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SEC Charges LA Company With $100 Million “Life Settlements” Fraud

Many of us take out life insurance policies to provide for family members in the event of our death. But life insurance can also be bought and sold like a security. “Life settlements” are a common device used to sell life insurance policies to third parties. For example, let’s say you have a life insurance policy. If you decide you no longer need the policy, you could sell it for a lump-sum to a third party. That third party would then continue paying the premiums, and would ultimately receive the death benefit after you die. Assuming the death benefit exceeds the value of the premiums paid, the investor nets a profit.

SEC v. Pacific West Capital Group

The above hypothetical sounds simple enough. But life settlements are big business and can attract less than scrupulous individuals. The U.S. Securities and Exchange Commission recently filed a lawsuit against a Los Angeles corporation accused of defrauding investors out of nearly $100 million by selling shares in life settlements. Although the life settlements are genuine—this is not a case of someone selling non-existent investment products—the SEC nonetheless claims investors were misled about the true risks involved.

The principal defendants in this case are Andrew B. Calhoun IV, a Beverly Hills life insurance agent, and his corporate entity, Pacific West Capital Group (PWCG). According to the SEC’s complaint, Calhoun and PWCG sold shares of about 3,200 life settlements to 125 investors, raising a total of $99.9 million in the process. Calhoun allegedly told investors the insurance policies would pay off in four to seven years as the insured persons passed away. Altogether, he claimed investors would receive returns of 100%-150%.

What Calhoun did not tell investors, the SEC said, was PWCG took 45% of customer funds as profit for itself, and failed to maintain adequate reserves to ensure the underlying life insurance premiums could be kept up-to-date. Ultimately, the SEC claimed, Calhoun and PWCG were forced to “to use money from the sale of new life settlements to pay premiums on older policies” to avoid tapping reserves. In other words, the SEC said Calhoun was manipulating his books to make PWCG’s life settlements look healthier than they really were. Had he followed proper procedures, the SEC said, investors would have been asked to invest more money to keep premium reserves current. “Such a course of events would have put a significant damper on their sales efforts and their ability to raise money from new investors,” the SEC alleged.

The SEC also said Calhoun personally selected the insurance policies offered to investors, and in many cases he badly misjudged the life expectancy of the insured persons. The SEC noted Calhoun “is not an actuary or medical doctor,” and his “selection of a policy depended largely on the premium cost to keep the policy in force.”

A Warning to All Investors

The SEC has accused Calhoun, PWCG and several related defendants with fraud and selling unregistered securities. As always, these are just allegations at this point, and the SEC must still prove its case in federal court. But these charges do highlight the importance of understanding the risks of life settlements or any other investment product. Investors must always be skeptical of unregistered offerings promising guaranteed high returns. If you believe you were misled about a life settlement or any other investment, it is important that you seek independent legal advice from an experienced, Florida securities fraud attorney. Call Gregory Tendrich, P.A., today.

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