Betting Their Lives

It's easy for a three-time felon to get $20 million for his investment company, as long as no one asks any questions.

The industry got its start as "viaticals" in the mid-1980s, when AIDS was a death sentence and patients wanted immediate access to funds. Young men whose bodies were ravaged by toxoplasmosis and Kaposi's sarcoma were many an investor's meal ticket.  But unfortunately for them, as time passed, advances in HIV/AIDS care prolonged patients' lives, and there was no longer any way to adequately predict their life expectancy. The industry withered, but not before attracting its share of unscrupulous entrepreneurs eager to exploit regulatory agencies' unfamiliarity with the product.

Viaticals later resurfaced, repackaged as "life settlements," and old people with multiple health problems were where it was at.

National Life Settlements pitched this product to retirees as safer than stocks and more lucrative than traditional retirement accounts. The problem, according to authorities, is that Judah and Jablonski created NLS mostly to serve as their own piggy bank. Prosecutors also accuse the NLS co-founders of not disclosing Judah's criminal background, and not accurately describing the inherent risks of the life-settlement market, among other indiscretions, such as flat-out lying. The indictment alleges that Judah "knowingly misrepresented that Warren Buffet was an investor, owner or affiliated with National Life Settlements...and that [NLS] was the custodian of policies on behalf of a company controlled by Warren Buffet known as GenRe..."

According to the indictment and federal court records in New York, Judah was convicted of the following:

• conspiracy to commit wire fraud in 1998. Sentenced to 32 months in prison followed by three years of supervisory release;

• engaging in monetary transactions in property derived from specified unlawful activity in 1997. Sentenced to 46 months in prison, followed by two years of supervisory release;

• contempt of court in 1996. Sentenced to 12 months and a day, followed by three years of supervisory release.

The wire fraud conviction related to Judah and a co-conspirator "devising a scheme to sell to victims nonexistent or fraudulent bank documents referred to as 'prime bank guarantees.'"

Moreover, according to the indictment, Judah told victims in that scam that he was a "senior executive of Ford Motor Credit and/or Ford Motor Company" — something Texas authorities allege he also did with NLS investors.

In the "monetary transactions" charge, Judah "was convicted of combining and conspiring with others to transfer funds that were purportedly the proceeds of cocaine sales from the United States through an account in France to an account in Montevideo, Uruguay."

The conviction was obtained in part through wiretapped conversations between Judah and his co-defendants. It appears that, the more Judah talked, the more investigators believed they were reeling in a big fish. It wasn't until later that they discovered Judah had a rather tenuous relationship with the truth.

Baruch Weiss, the former federal prosecutor who tried the money-laundering case, said that, when it came to Judah's "internal circle of people, he would lie to them all the time, to puff himself up."  

As for the history Jablonski brought to NLS, according to the Texas charges: He didn't disclose to investors that a company he launched in Colorado, My E-Networks, filed for bankruptcy in 2007, "with almost $6 million in liabilities and $57,652 reported as assets..."
_____________________

False statements and material omissions seemed to be part and parcel of NLS from its inception.

Shortly after incorporating NLS, Judah and Jablonski created booklets for sales agents that claimed the company was an established industry leader. Jablonski conceded in a 2009 deposition that those claims were fictions. Yet those claims were in sales agent David Herzog's PowerPoint presentation — the one that requires destruction after viewing — to the undercover securities agent.

The PowerPoint describes Herzog and his nebulous associates at IAM Financial, Inc. as 20-year experts in "bringing the most innovative and market leading investment products to our clientele," who "thoroughly research and scrutinize every offering before making a recommendation." This bold assertion is followed by the claim that NLS has been around for "many years." (Herzog declined to comment, but in his defense, it's entirely possible that his definition of "many" is "one or two.")

Judah and Jablonski could never have spread their gospel without a hungry sales force, which included licensed insurance agents and people who liked to play financial expert on the weekends.  And in February 2011, the receiver sued these agents in an attempt to recoup $9 million.

Although life-settlement investments aren't considered securities by the U.S. Securities and Exchange Commission, they're classified as such in Texas. As stated on the State Securities Board's Web site, "the term 'security' is defined broadly..." Basically, if you invest money in something and expect money in return, Texas considers it a security, whether you like it or not. The board doesn't keep this information under lock and key. There is no secret handshake or special door-knock required.

Through their attorneys, Judah and Jablonski claim that they honestly didn't know life settlements were securities under Texas law. In the year and a half since NLS was shut down, they haven't come up with a better argument. Through their lawyers, Judah and Jablonski have constructed a legal defense predicated on the suggestion that they are  pathological idiots incapable of performing even the most basic Google search, and who delegated fundamental financial matters to "experts" with an even more alarming scarcity of sense.

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12 comments
jiazhuangde
jiazhuangde

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Valkyre
Valkyre

The old saying "If it seems too good to be true, then it probably is (too good to be true)" still holds true.

Guest
Guest

You guys are 2 in a row with solid cover stories this month. Keep up the good work, Malisow.

Note to the Editor-in-Chief: Can you see how this type of story is more useful than uninspired "top five lists" and vanity blogs about "The 1980s softcore cable porn I jerked off to when I was a kid?"

Gary Packwood
Gary Packwood

Good article about strange companies in the business of trying to guess when folks are going to die.

I think we are talking about Life Partner Holdings, Inc. out of Waco, Texas ...NOW.

http://www.lphi.com/default.ht...

And their stock (Life Partner Holdings) closed out today at about $8.00 per share

http://www.bloomberg.com/apps/...

And today, March 9, 2011 Attorneys are attempting to communicate with investors.

Lieff Cabraser Heimann & Bernstein, LLP Reminds Investors of Upcoming Deadline In Class Action Lawsuits Against Life Partners Holdings, Inc. (April 4, 2011)

http://bit.ly/dGKTPo

Again, the deadline is April 4, 2011 and investors need to be aware of that deadline so we can all watch the stock price move down to $7, $6, $5, $4, $3, $2, $1 and then one penny.

Texanfanrocket
Texanfanrocket

Not a timely or well-informed article, and you gotta love folks throwing in their opinion into these articles, as well. NLS was shut down 2 freaking years ago, and mainly for non-disclosure of ownership. ie. They were the owners and beneficiaries of the policies. Hell, 2 others were shut down last year. You couldn't write-up on at least a more recent one?

Secondly, You did know annuity companies have been using mortality rates (ie. life expectancies) to determine a payout, right? Right? No, of course you didn't. Please tell me your outrage there. These are 80-90 year olds, typically. Nobody is betting on a 20 year old getting run over by a car.

Thirdly, The State of Texas has determined this not to be a security. Links are below.

If you want to be a serious journalist, keep your opinions to yourself, and be better informed. It took 15 minutes to shred every ounce of credibility regarding this article.

http://www.google.com/#hl=en&a...

http://ctwatchdog.com/2010/05/...

Texanfanrocket
Texanfanrocket

That would primarily be in response to the WSJ article from Dec. that claimed that Life Partners was tossing out valid life expectancies and replacing them with an "in-house" doctor who only took a few minutes to review each and significally shortened the LE's making them look more favorable than they really were.

And, yes. THAT story would've been a tad better as far as timeliness.

Instead we get a story that was written in the Chron when it actually occured. 2 years ago.

Look into Retirement Value and AGAP, as well for at least some that happened in the last 12 months.

Craig Malisow
Craig Malisow

Hi Texanfanrocket,

Thanks for posting your thoughts, and I just wanted to briefly respond.

1.) The reason we felt this was a timely article was that there are currently criminal charges pending. Although the company went into receivership in 2009, the story wasn't over. But of course, it's all up to the amount of interest a person has in a story. There are plenty of 600-word summaries of the NLS receivership, but if a person wants to dive deeper and get to know the people involved, and their histories, then they may enjoy an in-depth look. Different strokes, I suppose.

2.) Yes, life expectancy is calculated in both annuities and life settlements, but they are different products. Of course, my characterization of life settlements as "repugnant" is an opinion, and I understand that other people may not feel the same way. However, I hardly feel that a difference of opinion is a "credibility" factor.

3.) I think the point is that the State Securities Board defines life settlements as securities, and Judah and Jablonski are being charged with securities fraud. We'll be following the proceedings, and if a trial or appellate court rules in this case that NLS was not peddling securities, then we'll report that.

Thanks again for sharing your thoughts,Craig Malisow

Texanfanrocket
Texanfanrocket

Hi Craig,

1.) There have been in-depth articles written in both Forbes and the Wall Street Journal about these. I'll be more than happy to provide links if you would like.

2.) Did you know that Social Security uses these LE's, also! How repugnant to think our Gov. uses tables to determine when people will die? If you want to really be offended, then look no further than the Insurance Companies. The "Cash Value" on policies is so laughably bad that it created this market in the first place. Imagine if you put away $10,000 a year for a $1,000,000 insurance policy for 30 years and then your significant other passes, or you need extra cash, etc. and the insurance company decides that they will give you $100,000 for it?!? The whole reason this exists is so folks can get additional funding and has been around since 1911... But I'll assume you didn't know that, either.

Life Settlements have been used as investments by institutions for years, including Berkshire Hathaway, Wells Fargo, and the like.

3.) NO. You obviously didn't look at the link I provided. It is NOT defined that way by the State of Texas. They are being charged by the SEC because they worked in several States and are therefore subject to Federal law, which at this point does seem to regard these as a security.

Texanfanrocket
Texanfanrocket

Craig,

The first point is that typically investors are buying a bundle of policies with the full understanding that the estimates are just that: estimates. Some will pass earlier than others. The main issue is the knowledge that folks in their 80s tend to die sooner rather than later.

And if the TSSB had determined these to be securities, Life Partners would have been shut down years ago. They are located in Waco, after all.

If and when they are determined to be securities, I promise I'll be the first to let you know.

Craig Malisow
Craig Malisow

Hi Texanfanrocket,

I don't want to prolong this exchange indefinitely, but, if you read closely, my characterization of life settlements as repugnant is not based on the mere fact that LE's are used. LE's themselves are completely benign. My opinion -- and again, it's only my opinion -- was based on third parties literally profiting from someone else's death. The fact that LE's are a factor is a non-issue. Investors are not making money off pork bellies or a better mousetrap; they are literally getting a payout upon a complete stranger's death. Was that person going to die anyway? Absolutely -- we all are. So therefore, some people might say, "Look, this old bag is gonna kick the bucket anyway; I might as well make some money off it," and sleep peacefully. You might feel that, since the seller of a policy gets cash they might need right away, then everyone benefits. Totally valid point. It's also a valid point that some people might find that idea ghastly. Again, different strokes.

And again: the State Securities Board believes life settlements are securities, regardless of what the court ruling says in the link you provided. Now, you might believe the Board to be foolhardy and quixotic in their stance against life settlements, but nevertheless, they are the ones who believe they had jurisdiction, and they are the ones who got the ball rolling. Again, you can disagree with them, and hey, maybe they'll change their minds in the future, but right now, they believe life settlements are securities. (The SEC is still undecided on the matter and recently convened a task force to look into it; the task force recommended that they be defined as securities).

I'm sure you'll again point out the error of my ways, and I truly appreciate your input, but I think I've addressed everything.

Thanks,Craig

 
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