Securities Law Blog

An offshore insurance company located in Costa Rica has been simultaneously charged by the Securities and Exchange Commission (SEC) and by the U.S. Attorney’s Office for the Eastern District of Virginia and the Fraud Section of the Department of Justice’s Criminal Division. Provident Capital Indemnity, Ltd. (PCI), its president, Minor Vargas Calvo (Vargas), and its purported outside auditor, Jorge L. Castillo have been charged with conducting a massive life settlement bonding fraud.

PCI 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 life expectancy. According to the complaint, PCI issued approximately 197 bonds backstopping numerous bonded offerings of investments in life insurance policies with a face value of more than $670 million, from at least 2004 to March 2010.

The SEC claims that Vargas and Castillo misrepresented PCI’s ability to satisfy its obligations under its bonds, made material misrepresentations about the assets that backed PCI’s bonds, PCI’s credit rating, the availability of reinsurance to cover claims on PCI’s bonds, and whether PCI’s financial statements had been audited.

According to the complaint, Castillo never conducted an audit of PCI but continued to issue clean audit reports at the request of Vargas. Castillo’s actions reportedly furthered the illusion that PCI had materially larger assets and greater financial resources to support its obligations.

The complaint alleges that PCI’s “audited” financial statements were provided to Dun & Bradstreet (D&B), which issued PCI a favorable rating of “5 A/S” based on PCI’s reported net worth. PCI then marketed itself as providing “successful customer satisfaction” and having “the ability to maintain one of the insurance industry’s lowest loss ratios,” based on the D&B rating.

The SEC Life Settlement Task Force released a report last year nothing that the market for life settlements has grown over the past decade and calling for greater regulatory coordination and investor protection.