On December 17, 2008, Keith King opened his e-mail and unknowingly played his part in the downfall of what state prosecutors say is a $20 million investment scam.
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King, an Austin mortgage consultant, had been moonlighting for a friend, hawking a sure-fire investment opportunity in the midst of crumbling financial markets. Like any legitimate, non-sketchy investment program, it was advertised in the financial services section of Craigslist.
King saw an e-mail from a guy named Ron Frank: "I saw your ad...I may be interested in making an investment. Could you send me some info?"
"Yes, sir," King replied. "Take a look at this, and if you're still interested, let me know. We can then set up a meeting with my partner, David Herzog, a long-time financial advisor who specializes in retirement income."
King shot Frank some literature from a company called National Life Settlements, which sold interests in securitized pools of life insurance policies of old, sick people who sold their policies for less than face value so they'd have the money right away. These were people who were going to die in five years. All you had to do was wait around for the geezers to croak, and your $25,000 investment (the minimum) would yield $37,500, guaranteed. No traditional investment vehicle guaranteed that kind of no-risk return, according to National Life Settlements. If you invested before January 1, 2009, you'd get a 10 percent return. After that, for some reason, the return would dip to 8 percent.
Frank replied the following day, saying he was really interested and wanted to talk to Herzog ASAP. King gave Frank Herzog's phone numbers. What Frank didn't say was that his real name was Rani Sabban, and he was an investigator for the Texas State Securities Board.
According to Sabban's subsequent affidavit, Herzog explained to him that NLS was run by a Houston guy named Howard Judah — a retired former "head" of Ford Motor Credit — and his partner in Colorado, Greg Jablonski. Herzog e-mailed "Ron Frank" a PowerPoint presentation detailing how the investment product worked. In true Mission: Impossible style, according to Sabban, Herzog asked Sabban to "destroy" the file after he viewed it.
Sabban and Herzog forged a professional relationship built upon mutual omission: Sabban wouldn't say he was working undercover, and Herzog wouldn't say that Howard Judah was a three-time felon who wouldn't recognize a sensible investment program if it bit him in the ass. (National Life Settlements' literature failed to disclose that Judah had been convicted in a New York federal court of wire fraud, contempt and money laundering in the late 1990s. It's doubtful that NLS's sales agents knew this.)
The same could be said for the nearly 300 people — many of whom were public schoolteachers — in Texas and abroad who invested more than $20 million in National Life Settlements. In Texas, teachers at or near retirement rolled $2.6 million from their state pensions into NLS. Many of these people were steered toward NLS through insurance agents they trusted.
As far as the State Securities Board was concerned, Judah and Jablonski were selling unregistered securities; in other words, they didn't have proper state certification. In 2009, the board and the Texas Attorney General's Office seized NLS's assets and assigned a receiver to oversee reimbursement to investors. Judah and Jablonski were sanctioned civilly.
Then, in January 2011, the two were charged criminally in Harris County District Court with misleading investors. Both men maintain they are not guilty. (There are still hearings scheduled before a formal plea must be entered.) According to securities regulators and district prosecutors, Judah and Jablonski were responsible for the following violations, among others:
• They only invested a fraction of their clients' money and used the rest to line their own pockets.
• They claimed that NLS was an industry leader before it even had any clients.
• They misrepresented that investors' returns were guaranteed.
• They misrepresented that NLS had billions of dollars in backing from the Federal Reserve.
If NLS was the scam that state authorities allege, it was an almost obscenely unsophisticated one, perpetrated by a soft-headed septuagenarian and his equally oblivious co-conspirator. If it was a scam, it reads as a sort of what-not-to-do guide that could serve as a learning tool for budding swindlers. So if you're a budding swindler, pay attention to what Judah and Jablonski did, and try to do pretty much the opposite. It will go a long way toward ensuring an exciting career in white-collar crime.
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Though not illegal, life settlements are perhaps the most repugnant way to make a buck off an investment.
They literally place a value on human suffering and death. The industry's ideal insurance policy was written for an old person with at least two severe medical conditions. Once you plunk your money down, you become a buzzard. You are waiting for someone's grandmother to die so that you can get a return on investment. Ideally, this grandmother is in an advanced stage of renal failure or smokes Salems through a stoma, because you're betting on the short life expectancy that was advertised. If doctors suddenly cure what ails them, you're screwed.
