An offshore company, its president, and its "outside auditor" where charged by the SEC with conducting a massive life settlement bonding fraud, while the U.S. Attorney and DOJ arrested the 2 individuals in a related criminal case.  The offshore company, PCI, is located in Costa Rica and provides financial guarantee bonds on life settlements and claims to protect investors’ interests in life insurance policies by promising to pay the death benefit if the insured lives beyond his or her estimated life expectancy. 

From at least 2004 to March 2010, PCI issued some 197 bonds backstopping numerous bonded offerings of investments in life insurance policies with a face value of more than $670 million - a material component of numerous 3rd-party life settlement offerings in the U.S. and abroad.

    SEC Allegations.    PCI, president Minor Vargas Calvo (Vargas), and supposed outside auditor Jorge Castillo allegedly misrepresented PCI’s ability to satisfy its obligations under its bonds - making  material misrepresentations about the assets that backed PCI’s bonds, PCI’s credit rating, availability of reinsurance to cover claims on PCI’s bonds, and whether PCI’s financial statements had been audited.

PCI, Vargas and Castillo allegedly represented to life settlement issuers, and in turn, the investing public, that Castillo had audited PCI’s financial statements in accordance with GAAS, when he, in fact, never conducted an audit of PCI.  He, nonetheless issued clean audit reports at Vargas’s bidding, thereby supporting the illusion that PCI had materially larger assets and greater financial wherewithal to support its obligations under the life settlement bonds.  PCI’s “audited” financial statements reflect what appears to be a fictitious “Long Term Asset” that has comprised some 70% to 80% of PCI’s total reported assets from at least 2003 to present.

The SEC complaint further alleges that PCI’s “audited” financials were provided to Dun & Bradstreet, which issued PCI a favorable rating of “5 A/S” based exclusively on PCI’s reported net worth.  PCI then misleadingly represented in its marketing materials that D&B’s rating is a reflection of “successful customer satisfaction” and “the ability to maintain one of the insurance industry’s lowest loss ratios.” According to the SEC’s complaint, PCI and Vargas also have represented that PCI was backed by a “bouquet” of reputable reinsurers that would backstop PCI’s obligations under its life settlement bonds. PCI did not have that bouquet of reinsurance.

The U.S. Attorney’s Office for the Eastern District of Virginia and the Fraud Section of the Department of Justice’s Criminal Division also announced simultaneously a parallel criminal action against the defendants and the arrests of Vargas and Castillo.

    What's a Life Settlement Investment.   According to the SEC’s complaint, it's illiquid and open-ended without a bond because the investment’s payout date and return are dependent upon the date of the insured’s death.  PCI’s bonds offered a fixed maturity date for the investments because PCI’s bond obligated PCI to pay investors (directly or indirectly through the life settlement issuer) the face value of the underlying insurance policy by a date certain if the insured lived past his life expectancy date.

Last summer, an SEC Life Settlement Task Force released a report noting that the market for life settlements has grown over the past decade and calling for greater regulatory coordination and investor protection. The SEC’s Office of Investor Education and Advocacy today issued an update to its Investor Bulletin on life settlement investments that was originally published following the release of that report.

    SEC Staff Credits.   Mika Donlon, Michael Fuchs and Josh Felker, together with accountants Regina Barrett and Deborah Russell, conducted the SEC's investigation, which continues.  SEC litigation efforts will be led by Suzanne Romajas.

For further details and the SEC Complaint, go to:  [SEC PR 11-15, 1/19]