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Grim news for investors in some life settlements

Posted Friday, Aug. 27, 2010  comments  Print Reprints
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Before investing

Contact the Texas State Securities Board and ask for background information on individuals and companies you are dealing with. www.ssb.state.tx.us, 512-305-8300

Check with the Texas Department of Insurance, which licenses those who buy the policies from individuals before they are resold: www.tdi.state.tx.us, 800-252-3439

Check the background of investment professionals at BrokerCheck, www.finra.org

Ask for a complete disclosure of all fees and charges.

Regulating life settlements

The federal Securities and Exchange Commission recommends that:

Congress include life settlements in federal securities law.

Regulators monitor conduct by brokers and providers.

State legislatures consider stronger laws for life expectancy underwriters.

Source: SEC

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lieber Sharon Brady realizes that she will never see the 16 percent annual return she was promised on her $50,000 investment. Worse, she realizes she may have lost most of her money.

"This actually makes you physically ill," she says.

The retired Tarrant County sheriff's deputy invested in what regulators describe as an alternative investment: life settlements. Her money was used to buy insurance policies of older adults who want to cash out and sell their benefits to investors. When the original policyholder dies, investors, who pay the premiums, reap the death benefits. The quicker the person dies, the greater the payoff.

As I reported in the spring, the company she invested with, Retirement Value Llc. of New Braunfels, has been shut down by the state. Now comes word from the court-appointed receiver that commissions paid to financial advisers and company officials were 30 percent.

Of $77 million raised in a year from 900 investors like Brady, about $10 million went to Retirement Value and $13 million went to sellers of the program. Brady says nobody told her commissions would be that high.

Eduardo Espinosa, the receiver, told me: "Every time I've spoken to an investor, they did not realize the commissions were coming off the top, or the extent of the commissions."

Texas is one of a few states that don't regulate life settlement investments specifically. The term does not appear in state law.

The Texas State Securities Board, which closed Retirement Value, evaluates each complaint case by case. The agency's enforcement director says that fraud is growing and that Texas is wide open for abuses.

A lengthy report released last month by the Securities and Exchange Commission recommends that Congress toughen federal laws for life settlements. Texas lawmakers may do the same in the 2011 session.

The state receiver's report is the first full look at the workings at Retirement Value.

The contents, which Espinosa describes as allegations, portray, in his words, "substantial evidence of fraud."

Although the company was a little more than a year old, its sellers raised $77 million in the first year. Investors were promised that their money would be placed in third-party escrow accounts. That didn't happen. The money was kept under the control of Retirement Value, the report alleges.

As the state prepared to seize the company's assets, CEO Richard Gray moved $1 million from company coffers to another company set up by friends. The receiver found out and seized the money. The receiver has seized $25 million all told.

The company purposefully underestimated the life expectancy of policyholders to lure investors, the report alleges. The estimates used were calculated by a company run by a convicted felon.

The report also alleges that investors were told false information that prevented them from making informed decisions. That's against state law.

How much Brady and the other investors get back is up to the receiver. He has to decide whether to pay back the 900 investors from that seized $25 million or keep the investments alive by using that money to continue paying insurance premiums.

"I anticipate there will be a loss," he says. "How big? I don't know."

Brady made the investment last year at the Camp Bowie Boulevard office of James E. Poe, owner of Senior Retirement Planners. Poe introduced Brady to Bruce Collins, chief operating officer of Retirement Value.

"They really played it up," Brady says of the investment, sometimes called "death bets" by critics.

After the state came down on the company, Poe wrote Brady and about 20 other investors that they should be wary when contacted by state investigators.

"You are under no obligation to respond, or even continue the conversation," Poe advised his clients in a letter.

Poe told me in June that the investments were good and that the company would come out of this. The receiver's report makes that seem unlikely. (The Retirement Value receiver's website is www.rvllcreceivership.com.)

Last week, Poe said that the company's side is not being told. He said his lawyer advised him not to discuss specifics with his clients.

"There's not enough room in your paper to present a fair and balanced argument on both sides of this, sir," he said.

Barry Bishop, a lawyer for former CEO Gray, did not respond to a request for an interview.

When I asked about commissions, Poe answered: "Every business in America operates on a profit margin. And a 30 percent profit margin for a company that creates a product can be made to look disgraceful. Or it can be made to look like a reasonable return."

The receiver says the story of Retirement Value offers a warning to investors: Whenever someone touts an alternative investment that promises low risk and high rewards, be skeptical.

"That should trigger an alarm in your head that something is not right," Espinosa says. "Dig a little deeper."

The former sheriff's deputy knows that now: "It affects your life in all directions. Even though you pick up the pieces and act normal, it's always there in your mind."

The Watchdog column appears Fridays and Sundays.

Dave Lieber, 817-685-3830

Twitter @DaveLieber

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