Secondary market annuities
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A secondary market annuity is a term used by salespeople to describe an investment in structured settlement payment rights. The use of the term secondary market annuity (or the plural secondary market annuities) is wholly misleading, because what is being sold and what the investor is buying is not an annuity, but structured settlement payment rights, a derivative of a structured settlement. The term “structured settlement payment rights” means rights to receive payments under a structured settlement. When the ownership of structured settlement payment rights is transferred, 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. The structured settlement derivatives being marketed to investors as "Secondary Market Annuities" do not have the same statutory protections as legitimate annuities.
- 1 How Does a Legitimate Structured Settlement Annuity Compare With a "Secondary Market Annuity"?
- 2 Lack of Regulation of Sales Practices
- 3 Origins of non-institutional funding in structured settlement secondary market
- 4 Unsettling Events Underscore the Potential Risks to Investors in Secondary Market Annuities
- 5 Vacated Court Order Insurance
- 6 References
How Does a Legitimate Structured Settlement Annuity Compare With a "Secondary Market Annuity"?
When structured settlements are established "there is a direct contract between the insurance company and the annuitant. This direct connection has none of the transactional risk of the factored transactions":.Primary structured settlements are shielded from creditors in accordance with their statutory protections. Even in bankruptcy proceedings, they are usually considered an exempt asset and cannot be accessed by creditors. Once a structured settlement (the payment rights) goes through the series of purchase and sale transactions to become a re-factored annuity, it loses 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
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..
Origins of non-institutional funding in structured settlement secondary market
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
Unsettling Events Underscore the Potential Risks to Investors in Secondary Market Annuities
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 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 doesn't happen when you buy a legitimate annuity. In April 2010, Somerset Consulting established and continues to operate a website called Secondary Market Annuities that since December 2016 underscores that factored structured settlements are not annuities. 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 (another action against Access Funding) therefore would not affect the payments to which you are entitled". Oral arguments are scheduled to be 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.
A Pittsburgh area couple paid $152,833.37 of their retirement money to Altium Group, a NJ 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 The Wall Court issued an opinion January 12, 2017.
In July 2017 Altium posted a warning 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 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 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 investor's believe they have acquired.
On August 8, 2018, a spokesman for DRB Capital, a prominent structured settlement factoring company backed by the Blackstone Group 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. 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
In re: Assignment of Certain Structured Settlement Payment Rights of James V McMillan is a 2018 legal proceeding in Sumter County Florida in which James McMillan,a victim of the October 15, 2003 Staten Island Ferry crash, seeks to rescind nine alleged forum shopped Ex-Parte structured settlement transfer orders. 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.
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 cover 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.
- National Association of Insurance Commissioners (NAIC) Statutory Issue Paper 160, introduces substantive revisions to SSAP No. 21—Other Admitted Assets
- "State Guaranty Fund : Overview and Directory and State Insurance Department Directory" (PDF). Nafa.com. Retrieved 2017-07-28.
- "New York Consolidated Laws, Insurance Law - ISC § 7718". FindLaw.com. Retrieved 2017-07-28.
- "Preliminary Statement" (PDF). Marylandattorneygeneral.gov. Retrieved 2017-07-28.
- 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.
- "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 2017-07-28.
- Wall v. Corona Capital, Civil Action No. 16-1044, 2016 U.S. Dist. LEXIS 161683 (W.D. Pa. Nov. 22, 2016)
- Seneca One Finance , Inc. v Jeremy Wright and US Annuity Services, LLC and John Does 1-5* Circuit Court Montgomery County MD Case 436464V
- 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
- In re: Assignment of Certain Structured Settlement payment Rights of James V McMillan 2013CA0007 Sumter County FL
- 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
- In re: Assignment of Certain Structured Settlement payment Rights of James V McMillan 2013CA0007 Sumter County FL