January 19, 2011
SEC, DOJ Charge Off ShoreCompany with Life Settlement Bonding Fraud
The SEC 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, 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.
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.
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