Secondary market annuity

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A secondary market annuity is a term that certain salespeople use to describe an investment in structured settlement payment rights. What is being sold and what the investor is buying is not an annuity,[1] but structured settlement payment rights, a derivative of a structured settlement. Thus the use of the term secondary market annuity (or the plural secondary market annuities) is wholly misleading. The term “structured settlement payment rights” means rights to receive payments under a structured settlement.[2] When the ownership of structured settlement payment rights is transferred by a Qualified Order[3], the ownership of the actual insurance product, the structured settlement annuity, does not move. It stays the same as it was when the structured settlement was established. It is in most cases owned by a qualified assignment company, a subsidiary of the annuity issuer. The structured settlement derivatives being marketed to investors as "secondary market annuities" do not have the same statutory protections as legitimate annuities.

Structured settlement annuity compared with a "secondary market annuity"[edit]

When structured settlements are established there is none of the transactional risk of investing in factored structured settlement payments. A stark example of transactional risk is the Wall case. On April 30, 2019, a judge in the matter of Robert Wall and Linda Wall vs Corona Capital, LLC and Altium Group, LLC[4], granted summary judgment in favor of Altium Group[5]. Altium Group LLC is an intermediary that had a relationship with the originating company Corona Capital and made the deal originated by Corona Capital available to its network of agents and advisors. The Walls are retirees, who invested $152,833.37 in a deal that was approved by a Florida state court March 28, 2012. The original annuitant Kenneth Stevens subsequently discovered a fraud in the origination. Stevens had filed papers seeking to overturn the order and, “after extensive discovery”, the court concluded that Stevens “did not sign any of the documents submitted to this Court in support of the” Corona petition. In other words, his signature had been forged. Stevens successfully sued to vacate the Order approving the transfer of payment rights. The Walls subsequently sued Corona Capital, LLC and Altium Group, LLC. The Court ruled that the Walls could not sue the finance company for breach of transfer warranties under the Uniform Commercial Code but may sue the intermediary seller (Altium Group LLC) receiving her investment for breach of contract". While initially successful on the breach of contract claim, the ruling was overturned in favor of Altium on appeal, leaving only an unjust enrichment claim to be contested[6]. As things stood on April 30, 2019, the Walls invested $152,833.37 in 2012 and have lost their entire investment and incurred substantial legal fees. Altium Group's website continued to tout "Unparalleled Safety of Principal" in solicitation to investors[7] for a considerable time after the Wall transaction. Other examples of matters related to transactional risk appear in Unsettling Events Section below.

Primary market structured settlement payees may have statutory protections in the event of carrier insolvencies, however that may not be case with investments in factored structured settlement payment streams. In January 2019, the Tennessee legislature introduced House and Senate bills excluding from coverage under the Tennessee Life and Health Insurance Guaranty Association Act a person who acquires rights to receive payments through a structured settlement factoring transaction, as defined in federal law, regardless of whether the transaction occurred before or after the federal law took effect[8]

Primary structured settlements are shielded from creditors in accordance with their statutory protections. An investment in factored structured settlement payment streams does not have this protection. It then becomes like any other investment and is open to the rights and claims of creditors, bankruptcy trustees and other claimants.

Lack of regulation of sales practices[edit]

Originators of structured settlement derivatives that end up being labeled "secondary market annuities" are currently not subject to any licensing standard. With few exceptions, like Maryland (where registration and posting a bond is required), many of the salespeople and their companies that originate the derivative cash flows being sold to investors, are not even registered to business in the states where prospective customers and repeat customers are solicited. A number of the sellers of structured settlement derivatives who hold active insurance licenses however, have mislabeled them "secondary market annuities" anyway and some insinuate state guaranty fund insurance coverage, despite prohibitions on advertising them in state insurance laws. For example, New York's Insurance Law Section 7718.[9].

Origins of non-institutional funding in structured settlement secondary market[edit]

Initially structured settlement payments rights were primarily packaged up by large buyers such as JG Wentworth, securitized and sold to institutional investors. During a period where institutional capital became less available in the immediate aftermath of the 2008-2009 financial crisis, a number of intermediaries began marketing structured settlement payment rights to investors. Some began to use labels that included the term "annuity", such as in force annuities, secondary market annuity, secondary market annuity, secondary market income annuity and/or the acronym SMA or SMIA, despite the fact that these were not annuities and that many of the people marketing these instruments did not even hold insurance licenses. Some make reference to State Insurance Guarantee Funds of which the mere mention in connection with the sale or solicitation of a legitimate regulated annuity would be unlawful. Most states have, as part of their insurance laws, an advertising prohibition which specifies that insurance companies and insurance agents may not use the existence of the guaranty association for the purpose of sales, solicitation, or inducement to purchase insurance, including annuity contracts[10][11]

Potential risks to investors[edit]

Absent most of the sales pitches for "secondary market "annuities" is mention of transactional risk, the possibility that a structured settlement transfer order can be later vacated and result in suspension of payments and possibly the loss of the entire investment. Following the Maryland Attorney General's lawsuit against Access Funding[12] and several associated defendants, servicers of structured settlement payment rights notified certain investors with Somerset Wealth Strategies that their payments were being suspended pending the outcome of the litigation. This does not happen when one buys a legitimate annuity. In April 2010, Somerset Consulting established[13] and continues to operate a website called Secondary Market Annuities that since December 2016[14] underscores that factored structured settlements are not annuities.[15] On August 19, 2017, Somerset CEO Thomas Hamlin issued an update to investors' Maryland Attorney General lawsuit against Access Funding, et. al. (“the Lawsuit”) in which he stated "An important difference is that the plaintiffs in the class action are trying to recover damages from Access Funding, but not to void the orders approving transfers of payments. The class action[16] (another action against Access Funding) therefore would not affect the payments to which you are entitled". Oral arguments were heard in the appeal of the Attorney General's case, in March 2019. In the meantime buyers of structured settlement derivatives that were marketed as "secondary market annuities" by Somerset have not been receiving the income payments that they paid for. The Maryland Court of Special Appeals overturned the lower court decision in April 2019,[17] leaving investors to remain in limbo with no payments.

A Pittsburgh area couple paid $152,833.37 of their retirement money to Altium Group, a New Jersey intermediary, on the recommendation of their financial adviser under the Master Agreement but never received payments from Altium or Corona Capital. In November 2016, the United States District Court for the Western District of Pennsylvania pointed out that “[a]s a caution to those investing in these [structured settlement factoring transactions], a court can later vacate the sale of the . . . payments when the underlying plaintiff selling his . . . payments lacked authority to sell . . . leaving the eventual investors without the purchased asset".[18][19] The Wall Court issued an opinion January 12, 2017. See Footnotes 4 and 5 for status as of April 30, 2019 in which a legal decision essentially renders the Wall's investment worthless.

After years of advertising "Secondary Market Annuities as having "Unparalleled Safety of Principal" [ see Footnote 7], in July 2017 Altium Group finally posted a product warning[20] about "Secondary Market Annuities":

"Despite best efforts to comply with the SSPA (Structured Settlement Protection Act), Secondary Market Annuity transfers possess a risk of criminal fraud and violations that can be committed by any party involved in the transaction. As such, a Secondary Market Annuity may result in a reversal or vacation of its underlying court order if it is determined that the original sale was approved under false pretense. A Vacated or Reversed order would result in the termination of future annuity payments to the investor"

On September 1, 2017, Seneca One Finance filed a suit in Montgomery County MD[21] against US Annuity Services, Inc. and Jeremy Wright, which raises a number of allegations that, if proven, could be grounds to overturn or vacate orders and impact investors.

  1. USAS made a practice of having statutory disclosures signed at the same time as structured settlement transfer agreements and backdating the disclosure statements to make it appear as if the disclosure statement was prepared and delivered prior to the transfer agreement [Complaint at 61 p 14]
  2. At least one USAS employee has created fake documentation about an annuitant's income in an effort to mislead a court into believing that the annuitant had other monthly income, thus increasing the chance that the transaction is approved [Complaint 64 p 14]
  3. At least one USAS employee has altered a signed contract with an annuitant without the annuitant's permission [Complaint 66 p 15]
  4. Upon information and belief at least one USAS employee has paid a third party to pose as a particular annuitant and falsely testify in court that she was the annuitant. [Complaint 67 p 15]

On September 14, 2017, a class action law suit filed in the Eastern District of Pennsylvania[22] has the potential to impact both securitization and individual investors. The suit alleges Portsmouth, Virginia, Circuit Court judges were complicit in an "Annuity Fraud Enterprise" scheme, in which a Virginia lawyer and 79th District delegate, Steve Heretick, was the central figure, representing JG Wentworth, Seneca One, 321 Henderson Receivables and other settlement purchasers, that allegedly violated the rights of thousands of structured settlement annuitants. Plaintiffs allege violations of RICO statutes against multiple defendants, violations of right to due process an seek a constructive trust. against all defendants and all nominal defendants which include several life insurers who issue the annuities which fund the periodic payments that the investors believe they have acquired.

On August 8, 2018, a spokesman for DRB Capital, a prominent structured settlement factoring company backed by the Blackstone Group,[23] said in a press release that "in DRB's opinion, a number of bad actors are engaged in illegal, unfair and abusive/deceptive behaviors and these firms have besieged legitimate companies and consumers in this market. We are committed to rooting them out and bringing them to justice. Sunshine is the best disinfectant and we intend to provide evidence unearthed by this program to relevant State Attorneys General, the IRS, and the CFPB. In addition we will use it in direct legal actions against these malefactors and the individuals responsible for this reprehensible conduct.[24] Among the alleged illegal conduct described by DRB Capital is (1)violations of the internal revenue code section 5891; (2)violations of state structured settlement protection acts; (3)improper forum shopping; (4) suborning perjury by, among other things, making consumers execute affidavits containing false information about their residence and other matters; (5)violations of federal and state Deceptive and Unfair Trade Practices Acts and (6) DRB is seeking information on abusive and unfair trade practices including extortion behavior and practices against sellers[25]

In re: Assignment of Certain Structured Settlement Payment Rights of James V McMillan[26] is a 2018 legal proceeding in Sumter County, Florida, in which James McMillan,[27] a victim of the October 15, 2003, Staten Island Ferry crash,[28] seeks to rescind nine alleged forum shopped ex-parte structured settlement transfer orders.[29] McMillan alleged that Seneca One, LLC, Structured Asset Funding and Settlement Capital Services Plus LLC engaged in civil theft, exploitation of the disabled and a systematic scheme to defraud McMillan and the Court in Sumter County. McMillan contends that at the urging of petitioners the court improperly exercised jurisdiction over McMillan, who lived in New York at all relevant times, and the court improperly exercised in rem jurisdiction over the structured settlement payment rights. McMillan contends that by entering orders without proper jurisdiction that the court inadvertently created a series of nullities, void orders that should be immediately vacated[30].

Vacated court order insurance[31][edit]

The Wall case inspired Altium to accelerate the development of insurance to help protect investors against vacated structured settlement transfer orders. Such insurance, placed with Lloyds of London, was introduced in May 2017. It is possible to buy coverage on existing deals provided they have not been subject to litigation. The exclusions under the policy are for fraud or forgery perpetrated by the insured. There is a $1,000,000 aggregate limit and defense costs are not covered under the policy.

References[edit]

  1. ^ National Association of Insurance Commissioners (NAIC) Statutory Issue Paper 160, introduces substantive revisions to SSAP No. 21—Other Admitted Assets
  2. ^ IRC§5891(c)(2)
  3. ^ https://www.law.cornell.edu/definitions/uscode.php?height=800&def_id=26-USC-1667062070-1500190671&term_occur=1&term_src=title:26:subtitle:E:chapter:55:section:5891
  4. ^ Robert Wall and Linda Wall vs Corona Capital, LLC and Altium Group, LLC WD Pennsylvania Case No. 2:16-CV-01044-MRH, filed July 15, 2016
  5. ^ https://structuredsettlements.typepad.com/files/wall-v-altium-summary-judgment-in-favor-of-altium-group.pdf
  6. ^ Ibid, accessible on Pacer.gov
  7. ^ https://web.archive.org/web/20131229134445/http://altiumgroup.com/
  8. ^ http://wapp.capitol.tn.gov/apps/BillInfo/default.aspx?BillNumber=SB0084&GA=111
  9. ^ "Advertising Prohibition Policy". www.nylifega.org. Retrieved April 30, 2019.
  10. ^ "State Guaranty Fund : Overview and Directory and State Insurance Department Directory" (PDF). Nafa.com. Retrieved 2017-07-28.
  11. ^ "New York Consolidated Laws, Insurance Law - ISC § 7718". FindLaw.com. Retrieved July 28, 2017.
  12. ^ "Preliminary Statement" (PDF). MarylandAttorneyGeneral.gov. Retrieved July 28, 2017.
  13. ^ "secondarymarketannuities.com - Archived whois lookup from 2018-12-24 - Whoisology". whoisology.com. Retrieved April 30, 2019.
  14. ^ web.archive.org
  15. ^ "Recent Developments". secondarymarketannuities.com. Retrieved April 30, 2019.
  16. ^ Crystal LINTON, and Dimeca D. JOHNSON, On Behalf of Themselves and Others Similarly Situated, Plaintiffs, v. ACCESS FUNDING, LLC, RELIANCE FUNDING, LLC , ACCESS HOLDING, LLC, ASSOC, LLC Serve on: Lee Jundanian, EN COR, LLC Serve on: Lee Jundanian, Charles E. SMITH, CES LAW GROUP, LLC, Anuj SUD, and SUDLAW, LLC, Defendants. 2016 WL 3627316 (Md.Cir.Ct.) July 6, 2016.
  17. ^ https://www.washingtonpost.com/local/md-politics/victims-of-lead-paint-poisoning-could-receive-more-money-following-ruling/2019/04/24/daba972a-65ee-11e9-82ba-fcfeff232e8f_story.html
  18. ^ "One of Two Counts Survive Motion to Dismiss by Finance Company, in Litigation Over Invalidated Structured Settlement Factoring Transfer - Secondary Insurance Market Blog - Reardon Scanlon Vodola Barnes LLP". Secondaryinsurancemarketblog.com. Retrieved July 28, 2017.
  19. ^ Wall v. Corona Capital, Civil Action No. 16-1044, 2016 U.S. Dist. LEXIS 161683 (W.D. Pa. November 22, 2016)
  20. ^ http://altiumgroup.com/secondary-market-annuity-intro/
  21. ^ Seneca One Finance, Inc. v Jeremy Wright and US Annuity Services, LLC and John Does 1-5* Circuit Court Montgomery County MD Case 436464V
  22. ^ Larry G. Dockery, On behalf of himself and all others similarly situated, Plaintiffs v Stephen E. Heretick, 321 Henderson Receivables, LLC, JG Wentworth Receivables, LLC, Seneca One Finance, Inc., Structured Settlement Investments, LP, Structured Settlement Purchaser John Doe Inc. Purchaser Defendants 1-100 and John Doe Individual Defendants 1-100 and New York Life Insurance Company, Metropolitan Life Insurance Company, Symetra et al*. United States District Court Eastern District of Pennsylvania Case 2:2017:cv-04114-MMB
  23. ^ Goldstein, Matthew; Silver-Greenberg, Jessica (June 25, 2018). "Hedge Funds Look to Profit From Personal-Injury Suits". Retrieved April 30, 2019 – via NYTimes.com.
  24. ^ LLC, DRB Capital. "DRB Establishes $100,000 "Bounty" for Whistleblowers with Information About Illegal Conduct in the Structured Settlement Factoring Market". www.prnewswire.com. Retrieved April 30, 2019.
  25. ^ Ibid.
  26. ^ In re: Assignment of Certain Structured Settlement payment Rights of James V McMillan 2013CA0007 Sumter County FL
  27. ^ Newman, Andy (September 17, 2008). "Judge Gives Man Paralyzed in Ferry Crash Highest Award So Far". Retrieved April 30, 2019 – via NYTimes.com.
  28. ^ https://www.ntsb.gov/investigations/AccidentReports/Reports/MAR0501.pdf
  29. ^ 13-CA-710 Allstate Life Insurance Company of New York 13-CA-711 Pacific Life and Annuity Company 13-CA-782-Hartford Life Insurance Company 13-CA-941 New York Life Insurance Company 13-CA-1099 Allstate Life Insurance Company 13-CA-1100 Pacific Life and Annuity Company 13-CA-1106 Hartford Life Insurance Company 13-CA-1113 New York Life Insurance Company 13-CA-1381 John Hancock Life Insurance Company
  30. ^ In re: Assignment of Certain Structured Settlement payment Rights of James V McMillan 2013CA0007 Sumter County FL
  31. ^ "Vacated Court Order Insurance Now Available For Structured Settlement Investors". Structured Settlements 4Real® Blog: Structured Settlements - Settlement Planning News and Commentary, Now in 14th Year!. Retrieved April 30, 2019.