SEC claims that Provident Capital made false statements about its ability to cover its bond obligations
The Securities and Exchange Commission yesterday slapped Provident Capital Indemnity Ltd. with a lawsuit, alleging that the company had conducted a major life settlement bonding fraud.
The firm's president, Minor Vargas Calvo, and its outside auditor Jorge L. Castillo, were also charged in the case.
PCI, based in Costa Rica, provided the financial backstop for many life settlements and their investors. Between 2004 and March 2010, the firm issued some 197 bonds covering investments in life insurance policies with a face value of at least $670 million.
In a complaint filed in U.S. District Court for the Eastern District of Virginia, the SEC charged that the firm, along with Mr. Vargas and Mr. Castillo, misrepresented PCI's ability to cover its bond obligations by inflating the value of the assets backing the bonds. The regulatory agency also claims that PCI tarted up its credit rating and made false statements about the availability of reinsurance to cover the bond claims.
The company also kept inaccurate financial statements, the SEC alleged. Mr. Castillo never audited PCI, but instead issued unqualified audit opinions at Mr. Vargas's bidding, giving the impression that PCI had the assets to cover its obligations under the life settlement bonds, according to the complaint
Based on those purportedly false statements, the company received a favorable rating of 5-AS from Dun & Bradstreet, which PCI said in its marketing materials represented “successful customer satisfaction” and “the ability to maintain one of the insurance industry's lowest loss ratios,” the SEC alleged.
Mr. Vargas and PCI also claimed that the firm was backed by a “bouquet” of reinsurers that would backstop the bond obligations, when there was really no reinsurance coverage, according to the complaint.
The agency claims that last February, as Mr. Vargas and Mr. Castillo became aware that regulators were looking into their auditing practices, Mr. Castillo had proposed redrafting the audit work papers for the last four years.
“I know it won't be possible to justify [everything] 100% with real documents, but this is auditing,” Mr. Castillo wrote in an e-mail, according to the complaint. “I don't need to justify 100% to anyone, since auditing is based on selective proof.”
Attempts to reach attorneys for Mr. Castillo and Mr. Vargas were unsuccessful. An executive at PCI noted that Provident has no relationship with the lawyers representing the pair.
The alleged fraud will no doubt roil the insurance industry. PCI's bonds covered life settlements sold by American Settlement Associates LLC and A&O Resources Management Ltd.
The latter, whose life settlement-selling subsidiaries filed for bankruptcy in 2009, has been hit by a series of lawsuits, including a suit in federal court in Illinois by a retail investor who claimed a broker solicited him to invest about $2 million in so-called “guaranteed bonded life settlements.” And the litigation continues: Last September, the U.S. Attorney's Office for the Eastern District of Virginia unsealed indictments against A&O's founder, Christian M. Allmendinger, and others for conspiracy to commit mail fraud, money laundering and securities fraud, according to the SEC's complaint. That trial is set for this spring.
The SEC called for an asset freeze on PCI, Mr. Vargas and Mr. Castillo, disgorgement of the ill-gotten funds, plus interest, a civil penalty and temporary, preliminary and injunctive relief.
PCI, Mr. Vargas and Mr. Castillo are also in hot water with the Justice Department. All three face one count of conspiracy to commit mail and wire fraud, plus three counts each of mail wire fraud. Authorities are seeking more than $40 million in forfeitures.
Both Mr. Vargas and Mr. Castillo were arrested earlier this week.
