Investing Blind

Fraud in the ‘Life Settlement’ business underscores need for thorough due diligence

Paula Whitaker, a Texas school teacher-turned entrepreneur, thought she was a savvy investor – not a mark who could fall victim to an investment scam.

So when Christian Allmendinger and Brent Oncale of A&O Resource Management came calling in late 2006 to pitch Whitaker on investing in the firm’s life insurance settlement fund, she took her time vetting the Houston-based company. Over the next couple of months, she grew more impressed with the company, particularly the fact that an independent firm, Provident Capital Indemnity, Inc., would guarantee the investment with a bond. Whitaker ultimately agreed to invest $1 million in the fund.

It turned out that Whitaker misjudged the firm and overestimated her own ability to conduct effective due diligence. Last year, A&O Resource Management was exposed as a brazen investment fraud and Whitaker, along with 800 other investors who put $100 million into the company, lost her entire investment and much of her life’s savings.

The business of investing in senior citizen life insurance policies took off in the late 1990s and has surged in recent years as even large investment firms like Credit Suisse and value investors like Warren Buffett scour the globe for new sources of yield. Some analysts predict that the industry could grow to $500 billion nationally in the coming years if even a fraction of the $26 trillion in life insurance policies were in play.

However, because the industry remains largely unregulated in many states, and notably Texas, the life settlement business has also nurtured a growing number of investment scams like A&O Resource Management.

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“Even though the settlement industry is relatively young, it has produced a
substantial amount of harm to Texas investors.” – former Texas Insurance Commissioner Mike Geeslin
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In January 2012, the U.S. Securities and Exchange Commission filed charges against Texas-based Life Partners Holdings Inc., alleging that its top executives “systematically and materially” underestimated life expectancy estimates which are used to price transactions-a critical component for investors to gauge the firm’s revenues and profit margins.

Another firm, American Settlement Associates, LLC, was targeted by the SEC in 2010 after allegedly selling fractional interest in a life insurance policy and then skimming $2.3 million from investor funds to support their high-roller lifestyles. The policy was not maintained and lapsed and investors were left out in the cold.

A third Texas firm, Retirement Value, was sued into receivership in 2010 by the Texas State Securities Board and the state’s Attorney General for using deceptive practices to raise more than $65 million for its fund in less than a year. Prosecutors dubbed Retirement Value’s CEO Richard Gray “a recidivist who has repeatedly engaged in illegal sales of securities through fraudulent schemes” and stated that Gray siphoned off $8.4 million of investor funds for himself.

“Even though the settlement industry is relatively young, it has produced a substantial amount of harm to Texas investors,” then Texas Insurance Commissioner Mike Geeslin wrote to lawmakers in late 2010, citing a number of the frauds that had been exposed. Geeslin advocated for new laws to compel those selling life settlement investments to register with the state. No legislation was passed and Geeslin quietly retired in June 2011.

Life settlements offer investors the ability to purchase life insurance policies-or fractions of bundled policies – primarily from senior citizens who need cash for their golden years. Investors pay the individuals more than the cash ‘surrender value’ of the policies but less than the policy’s death benefit. The acquirer often pays the policy premiums from investor monies until the insured dies and the death benefit is paid to the investors. However, as noted, these are very complex investments that rely on precise calculations and predictions in order to pay off.

In the fall of 2010, a federal grand jury in Virginia returned an 18-count criminal indictment against A&O Resource Management and its principals, including Allmendinger, Oncale and Adley Abdulwahab, a former hedge manager, revealing compelling details about the wide-ranging fraud scheme and lessons about the dangers facing investors.

The basic elements of the A&O Resource Management fraud were of the sort that have been frequently seen before in other cases; including the use of flash, glitzy props – such as Hummers and expensive watches – and smooth promises by the flim-flam men to solicit investors with the illusion of lavish wealth with little or no risk.

Prosecutors alleged that Allemendinger, Oncale and Abdulwahab, managed to appear rich by siphoning off at least $30 million for themselves. “They had multiple Ferraris, an Aston Martin, a Lambroghini and multi-million dollar homes,” according to Laura Taylor, a Justice Department prosecutor. “There was also a Steinway grand piano purchased for $86,000 and multiple other luxury and designer purchases including [a 15-karat] diamond ring.”

Prosecutors said that the A&O Resource team sounded reasonable to investors by promising reasonable-if-healthy returns in the 12% range, the kind of profit margin that wouldn’t necessarily raise immediate red flags. Also, they shrewdly integrated financial guarantee bonds issued by the impressive sounding Provident Capital Indemnity, Inc. as an effective way to lure investors into believing their money was backstopped.

But behind the veneer of success, according to the federal indictment, the A&O Resource Management team lied to investors about virtually everything. Provident Capital Indemnity, most notably, was a complete shell based in Costa Rica and its principals are now facing criminal and civil prosecution for what the feds have described as a “massive ongoing fraud.”

Allmendinger and company also misrepresented the size of A&O Resource Management, including its offices, their locations and the number of staff they employed, its business practices and the actual security and management of investors’ money. Abdulwahab had even lied about his past, falsely claiming to have a degree in economics and neglecting to mention he had pleaded guilty to felony forgery in Texas.

Clearly, the warning signs were there but wealthy individuals often gamble that they can assess whether an investment is legitimate and guess wrong.

“The internet is a powerful tool, but investors shouldn’t assume that a few nights searching Google is going to effectively assess whether an investment opportunity is legitimate,” said David Cogan, Managing Director of Sapient Investigations, Inc. “If wealthy individuals don’t have professionals conduct thorough due diligence on their behalf they are simply flying blind into an investment.”

Allmendinger and Abdulwahab were found guilty in 2011 and U.S. District Judge Robert E. Payne brought down an iron gavel on the duo: Allemendinger, 40, was sentenced to 45 years in federal prison. Abdulwahab, 36, was sentenced to a grueling 60 years behind bars-a life term.

“Christian Allmendinger masterminded a fraud scheme in excess of $100 million and gutted the retirement accounts of countless people across the United States,” Assistant U.S. Attorney Michael S. Dry wrote in a sentencing brief. “Many of those people will never recover financially, emotionally or psychologically. Yet even at this late date, Allmendinger is absolutely devoid of any concern, compassion or remorse for his actions, as demonstrated by his profligate spending … Quite simply, the notion that anything less than a life sentence is appropriate for this man is completely untenable.”

Bringing such investment fraudsters to justice is cold comfort to victims like Whitaker, who testified at the A&O Resource trial. For Whitaker, the deep financial pain of being victimized in the A&O scam takes on an even more personal, bitter sting as her 25-year-old son Ryan had died just months after she initially invested her savings. The foundation she then set up in his name was supposed to receive the return on her investment.

“I won’t be able to do all the things I wanted to do,” Whitaker told the Houston Chronicle. “I could have done some mighty, mighty things to help people. Now, I’ll be working until the day I die.”