Beyond Structured Settlements

SSP and NSSTA 2009 Annual Meetings

The Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) are hosting sequential 2009 Annual Meetings this week in Washington, D.C. S2KM will attend both meetings and publish reports and commentary next week.

For S2KM's most recent related reports, see:

• SSP 2008 Annual Meeting
• NSSTA 2009 Winter Meeting
• Settlement Consulting Series
  • Part 1 - Joseph DiGangi's NSSTA presentation
  • Part 2 - Definitions and boundaries
  • Part 3 - Settlement consulting history
  • Part 4 - Transaction diagram and analysis

Spencer v. Hartford - 3

Spencer v. Hartford is a class action civil lawsuit potentially involving more than 9000 plaintiffs who received structured settlement annuities from Hartford insurance subsidiaries. The plaintiffs allege:

• Hartford has conducted a structured settlement program called "Secured Benefit Services" (SBS) since 1992 that violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud.
• Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford, who are not named as defendants in the civil class action, to further the mission of the SBS program. 

The case is currently on appeal to the U.S. Second Circuit Court of Appeals following a March 10, 2009 decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel .

Prior S2KM blog posts:

• Spencer v. Hartford - 1 summarizes the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal.
  
• Spencer v. Hartford - 2 provides S2KM commentary about the plaintiffs' allegations, potential damages, the NSSTA Code of Ethics, and selected educational discussions from the NSSTA 2009 Winter Meeting.

This S2KM blog identifies and recommends:

• Questions;
• Lessons;
• A proposed solution.

Questions:

• Will the plaintiffs' RICO and state fraud allegations in Spencer v. Hartford be adjudicated or settled?
• How does Hartford, recognized as "one of the World's Most Ethical Companies" and honored for "its products, services, research, philanthropy, and programs supporting individuals with disabilities" justify its SBS and BAP structured settlement programs?
• Did any Hartford employees or participating structured settlement intermediaries (incorrectly called "brokers') question the legality of the SBS and BAP programs?
• Has any structured settlement intermediary, defendant or plaintiff, in any Hartford case ever refused to share or receive annuity commissions from Hartford on account of the SBS and BAP programs?
• Will federal authorities initiate criminal RICO charges against Hartford and the structured settlement intermediaries who participated in Hartford's SBS and BAP programs?
• Should federal officials consider Spencer v. Hartford if and when Hartford applies for TARP funds?
• Should trial attorneys who originally represented Spencer v. Hartford plaintiffs in structured settlements with Hartford be held accountable for their incompetency, lack of due diligence, or poor advice?
• How widespread among insurance companies and structured settlement intermediaries are Hartford's allegedly illegal structured settlement business practices?
• Does Spencer v. Hartford reveal a continuing pattern of industry business behavior consistent with allegations in prior lawsuits such as Weil v. Manufacturers and Macomber v. Travelers?
• Regardless of case outcome:
  • What lessons, if any, will the structured settlement industry learn from Spencer v. Hartford?
  • What, if anything, about Spencer v. Hartford causes "shocked disbelief" among structured settlement stakeholders - to borrow a term and line of inquiry from Father Oliver Williams' Ethics Course at the NSSTA 2009 Winter Meeting.
  • Will Spencer v. Hartford promote the structured settlement industry "wake-up call" Joseph DiGangi recommended when he criticized the traditional business model during his "settlement consulting" discussion at the NSSTA 2009 Winter Meeting?

Lessons

• Structured settlements are complex and involve many federal and state laws and potential long-tail legal and financial liabilities.
• If you are a structured settlement participant and/or stakeholder, you should understand, obey and help improve the laws.
• The traditional structured settlement business model ("claim management") is inherently flawed and promotes conflicts of interests which are rarely identified, discussed or disclosed.
• Structured settlement compensation arrangements and relationships generally are not disclosed.
• Most plaintiff trial attorneys lack professional competence to advise their clients about settlement issues.
• Structured settlement stakeholders are not capable of self-regulation.
• The NAIC and state insurance regulators are not capable of regulating structured settlements or settlement planning under current laws, regulatory authority and budgets.

Proposed Solution

• Controlling criteria:
  • Judicial approval of structured settlements;
  • Standards and requirements:
    • Best interest test;
    • Due diligence;
    • Disclosure - compensation and conflicts of interest;
    • Informed consent;
    • Licensing;
    • Certification.
• Laws and regulations
  • Identify, preserve and promote existing structured settlement laws;
  • Improve state structured settlement protection statutes;
  • Apply the state protection statutes to the primary market;
  • Better integrate structured settlement laws with Social Security, Medicare, Medicaid, Veterans' benefits; and Federal housing laws.
• New business models
  • Re-define the "claim management" structured settlement business model:
    • Defendants' first priority in structured settlement cases should be to obtain a full legal release.
    • If defendants want to participate in settlement planning, they should:
      • Study settlement planning;
      • Understand the laws, products, documentation and participants;
      • Re-organize and re-focus their structured settlement business models, objectives, procedures and partners.
  • Grow the "settlement planning" business model featuring:
    • Qualified settlement funds (QSFs);
    • Structured settlement annuities - qualified and non-qualified under IRC 130;
    • Settlement trusts;
    • MSAs;
    • SNTs;
    • New products such as tax-free disability funds;
    • Secondary life and annuity markets.
• Re-learn and re-market structured settlements
  • Re-study structured settlements from a settlement planning perspective;
  • Feature and promote structured settlements as a strategic component for settlement planning learning, certification, products and business standards.
  • Identify settlement planning knowledge experts and learn about their expertise, work product, professional associations, online communities, networks and learning resources.
  • Design new business models utilizing, and compatible with, existing and emerging Internet technologies as well as new settlement planning laws and products.
  • Schedule and require ethics classes focused on structured settlement and settlement planning business conduct;
  • Organize, promote and participate in community service activities with and for disability associations.

Spencer v. Hartford - 2

Spencer v. Hartford is a class action lawsuit currently on appeal to the U.S. Second Circuit Court of Appeals following a decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel on RICO and state-law fraud claims.

A prior S2KM blog post (Spencer v. Hartford - 1) summarized the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal. This S2KM post begins S2KM's commentary.

Plaintiffs' Allegations

• Plaintiff allegations are summarized in "Spencer v. Hartford - 1 ".
• The U.S. District Court has neither affirmed nor denied any of the plaintiffs' allegations against Hartford.
• Pending a decision by the U.S. Second Circuit Court of Appeals, the District Court Judge is holding all case deadlines in abeyance.
• Defendants' appeal is limited to the District Court Order granting plaintiffs' Motion for Class Certification and will not address plaintiffs' allegations.
• Even if the Court of Appeals rejects the defendants' appeal, the District Court may never address the plaintiffs' allegations against Hartford.
• As defendants state in their Petition to Appeal: "...putative class actions alleging financial fraud almost always involve extremely large claims for damages, and an order certifying a class therefore exerts pressure to settle whether or not the claims have merit."

Potential Damages

• The civil component of the Federal Racketeer Influenced and Corrupt Organizations Act (RICO) allows for the recovery of damages in triple the amount of actual compensatory damages.
• Plaintiffs contend their two RICO subclasses ("cost" and "value") exceed 9000 persons and their damages total at least 15% of Hartford's applicable structured settlement premium from 1997 to the present.
• Using an assumed industry per case average structured settlement premium of $176,000, plaintiffs' potential RICO damages against Hartford in the Spencer class action case can be estimated as follows: $176,000 x 15% x 9000 cases x 3 = $712,800,000.
• The District Court's Class Certification Order also includes state-law fraud claims.

NSSTA Code of Ethics

• Hartford Life is a member of the National Structured Settlement Trade Association (NSSTA).
• NSSTA's Board of Directors and membership approved the NSSTA Code of Ethics May 9, 1997.
• Plaintiffs' Revised Second Amended Complaint alleges Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford to further the mission of Hartford's "Secured Benefit Services" (SBS) structured settlement program.
• Selected excerpts from the NSSTA Code of Ethics:
  
  • "This Statement of Ethics and Professional Responsibility (Statement) has been adopted by the Board of Directors and Membership of the National Structured Settlements Trade Association (NSSTA) to provide guiding principles to its members and member organizations."
  • "Implicit in the acceptance of this Statement is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services."
  • "This Statement applies to all NSSTA member companies, their employees and to individual members, regardless of their voting rights and responsibilities."
  • "The NSSTA member must exercise the utmost integrity when providing professional structured settlement services."
  • "The nature and extent of services rendered must be dictated by professionalism, honesty and candor which should not be compromised for personal gain or advantage."
  • "All persons engaged in the provision of any part of a structured settlement shall perform their duties in an honest, ethical and fair manner."
  • "Fairness mandates intellectual honesty and disclosure of relevant conflict(s) of interest."
    
  • "A NSSTA member should comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided." (emphasis added).
    

NSSTA 2009 Winter Meeting

• S2KM's Managing Director, Patrick Hindert, is a member of NSSTA and attended the NSSTA 2009 Winter Meeting.
• Plaintiff and Defense Panel
  • One of the educational programs at the NSSTA 2009 Winter Meeting was titled "Plaintiff and Defense Panel".
  • Program description: "There is a need for brokers on both sides to serve as their client's advocate and there should be mutual respect for what each broker contributes to the resolution of the claim and what they bring to the "settlement table". This session will cover some of those concerns."
  • Selected Hindert notes from the panel discussion:
    • "Most structured settlement brokers are 'Good People'."
    • "Our most important role is taking care of the plaintiff."
    • "IRC 468B is bad because it prevents defendants from initiating structured settlements."
    • "Our clients should have no right to dictate how we earn our living" - responding to a question about the need to disclose commission sharing.
    • "I will fight for my clients' right to spend their money the way they want" - responding to a question about approved lists of annuity providers.
    • "We are part of an adversarial system and must support our clients."
• Ethics Course
  • Father Oliver F. Williams, from the Notre Dame Center for Ethics & Religious Values in Business, taught an ethics course at the NSSTA 2009 Winter Meeting.
  • Selected Hindert notes from Father Williams' ethics course:
    • "NSSTA's Code of Ethics is as good as it gets in the structured settlement industry."
    • "Alan Greenspan (Chairman of the Federal Reserve from 1987 to 2006) expressed 'shocked disbelief' following the September 2008 financial crisis. What causes you (NSSTA members) to feel 'shocked disbelief' about the structured settlement industry?"
    • "The life cycle of social moral issues has six stages:
      • Stage 1 - changes occur;
      • Stage 2 - problems are recognized;
      • Stage 3 - organizations are established;
      • Stage 4 - policy agendas are set;
      • Stage 5 - solutions are formalized;
      • Stage 6 - social control becomes routine.
    • "There are three levels of analysis for social moral issues:
      • Individual;
      • Organizational;
      • Systemic.
    • "There are three types of social moral standards:
      • Utilitarianism - the greatest benefit at lowest cost;
      • Rights - protect entitlements set around individuals pursuit of interests;
      • Justice - distribute benefits and burdens fairly."
• Settlement Consulting
  • Joseph DiGangi spoke about "Comprehensive Settlement Consulting" at the NSSTA 2009 Winter Meeting.
  • In what he termed "a wake up call for the industry", DiGangi criticized the traditional structured settlement business model and knowledge standards.
  • S2KM summarized and analyzed DiGangi's NSSTA presentation in a four-part blog series titled "Settlement Consulting"
    • Settlement Consulting
    • Settlement Consulting - 2
    • Settlement Consulting - 3
    • Settlement Consulting - 4

Spencer v. Hartford - 1

This S2KM blog post summarizes the Spencer v. Hartford case to date. A subsequent post will offer S2KM commentary.

Status

Spencer v. Hartford is a class action lawsuit currently on appeal to the U.S. Second Circuit Court of Appeals following a decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel on RICO and state-law fraud claims.

Partial Chronology

• October 31, 2005 - Plaintiffs filed the Original Class Complaint in U.S. District Court, Bridgeport, Connecticut;
• May 1, 2006 - Plaintiffs filed an Amended Complaint;
• October 24, 2006 - District Court Judge denied Defendants' Motion to Dismiss;
• February 6, 2008 - Plaintiffs filed Second Amended Complaint;
• March 4, 2008 - Plaintiffs filed Revised Second Amended Complaint;
• March 10, 2009 - U.S. District Court Judge issued Orders:
  • Granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel for the RICO and state-law fraud claims;
  • Denying plaintiffs' Motion for Class Certification and Appointment of Class Counsel for the state-law breach of contract and unjust enrichment claims;
  • Certifying two subclasses (based upon alleged "cost" and "value" representations) for both the RICO and fraud claims.
• March 24, 2009
  • Defendants filed a Petition to Appeal the District Judge's Orders to the U.S. Second Circuit Court of Appeals;
  • District Court Judge issued an Order:
    • Granting Defendants' Petition to Appeal;
    • Holding in abeyance further deadlines pending a decision by the Court of Appeals.

Participants

• Plaintiffs - Three named plaintiffs (Oshonya Spencer; Charles Strickland; and Douglas McDuffie) plus all other persons who:
  • Entered into a settlement with any of the Hartford Property and Casualty Companies between 1997 and the present;
  • In which some or all of the settlement amount was to be paid as a structured settlement funded with an annuity from one of the Hartford Life Companies; and
  • Who had a written contract that, or before entering into the contract had received a written representation that, made explicit or implicit reference to the "cost" (Subclass 1) or "value" (Subclass 2) of the settlement or portion of the settlement being structured or the "cost" or "value" of an annuity being used to fund the structure.
  • Excluded from each class of plaintiffs are persons who were represented by a plaintiffs' broker in connection with the settlement.
• Defendants
  • The Hartford Financial Services Group, Inc.
  • Hartford Life, Inc.
  • Hartford Life Insurance Company
  • Hartford Accident and Indemnity Company
  • Hartford Casualty Insurance Company
  • Hartford Insurance Company of the Midwest
  • Hartford Fire Insurance Company
• U.S. District Court Judge - Hon. Janet C. Hall
• Plaintiff Class Counsel
  • David S. Golub
  • Jonathan M. Levine
  • Peter R. Kahana
  • Steven L. Bloch
  • Carl S. Kravitz
  • Ellen D. Marcus
  • Richard B. Risk, Jr.
• Defense Counsel
  • Wilmer Cutler Pickering Hale and Dorr LLP
  • Wiggin and Dana LLP

Plaintiff Allegations

• Beginning in 1992, Hartford engaged in a uniform policy, pattern and practice of fraudulently, wrongfully and systematically retaining for its own benefit at least 15% of amounts it should have used to fund its structured settlements.
• Hartford called its program "Secured Benefit Services" (SBS) the purpose of which was to direct Hartford P&C companies to settle claims against their insureds using structured settlements funded with annuities from Hartford Life companies thereby retaining a substantial portion of the settlement funds and transforming claim losses into gains.
• Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford to further the mission of the SBS program.
• If a participating broker could not arrange a structured settlement funded with a Hartford Life annuity, the broker was to arrange an all-cash settlement so Hartford would not lose annuity business to competitors.
• Instead of paying participating brokers an industry standard 4% commission, Hartford paid 3% and unjustly and fraudulently passed a 4% commission cost to the claimant while falsely portraying the brokers as independent.
• In return, the approved brokers provided Hartford with outside markets for structured settlement annuity sales through their relationships with other P&C insurance companies thereby helping Hartford generate record increases in annuity sales.
• Using SBS and BAP, Hartford executed a scheme to breach settlement agreements, defraud claimants and/or unjustly enrich itself by retaining 15% of the amount it had promised or agreed to use for its structured settlements and concealing it was illicitly profiting from each structured settlement.
• Internally, Hartford allocated the 15% as follows: 5% immediate profit to Hartford (in addition to future investment profit); 5% for Hartford's marketing and sales programs including brokerage commissions; 3% for Hartford's operational expenses; 2% to pay taxes on income derived from annuity sales.
• Representations by Hartford and its approved brokers to claimants and their advisers falsely indicated 100% of the amount Hartford promised or agreed to use to fund the annuities was in fact used for the annuities.
• Hartford instructed its SBS and BAP program participants:
  • Never to disclose Hartford was retaining 15%;
  • To affirmatively misrepresent that claimants were receiving their structured settlement annuities at "no cost" in contrast with other potential investments.
• Hartford required SBS and BAP participants to use standard and uniform sales presentations developed by Hartford plus a Hartford software program to generate annuity quotes that were inherently false and deceptive.
• By making affirmative statements, Hartford and its representatives assumed a duty to disclose all other information about the structured settlement annuities.
• Hartford changed portions of its SBS and BAP programs in 2005 in part because then New York Attorney General Eliot Spitzer had notified Hartford his office was investigating brokerage commissions.
  
• In 2005, Hartford began to disclose in writing that deductions would be made from annuity costs for brokerage expenses and to offset operating expenses but Hartford still did not disclose that it retained other amounts.
• Hartford's SBS and BAP programs constitute violations of the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud, breach of contract and unjust enrichment.
  

U.S. District Court Decision - Judge Hall:

• Granted plaintiffs' Motion for Class Certification and Appointment of Class Counsel for the RICO and state-law fraud claims;
• Denied plaintiffs' Motion for Class Certification and Appointment of Class Counsel for the state-law breach of contract and unjust enrichment claims;
• Certified two subclasses (based upon alleged "cost" and "value" representations) for both the RICO and fraud claims.

Defendants' Appeal

• District Court Judge Hall approved Hartford's Petition for Permission to Appeal to the U.S. Second Circuit Court of Appeals her Orders certifying plaintiffs' RICO and state-law fraud claims as class actions.
  
• Hartford's petition claims Judge Hall misread controlling precedent and "assumed away" the substantive elements of reliance and causation that ordinarily preclude certification of RICO and state-law claims based on allegations of fraud.
• Hartford's petition raises three basic issues:
  • Whether RICO cases require proof that someone relied on representations that allegedly caused plaintiff's injuries?
  • Whether "self-proving reliance" eliminates the need for individual proof of transaction causation in state-law fraud cases based upon alleged financial misrepresentations?
  • Whether the rule that "uniform misrepresentations" may be established by common proof extends to non-uniform but allegedly "similar" representations?

S&P Withdraws J.G. Wentworth Credit Ratings

Standard & Poor's Rating Services has announced it will no longer rate J.G. Wentworth's counterparty credit and senior secured debt at Wentworth's request. S&P's announcement occurred on March 31, 2009 after Wentworth announced Deutsche Bank had extended a "standstill" agreement but before Wentworth's March 31 deadline to pay $6 million of quarterly interest on separate corporate debt.

The standstill agreement relates to an earlier unpaid $16.9 million margin call on Wentworth's warehouse credit line with Deutsch Bank which Wentworth uses to purchase structured settlements.

Industry sources have informed S2KM:

• Wentworth subsequently missed its March 31 midnight deadline to pay the $6 million of interest on its general corporate debt although a 30 day grace period apparently exists;
• By removing itself from the S&P ratings, Wentworth prevented a probable additional credit downgrade;
• Wentworth's $325 million of general corporate bonds are "almost worthless" and are trading, if at all, for pennies on the dollar.
• Although David Miller remains Chief Executive, Wentworth has hired an outside consultant for advice on debt restructuring.
• Structured settlement asset-backed securities already issued by Wentworth are legally separate from Wentworth and therefore not directly impacted by Wentworth's corporate financial problems.
  

Standard & Poor's Announcement

"On March 31, 2009, Standard & Poor’s Ratings Services removed its ratings on J.G. Wentworth LLC from CreditWatch, where they were placed with negative implications on March 17, 2009. At the same time, we affirmed Wentworth’s ‘CC’ counterparty credit and senior secured ratings and assigned a negative outlook. Subsequently, the ratings on Wentworth were withdrawn at the company’s request.

"This rating action follows Wentworth’s announcement that it had obtained an extension from Deutsche Bank of the waiver related to its $16.9 million margin call. The extension of this “standstill” agreement allows Wentworth to fund its business until April 22 without further margin calls. However, subsequent to the expiration of the waiver, the warehouse lender could provide a notice of default, which we believe could lead to a cross-default on Wentworth’s other debt, including the senior secured bank loan. In addition, we believe Wentworth’s ability to continue operating is limited without further financial assistance from private equity owners JLL partners."