurance policy transfers some risk from the insured to the insurer. If a policy does not involve risk transfer, GAAP treats it as a financing arrangement, with all premiums to be accounted for as deposits.4

(18) In December 1998, as the Auditors were beginning field work for the year-end audit, Brightpoint presented the Auditors with schedules of the UK losses, which assumed that Brightpoint would be offsetting against those losses at least $11.9 million in anticipated insurance recoveries. To accomplish this offset, Brightpoint needed to satisfy the probability principle outlined above. However, at the time, it had no such coverage available because Brightpoint's insurers were already indicating that coverage under the Brightpoint Policies was doubtful.

(19) Brightpoint eventually used the AIG Policy to satisfy this probability standard. In constructing the AIG policy, Brightpoint faced two accounting obstacles: First, the policy had to look like insurance. If it looked like a deposit, Brightpoint would not be able to net anticipated recoveries against the loss. Second, the policy could not look like retroactive insurance, i.e., insurance designed to cover a loss already quantified and known, because Brightpoint might then be required to expense the full $15 million "premium" immediately. Under GAAP, the insured is obligated to recognize the full premium expense associated with a retroactive policy at the time it recognizes the benefits of the policy. (SFAS No. 113)

The AIG Policy

(20) The AIG Policy consists of two governing documents: The Binder of Coverage (the "Binder") and the policy itself. The Binder was executed on January 6, 1999, but was dated effective August 1, 1998. The Binder states the policy period to be the three-year period August 1, 1998 to August 1, 2001. The policy provides two separate limits of coverage: Limit A and Limit B. Limit A has an aggregate limit of $15 million, while Limit B has a per loss limit of $15 million.

(21) Although not referred to in the policy as "retroactive," Limit A effectively provides broad retroactive coverage. The policy contains an insuring clause that provides: "The Company shall indemnify the Insured for Loss of Assets unless otherwise excluded by the terms and conditions of this policy." This insuring clause is applicable to both Limit A and Limit B. However, Limit B is subject to a laundry list of exclusions, while Limit A has no exclusions. Thus, virtually every "Loss" of "Assets" is covered under Limit A up to an aggregate amount of $15 million. Limit B, on the other hand, essentially provides prospective fidelity insurance coverage, which is circumscribed by exclusions.

(22) The Binder reflects a single, indivisible premium applicable to both limits. The total premium is $15,302,400, but this aggregate figure is never set forth. Instead, the Binder provides only a list of the elements constituting the premium: It provides that the premium shall be payable as follows:

  • $199,200 due within seven (7) business days from the execution of this Binder agreement; and
  • Thirty-two (32) monthly payments of $237,600 commencing January 30, 1999 and ending August 30, 2001; and
  • Letter of Credit [] in the amount of $7,500,000 due within seven (7) business days from the execution of this Binder agreement.5

(23) Neither the policy nor the Binder states how much of the premium is applicable to Limit A and how much is applicable to Limit B. Because the policy provides for a single premium applicable to both Limits, and Limit B theoretically provides infinite coverage, i.e., $15 million per loss, the policy on its face at least appears to involve significant risk transfer. However, according to an internal AIG deal sheet, which reflected the agreement between Brightpoint and AIG, Limit A was fully pre-funded by Brightpoint: The premium Brightpoint paid for Limit A coverage was $15 million plus a $100,000 fee that AIG charged for putting the deal together. Limit B was intended to provide traditional prospective fidelity coverage. According to the deal sheet, the premium for Limit B was $202,400.

(24) The policy specifically provides that it is non-cancelable, and the Binder states that the premium "shall be fully earned as of the date of this binder agreement," meaning that AIG was entitled to be paid the full premium from the very first day of coverage. The policy also contains an acceleration clause providing that if claims made under the policy at any point exceeded the dollar amount of premium paid to that point, AIG would not be obligated to pay further claims until Brightpoint paid all remaining premiums due, except for $302,400 - an amount that coincides with the unstated Limit B premium and $100,000 fee. The acceleration provision meant that AIG could never be out of pocket under Limit A.

(25) The policy contains no express provision granting Brightpoint the right to a refund if Brightpoint ended up paying more in premiums than it was claiming in losses - a scenario that might have occurred, for example, if Brightpoint ultimately succeeded in obtaining some coverage from Brightpoint's insurers under the Brightpoint Policies. However, there was an oral understanding between AIG and Harcharik that Brightpoint would receive such a refund, and the policy mechanism for obtaining that refund was to submit a claim under the very broad definition of coverage, which allowed Brightpoint to receive payment for just about any claim submitted under Limit A up to an aggregate maximum of $15 million.

(26) Brightpoint accounted for the AIG Policy as if it were prospective fidelity insurance. It expensed the premiums monthly over the three-year life of the policy, and it netted "probable recoveries" under Limit A against the UK losses, purporting to rely on the probability principle outlined above.

(27) Given the true substance of the AIG Policy, Limit A was not insurance because there was no risk transfer. Limit A was not even a financing arrangement because AIG was not extending credit to Brightpoint. The only money Brightpoint was entitled to receive under the policy was money that it first deposited with AIG - deposits on which AIG paid no interest. Accordingly, the premium payments should have been accounted for as deposits.

Bounsall's Approval of the AIG Policy and the Accounting

(28) Delaney did not have the authority to procure the AIG Policy without Bounsall's approval. Prior to Bounsall's authorizing the purchase, Delaney told him that the AIG Policy provided coverage for the UK losses on a retrospective basis and that the premiums were "expensive." Bounsall did not review any drafts of the binder, policy or any other written documentation, or investigate why AIG would insure already-liquidated losses on a retrospective basis. Bounsall approved Brightpoint's purchase of the AIG Policy and obtained the approval of Brightpoint's Chief Operating Officer for the policy. Bounsall also permitted the accounting for the AIG Policy, which allowed Brightpoint to net the $11.9 million insurance receivable against the approximate $29 million UK losses in Brightpoint's 1998 year-end financial statements. On January 6, 1999, the day the AIG Policy was executed, Bounsall prepared the initial draft of a press release announcing that the One-Time Charge was "expected to be approximately $17.6 million ... which is consistent with the previously-announced estimate."

AIG's Confirmation to the Auditors

(29) In connection with the Auditors' 1998 year-end audit, the Auditors asked Delaney to obtain from AIG a letter confirming the probability that Brightpoint would recover at least $11.9 million under the AIG Policy, which was the amount Brightpoint was seeking to offset against the $29 million UK losses. After working through numerous drafts with Harcharik, AIG signed and provided a letter to Harcharik, dated January 27, 1999, which stated "we [AIG] believe it is probable that Brightpoint will recover no less than $11,900,000 in proceeds, net of deductibles, under the Policy." AIG faxed a copy of the letter directly to the Auditors. On the basis of this confirmation, the Auditors approved Brightpoint's accounting for the insurance receivable and allowed Brightpoint to offset the UK losses by $11.9 million in probable insurance recoveries.

The Management Representation Letter

(30) As part of its audit procedures, the Auditors obtained during the 1998 audit a management representation letter from Brightpoint, signed by Bounsall, Delaney and others, that enabled the Auditors to form an opinion as to whether Brightpoint's financial statements presented fairly, in all material respects, the financial position, results of operations, and cash flow of Brightpoint, in conformity with generally accepted accounting principles. This letter, dated January 26, 1999, represented that to the best of the knowledge of the signatories the financial statements were fairly presented in conformity with generally accepted accounting principles and that all financial records and significant contracts were made available to the Auditors. Further, the letter stated that no material transactions were improperly recorded in the accounting records underlying the financial statements, that there was no fraud involving management, and that no events or transactions occurred subsequent to December 31, 1998 that would have materially affected the financial statements. In light of the facts regarding the "insurance policy" between Brightpoint and AIG, these representations were not true.

Brightpoint's Publication of the Material Misstatements

(31) Brightpoint publicly reported the material misrepresentations about its 1998 operating results, stemming from the improper accounting for the AIG Policy, in the Company's 1998 10-K, which was filed with the Commission on March 31, 1999. Subsequently, Brightpoint republished the misrepresentations in a registration statement filed with the Commission on September 27, 1999. The registration statement incorporated by reference the misrepresented operating results in Brightpoint's 1998 10-K.

The First Restatement

(32) In September 2001, the Commission's staff issued a subpoena to the Auditors for its workpapers relating to Brightpoint's 1998 One-Time Charge. The subpoena led the Auditors to reconsider Brightpoint's 1998 accounting for the UK losses. In the course of this review, the Auditors learned for the first time that (1) the AIG Policy had not been executed until January 1999; (2) the policy contained retroactive coverage; (3) the premium for the policy was $15.3 million; and (4) the policy was "non cancelable by either party and the entire premium [was] deemed earned at the inception of the policy," meaning that Brightpoint was obligated to pay the full $15.3 million in the fourth quarter of 1998.

(33) At the end of October 2001, the Auditors informed Brightpoint that it had incorrectly accounted for the AIG Policy and would have to restate its 1998 financial statements. However, because Brightpoint persuaded the Auditors that there was substantial risk transfer under Limit B, the Auditors determined that Brightpoint needed to restate its 1998 financial statements by expensing the full premium on the AIG Policy, rather than treating the premiums as a deposit.

(34) On November 13, 2001, the Company issued a press release announcing the First Restatement. The press release stated that: "Upon further review, the Company and its independent auditors now believe that premium expense should have been accrued at the date the Company entered into the [AIG Policy], rather than over the prospective policy period because the Company could not allocate the costs of the policy between the retroactive and prospective coverage." The First Restatement expensed the full policy "premium" in the fourth quarter of 1998, amounting to $15.3 million, and reversed the monthly premium expense recorded in 1999 through 2001. While the First Restatement essentially corrected Brightpoint's bottom line for 1998, it left intact the $11.9 million in probable insurance recoveries under the AIG Policy as an offset against the $29 million UK loss, in effect treating the AIG Policy as real retroactive insurance.

The Second Restatement

(35) A few days before Brightpoint's November 13th press release, Bounsall had told the Auditors that Brightpoint was in negotiations with AIG to terminate the AIG Policy. Bounsall represented to the Auditors that, under the anticipated termination agreement, Brightpoint and AIG would simply "walk away" from the policy. The November 13 press release addressed the subject of termination, stating that "[t]he Company believes that it will recognize a gain in the fourth quarter of 2001 related to the termination of the retroactive portion of the insurance policy, which will result in the complete reversal of the remaining accrual." The press release did not give any particulars and was consistent with the Auditors' understanding.

(36) The termination agreement, signed by Bounsall on behalf of Brightpoint, was actually executed on November 12, 2001, one day before the November 13 press release. However, neither Bounsall nor anyone else at Brightpoint notified the Auditors of the actual agreement prior to the issuance of the press release. The executed agreement essentially provided for full rescission of the Limit A part of the AIG Policy. Under the agreement, Limit A was terminated, with Brightpoint to receive a refund of about $2.3 million - just about the amount of premiums it had paid in excess of claims recovered. The agreement also provided that Limit B would continue in force for an annual premium of $97,000.

(37) The Auditors did not learn the precise terms of the termination agreement until January 14, 2002 in the course of its 2001 year-end audit of Brightpoint. Upon learning the terms, the Auditors determined that Limit A was not real insurance and that Brightpoint had to restate its restatement, using the deposit method.

(38) Two weeks later, on January 31, 2002, Brightpoint announced that "the Company has now determined that the appropriate accounting method for the agreement is deposit accounting... Deposit accounting requires treating the Company's payments under this agreement as deposits rather than as premiums and the Company's receipts under the agreement as withdrawals rather than claims paid by the insurance company...."

Legal Discussion

Bounsall Is Liable For Causing Brightpoint's Violation of Section 13(b)(2)(B) of the Exchange Act

(39) Section 13(b)(2)(B) of the Exchange Act requires issuers such as Brightpoint to devise and maintain an adequate system of internal accounting controls. Scienter and materiality are not elements of a violation of this provision. See SEC v. McNulty, 137 F.3d 732, 740-741 (2d Cir. 1998); SEC v. WorldWide Coin Investments, Ltd., 567 F. Supp. 724, 749 (N.D. Ga. 1983). Bounsall is liable for causing Brightpoint to violate Section 13(b)(2)(B) by failing to ensure, as the senior financial officer of the Company, that Brightpoint devised and maintained a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in accordance with GAAP. Brightpoint's internal controls were not sufficient to prevent numerous false accounting entries relating to the AIG Policy to be recorded without proper basis or support.

Bounsall Violated Rule 13b2-1 of the Exchange Act

(40) Rule 13b2-1 prohibits any person from directly or indirectly falsifying, or causing to be falsified, any book or record subject to Section 13(b)(2)(A). Section 13(b)(2)(A) of the Exchange Act requires issuers, such as Brightpoint, to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. Scienter is not an element of a violation of Rule 13b2-1. McNulty, 137 F.3d at 740-741.

(41) As described above, as Brightpoint's senior financial officer, Bounsall was ultimately responsible for the books and records of the Company. He gave substantial assistance in the preparation of financial records subject to Section 13(b)(2)(A) that were materially false because, among other things, they understated Brightpoint's true expenses, overstated the Company's assets and failed properly to account for the AIG Policy.

IV.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to by Bounsall in his Offer.6

Accordingly, IT IS ORDERED that:

Pursuant to Section 21C of the Exchange Act, Bounsall shall cease and desist from committing or causing any violations, or committing or causing any future violations of Section 13(b)(2)(B) and Rule 13b2-1 of the Exchange Act.

By the Commission.

Jonathan G. Katz
Secretary

 

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1 The findings herein are made pursuant to Bounsall's Offer and are not binding on any other person or entity in this or any other proceeding.

2 The trading division was involved in the purchase of wireless handsets from sources other than manufacturers or network operators and in the sale of those handsets to other trading companies dealing in the secondary market.

3 Statement of Financial Accounting Standards ("SFAS") No. 5; Emerging Issues Task Force ("EITF") No. 93-5 (concerning environmental insurance); Statement of Position ("SOP") 96-1 (concerning environmental insurance).

4 When a policy affords retroactive coverage, it is not regarded as insurance for accounting purposes unless there is either an underwriting risk or a timing risk associated with the policy. For example, where a loss has occurred and is known at the time the policy is written, there can nonetheless be underwriting risk if the dollar amount of the loss is not fully known. Alternatively, if at the time the policy is written the dollar amount is both known and fixed, there can still be a timing risk if the actual payout may be delayed for many years. In such circumstances, the insurer might set the premium on the assumption that it will not have to pay for ten or twenty years. The risk is that payment may actually become due at an earlier time.

5 In the investigation, Bounsall contended that the amount of the premium was ambiguous because of a later reference to the letter of credit as security. However, the Commission does not find that the Binder was ambiguous on this point.

6 Bounsall has agreed to pay a $45,000 civil penalty in a related federal civil action.