Life settlement providers eye broker commission disclosures

Nov 13, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Life settlement providers are scrambling to avoid becoming embroiled in broker compensation abuses similar to those that have been alleged against one of the industry's leading companies.

A lawsuit filed last month in Manhattan Supreme Court by New York Attorney General Eliot L. Spitzer alleged that The Coventry Group in Fort Washington, Pa., paid "secret commissions" and "co-brokering" fees - in effect, bribes - to brokers to manipulate policy bids to favor the company.

Like other settlement providers, the firm purchases life insurance policies from individuals for more than the cash surrender value that the insurer would pay. Many of those individuals are elderly and represented by brokers with a duty to obtain the highest price for their client's policy.

"While the attorney general has sued Coventry, the broader life settlement industry is clearly in the cross hairs," Alan Buerger, Coventry's chief executive, said in a prepared statement. The suit "challenges the integrity" of people in the industry and makes Coventry the "scapegoat" for perceived industrywide problems, he added.

Time for change

"In light of the suit filed in New York, it's a perfect time for our firm to implement changes," said Kristian Armstrong, chief executive of Milestone Providers LLC in Lancaster, Pa.

This month, Milestone started requiring a form from settlement brokers that wanted to submit business to the firm verifying that a commission disclosure was provided to, and signed, by the brokers' clients.

"[Before the Spitzer suit], we could have lost business, because settlement brokers most likely wouldn't have wanted to comply with this requirement," Mr. Armstrong added.

Although Mr. Spitzer will be leaving to become governor of New York, the commission problems aren't over, industry participants agreed.

The attorney general's office also is investigating the life settlement brokerage operations of National Financial Partners Corp. in New York, but no charges have been filed. Life settlements account for less than 8% of that firm's annual revenue.

"We are working with the attorney general's office but have no other information to provide," said NFP spokesman Elliot Holtz. NFP is the only broker that Mr. Spitzer announced he is pursuing.

"We support model legislation requiring brokers to disclose all settlement offers and compensation to their clients," said Brian Smith, president of the Life Settlement Institute in Bethesda, Md., a trade group for settlement providers. He added that the institute has "no specific stance" on the Coventry suit.

Mr. Smith declined to say what actions, if any, his own firm of which he is president, Life Equity LLC in Hudson, Ohio, is taking

to review the disclosure procedures of brokers with which it does business.

"We are studying the situation and have no comment at this time," said Larry Simon, chief executive of Life Settlement Solutions Inc. in San Diego.

In addition to signed proof-of-commission disclosure to clients, Invescor Ltd. of Farmington Hills, Mich., will continue to mandate that settlement brokers maintain all licenses required by state laws, use an escrow agent for money transfers, and have an errors and omissions insurance policy, said chief executive Michael Leibowitz. "Co-brokering fees are offensive to us," he said.

"We have taken great care to build self-monitoring procedures into our operation," said Leonard Goodman, chief executive of New York-based First Equity Benefits of America Inc. The company - a life settlements provider launched this month - chose New York as its domicile, in part because of the state's tight regulation of insurance, including brokers, he added.

Rescission worries investors

Settlement providers and their investors especially are concerned by Mr. Spitzer's suit, because it seeks rescission rights for all policy sellers who may have been harmed by Coventry's actions. So individuals who sold policies to Coventry may be able to undo those deals and seek higher bids.

"Our institutional investors - banks and asset managers - are worried that if commissions aren't fully disclosed, their assets could be impaired," said Douglas Lehman, chief operating officer of Milestone.

One of Coventry's largest institutional investors - American International Group Inc. in New York - was embroiled in an earlier scandal uncovered by Mr. Spitzer involving contingent commissions and bid rigging in property-

casualty insurance.

"The full disclosure model can't be implemented overnight," Mr. Leibowitz said. "A better approach would be to limit the maximum compensation per case."

Most broker-dealers already require commission caps in connection with a notice from Washington-based NASD requiring supervision of life settlements and related compensation, Mr. Leibowitz added.

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