Luke Lee, the founder and CEO of bankrupt Inspired Healthcare Capital, and its creditors are now in a tussle over insurance that could cover millions of dollars of legal fees for Lee at some point in the future.
Inspired Healthcare Capital collapsed and filed this winter for chapter 11 bankruptcy.
Lee launched the company in 2016. It eventually issued $1.2 billion – now of unknown worth - high-risk investments, including private placements and Delaware Statutory Trusts, which were sold by independent broker-dealers and their financial advisors to fund the assisted living developer.
The case has caught the eye of the financial advice industry. Broker-dealers that sold the now defunct private securities deals backed by Inspired Healthcare Capital generated more than $100 million in fees and commissions for securities that no longer issue distributions – think dividends - to clients.
Earlier this month, Lee filed a motion in bankruptcy court in Texas to get access to “Directors & Office” insurance, which totals $10 million, according to court documents. At the end of last week, June 19, Inspired Healthcare’s “committee of unsecured creditors” filed its objection claiming that the proceeds of such directors and officers insurance policies are property of the debtor’s estate, as well as other claims.
Fights for money from troubled or bankrupt investments such as Inspired Healthcare can prove particularly troubling for the parties involved. Last year, it was revealed that GPB Capital Holdings, another private-placement financed deal gone south, underwrote the legal costs of its two senior executives and convicted felons, founder David Gentile and broker-dealer chief Jeff Schneider, to the amount of $75 million.
“This type of insurance is to cover directors and officer from lawsuits, and it’s also a little blind to fraud,” said one senior industry executive, who spoke privately to InvestmentNews about the matter. “There is certainly an emotional aspect to this, but keep in mind what these policies are designed to do.”
An attorney for Lee on Thursday afternoon declined to comment.
The $100 million in fees and commissions on sales of $1.2 billion in Inspired Healthcare private securities equals an 8.3% rate paid to broker-dealers, clearly on the high end of industry standards.
Founded eight years ago by Lee, Inspired Healthcare Capital of Scottsdale, Ariz., first used private placements to raise money and then in 2020 relied on DSTs, according to a filing from February in the federal court bankruptcy proceedings.
Emerson Equity was the managing broker dealer on 29 of the DSTs and all the Investment Funds. Emerson Equity was also the managing broker-dealer for more than $1 billion in now almost worthless securities issued by bankrupt GWG Holdings, which declared bankruptcy in 2022.
The company has 33 operating senior-living facilities across 14 states, according to the filing, and it has acquired five real estate properties for development, two of which are still under development and three of which remain undeveloped land.
The Securities and Exchange Commission last year “initiated a formal investigation into the company,” according to court filings.
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