Attorneys and executives at broker-dealer firms are questioning the extent of National Financial Partners Corp.'s potential liability in a civil suit involving a failed life settlement transaction at an NFP affiliate.
In the suit filed in Ohio last month, Louis Levin, an 81-year-old client of Barry Kaye Associates Inc. of Boca Raton, Fla., claims that the firm and its president, Howard Kaye, encouraged him to purchase a $5 million insurance policy. Levin said he was told he would earn a “substantial profit” by selling the policy on the life settlements market.
After paying more than $322,000 in premiums, he sought to sell the policy last fall, but the firm told him that it couldn't find buyers, according to the complaint.
Mr. Levin, who lives in Centerville, Ohio, is suing for breach of contract, fraudulent representation and violation of securities laws. He also claimed that he didn't need the coverage in the first place.
Richard A. Talda, Mr. Levin's attorney at Coolidge Wall Co. LPA in Dayton, Ohio, declined to comment.
“The suit speaks for itself,” he said.
Mr. Levin didn't file a complaint with the Ohio Insurance Department, but enforcement attorneys in the state are looking into the lawsuit, focusing on what promises were allegedly made to him and whether he received state-mandated disclosures for life settlements.
NFP, which is affiliated with Barry Kaye Associates and Mr. Kaye, who is also a principal of Boca Raton-based Howard Kaye Insurance Agency Inc., hasn't been named in the suit, but some wonder what level of responsibility the New York-based firm might be expected to assume.
This isn't the first time that an NFP affiliate has been sued in the case of a life settlement gone awry.
In 2007, CNN host Larry King sued NFP-affiliated firm The Meltzer Group Inc. of Bethesda, Md. and founder Alan Meltzer for breach of fiduciary duty. In 2004, he was advised to buy $10 million in coverage and then sell it “immediately” to a third party for $550,000 — a move that wasn't in the talk-show personality's best interests, according to legal documents.
NFP wasn't named in that action either, and Mr. King received a settlement in the case.
Jane Simmons, a spokeswoman for NFP, said the company doesn't comment on pending litigation. A woman who answered the phone at the offices of Barry Kaye Associates said the firm had no comment.
The claim that stands out to -broker-dealer executives and attorneys in Mr. Levin's suit is the argument that Mr. Kaye was selling an unregistered security without a securities license. The Financial Industry Regulatory Authority Inc.'s BrokerCheck service doesn't have a listing for Mr. Kaye or his firm.
Ohio insurance regulators, who are examining the complaints in the case, say that a sale of a universal life insurance policy — like the one in the Levin case — isn't a securities transaction.
However, others assert that, according to the complaint, the policy had been marketed as an investment and in that context, it would qualify as a security.
“What you have here isn't ex-actly a life settlement because the sale of the policy didn't take place,” said Wallace A. Showman, an attorney at Ajamie LLP in Houston. “If the premise of the transaction isn't life insurance, then it's possible this could be deemed a security.”
If Ohio considered the sale a securities transaction, then suitability rules, supervisory duties and licensing requirements would be applicable, said Thomas R. Ajamie, managing partner at Ajamie.
However, attorneys said that it would be difficult to bring a suit against a parent company for an affiliate's action, since clients would have to prove that the parent knew about and participated in the misdeeds — for example, by promoting to members the concept of selling insurance policies to clients and flipping them on the secondary market.
Nevertheless, state and federal regulators may be interested in NFP if a pattern of fraudulent behavior is proven at affiliated firms, but it would be necessary to show that the parent company participated in the fraud, Mr. Showman said.
Finra might also be interested if a pattern of fraud was demonstrated, he said.
“And if not, then it's up to state or federal law enforcement to decide whether [NFP was] criminally liable for a pattern of fraud,” Mr. Showman said. “If it's just one case, it's likely that nobody will be all that interested unless you have some showing that they participated and knew about it.”
PATCHWORK OF RULES
The allegations in Levin's civil case could indeed draw more attention from state and federal regulators.
“In this case, on the face of the transaction, it's a life insurance policy where the intent is to make a profit, not from the death, but from the sale,” Mr. Showman said. “If it turns out the allegations are true, I wouldn't be surprised if the defendants were sued civilly or criminally by Ohio [securities or insurance] regulators.”
Broker-dealers note that oversight to prevent stranger-originated life insurance practices — the act of issuing an insurance policy for the purpose of selling it to a third-party investor — has led to a patchwork of rules across the country.
Finra of New York and Washington has given guidance on how firms ought to treat life settlements that use VUL policies, but universal-life policies aren't subject to the same treatment. As a result, a number of firms have compiled suitability guidelines and processes for settlements, regardless of what kind of insurance policy is being sold.
“There's criteria about the age, the death benefit, the original purpose of the issuance of the policy, does the client still need coverage?” Rita Robbins, president of Invescor Advisory Services Inc., said of Royal Alliance Associate Inc.'s approach to life settlements. Invescor is affiliated with Royal Alliance, and both are based in New York.
“We wouldn't treat the policy any different because it's a universal- or variable-life policy,” Ms. Robbins noted.
Although it remains to be seen just how Mr. Levin's case will evolve, observers think that its resolution will illuminate a foggy corner of the secondary market.
“This is a case that sounds like it will shine some important light on transactions to be avoided in the life settlements market,” said Barbara J. Farrington, a staff attorney at the Ohio insurance department.
E-mail Darla Mercado at [email protected].
