Beyond Structured Settlements

NASP 2014 Annual Conference

The National Association of Settlement Purchasers (NASP) celebrated its 10th annual conference November 5-6, 2014 in San Antonio, Texas with record attendance, recognition of past accomplishments and a clear existential message from its president Patricia LaBorde: "NASP exists to insure there will be a secondary structured settlement market for at least the NEXT 10 years".

NASP's 2014 educational conference followed by one week an historic NSSTA conference, which featured, for the first time, the presidents of NASP (LaBorde) and SSP (Neil Johnson) as speakers. LaBorde acknowledged this development in her opening NASP remarks stating: "we want to hear NSSTA's criticism and for the first time, they appear to want to hear ours." She expressed surprise and concern, however, about how little NSSTA members appear to understand about the secondary market including several basic misconceptions.

To underscore both NASP's "survival" theme and the need for improved education about the secondary market, LaBorde added: "there are some forces working against us right now and we need to remain diligent so our customers (structured settlement recipients who sell payment rights to NASP member companies) continue to have access to liquidity."

NASP lobbyist Jack Kelly and Executive Director Earl Nesbitt addressed some of NASP's challenges in their presentations providing legislative and case law updates respectively.

Legislative Update

Kelly reviewed structured settlement protection statute activities in Florida, Wisconsin, Minnesota, Louisiana, and Mississippi and declared NASP's 2014 state legislative lobbying a success. Kelly highlighted Florida and Wisconsin as states where NASP and NSSTA could collaborate to improve existing legislation. At the federal level, Kelly addressed H.R. 3897 and the July 23, 2014 "Consumer Protection for People with Disabilities" Congressional symposium which included a panel discussion about "factoring structured settlements".

Echoing LaBorde's comments about NSSTA, Kelly expressed his concern about "fact vs fiction" as to what happens and what benefits transfers provide for structured settlement recipients who experience unexpected or unaddressed financial needs. Emphasizing "no secondary market transaction can occur without a primary market transaction", Kelly criticized any development or activity that causes Congress to relook at IRC 130 and 104(a)(2). Speaking the morning after the 2014 election, Kelly labeled the Republican victory a political "tsunami" and the odds on new tax legislation in 2015 as a "toss up".

Case Law Update

For the uninitiated, Nesbitt prefaced his secondary market case law summary with several applicable "lessons": if you don't pay a seller the agreed amount, you will have trouble; courts take the "best interest" standard seriously; sometimes the prudent action is to dismiss a proposed transfer and move on; if you don't get what you want, don't move to another court or arbitration; words in a contract matter and words in a court order matter more; although rare in Texas, sometimes it rains (it did in San Antonio) and sometimes RSL Funding (formerly Rapid Settlements) wins cases.

Washington Square v. RSL

Among several significant cases, Nesbitt gave top billing to Washington Square v. RSL Funding wherein transfer company Washington Square (aka Imperial) sued transfer company RSL Funding in Texas for tortious interference with a transfer agreement that had not yet been approved in a final court order. The Court of Appeals of Texas, Fourteenth District, held:

• RSL was “justified” in interfering with Imperial’s proposed transfer agreement prior to court approval because obtaining a better price was in the seller's "best interest".
• Transfer agreements that have not received court approval are not enforceable on public policy grounds and therefore cannot justify legal actions for tortious interference with existing contracts.

Acknowledging this case represents a "big win" for RSL, Nesbitt also predicted "chaos" for the secondary market as rival transfer companies increasingly search court records and seek to outbid other transfer companies who are awaiting court approvals. Subsequent NASP panels of transfer attorneys and judges, as well as sidebar discussions with angry representatives of companies outbid by competitors, confirmed Nesbitt prediction and suggested a strategic marketing shift is already occurring among transfer companies.

Brenston Case

In a separate presentation, Nesbitt reviewed the Peachtree Settlement Funding v. Brenston case and its case law "progeny". In the Brenston case, the Illinois Supreme Court in December 2013 denied Peachtree's petition for review of an Illinois Appellate Court decision which found multiple Peachtree-Brenston transfer orders, which Illinois Circuit Courts had approved in accordance with the Illinois transfer statute, to be void ab initio because:

• Peachtree did not file all settlement documents with the transfer court.
• Peachtree concealed "by omission" the existence of anti-assignment provisions which the Appellate Court found "material".
• The conduct of Peachtree and it's attorney amounted to an "affirmative falsehood and a fraud upon the trial court".

An Amicus curiae brief filed by NASP with the Illinois Supreme Court stated: "Without the certainty and finality of a court order, there is no viable secondary market.... Because every structured settlement contains boilerplate language that purports to limit or restrict assignability, every Illinois court approved transfer could be subject to challenge at any time."

As NASP predicted, the denial of Peachtree's petition for review was quickly followed by Sanders v. JGWPT Holdings, a class action lawsuit, accusing JGWPT Holdings, Inc., several affiliate companies including J.G. Wentworth and Peachtree Settlement Funding, and Illinois attorney Brian Mack, of violating the Illinois Consumer Fraud and Deceptive Business Practice Act (ICFA). The case has since been removed to the Federal Court in the Southern District of Illinois with that court expected to rule on various motions and petitions in February 2015.

As a result of Brenston, according to Nesbitt:

• Many Illinois structured settlement recipients lack liquidity options because many transfer companies are avoiding the state.
• Some transfers continue to be completed in Illinois when all interested parties agree to waive existing anti-assignment language.
• Some annuity providers, however, will not waive anti-assignment provisions in Illinois cases while others evaluate them on a case-by-case basis.
• Attorneys for some annuity providers are citing Brenston to challenge transfers in other states.

Discounted PV and Applicable Federal Rate

The NCOIL State Structured Settlement Protection Model Act, which NSSTA and NASP have agreed to support, contains a definition for "discounted present value" linked to "the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service." This rate is generally higher than, and unrelated to, the discount rate actually incorporated into most structured settlement transfers. Nesbitt concluded his conference presentations with a detailed critique of NCOIL's discounted PV definition and explained why NASP believes this definition confuses rather than informs state judges.

Additional Presentations

NASP's conference featured two additional individual presentations.

Former NSSTA Deputy Executive Director Peter Arnold predicted future integration of the primary and secondary structured settlement markets. To support his prediction, Arnold reviewed NSSTA's historic attitude toward "factoring transactions." Arnold also highlighted NSSTA membership qualifications which currently prohibit members from "actively soliciting and promoting structured settlement factoring transactions to individuals who are receiving periodic payments under structured settlements."

Pery Krinsky, an ethics-based defense attorney who serves as Chairman of the Committee on Professional Discipline of the N.Y. County Lawyers' Association, spoke about legal ethics issues. He did not mention Paris & Chaiken, a New York law firm accused of falsifying court orders approving structured settlement transfers, which has reportedly retained Krinsky as outside ethics counsel for assistance with these cases.

Panel Discussions and Breakout Sessions

NASP's 2014 conference included four panel discussions and four breakout sessions (see listings below). Panel highlights and issues addressed:

• Drafting Transfer Agreements - Assigned payments vs. assigned payment rights; clients vs. sellers or annuitants relating to transfer company fiduciary responsibilities; representations and warranties; holdbacks and deductions; limited powers of attorney; testamentary agreements; arbitration provisions.
• Primary Market - NSSTA Fall conference; MSA market; primary market surveys; impact of Affordable Care Act; ELNY update; PLR-143928-13 and "hardship conversions"; settlement planning developments; re-cycled structured settlements; Bipartisan Budget Act of 2013; provider company departures; primary/secondary cooperation opportunities; best and worst business practices; annuity provider issues with transfer companies.
• Responding to Insurer Transfer Objections - Confirming his company's "good relationship" with transfer companies, Madis Smit of State Farm highlighted several insurer issues: unanticipated costs of reviewing 15 to 20 transfers per week; inadequate notice (need at least seven days); difficulty in locating some requested settlement documents; split payment problems resulting from insurer technology limitations; "three touches" constitute an insurer ideal (petition; order; notice of approval). Additional issues discussed: proposed documents from insurers that do not meet state-specific requirements; protecting public information in case filings.
• Judicial Panel - "Best interest" considerations; multiple transactions; common mistakes by petitioners; privacy issues; discount rates; independent professional advisors. The judges also were encouraged to identify questions for the audience - and did so. All three judges expressed a need and interest for additional education about the secondary market.

Alexander Hamilton Award

NASP honored James Lokey as the 2014 recipient of its Alexander Hamilton Award. Lokey completed the first transfer of structured settlement payment rights in 1986 thereby launching the secondary market. NASP has bestowed its Alexander Hamilton Award seven times "to distinguished individuals who have supported and defended the right to free alienability of property rights." NASP considers this right to be its own cornerstone and the foundation of the structured settlement factoring business.

Topics and Speakers

• Welcome Remarks - Patricia LaBorde.
• Legislative and Regulatory Developments - Jack Kelly.
• Legislative Update - Earl Nesbitt.
• Drafting Transfer Agreements - Jason Sutherland and Brian Mack.
• Hamilton Award - James Lokey.
• Integration of Primary and Secondary Markets - Peter Arnold.
• Primary Market Panel - Patrick Hindert (Moderator), Daniel Durbin, Medora Marisseau, Mark Wahlstrom.
• Ethics Issues - Pery Krinsky.
• Responding to Insurer Transfer Objections - Michael Damore (Moderator), John Shafai, John Mott, Michael Green, Steven Mastrantonio, Madis Smit.
• Break Out Sessions
  • Preparing vs.Coaching a Problem Payee - Laryssa Korduba and Elyse Strickland.
  • Addressing Judicial Concerns - Roger Dunaway and Andrew Hillman.
  • Life Contingent Issues - Michael Fasano and Dan Bonner.
  • Bankruptcy Issues - Michael Damore and Adam Zoldessy.
• Illinois Litigation and Discounted Present Value - Earl Nesbitt.
• Judicial Panel - Matthew Bracy (Moderator), Judges Lynne Parker, Patricia Summe, Travis Francis.

For S2KM reports of additional 2014 educational conferences plus eight of the nine prior NASP conferences, see the structured settlement wiki.

SSP 2014 Secondary Market Panel

In addition to its other accomplishments (most notably publication of "Standards of Professional Conduct for Settlement Planners"), the Society of Settlement Planners (SSP) has distinguished itself by sponsoring educational programs addressing issues, featuring speakers and permitting perspectives the more defense-oriented National Structured Settlement Trade Association (NSSTA) traditionally has been reluctant or unwilling to offer.

SSP's 2014 Annual Conference, to be held April 27-29 in New Orleans, promises to continue this more open-minded educational tradition.

As one example,  SSP's Secondary Market Panel discussion will feature two leading structured settlement transfer legal experts whose clients typically oppose each other in significant secondary market cases:

• Stephen R. Harris - among other roles and accomplishments, Stephen (a partner at Drinker Biddle whose clients include annuity providers) recently served as co-Chairman of NSSTA's Legal Committee.
• Earl S. Nesbitt - in addition to representing factoring companies, Earl (a founding partner of Nesbitt, Vasser & McCown) serves as Legal Counsel and Executive Director for the National Association of Settlement Purchasers (NASP).

SSP's Secondary Market Panel, which will be moderated by Patrick Hindert (S2KM's Managing Director and blog author), should be educational and entertaining - and hopefully somewhat controversial. Here are some of the questions the featured panelists will address.

Overview

• Is the secondary market good or bad for the primary structured settlement market?
• Among other objectives, IRC 5891 and the Model State Structured Settlement Protection Act (Model Act) were enacted to protect claimants from predatory secondary market business practices. Both NSSTA and NASP supported these statutes. How successfully have these statutes accomplished their objective to protect structured settlement recipients?
• Based upon your experience, what changes or amendments, if any, would improve the Model Act?
• Would adding a multiple bid requirement as part of the "best interest" test improve the secondary market?

Troubling Developments

• During NASP's 2013 annual conference, former NASP President Robin Shapiro expressed personal outrage about "troubling reports concerning the structured settlement factoring business" including:
  • Falsified transfer orders.
  • Inter-state forum shopping.
  • Short-cutting waiting periods and disclosure requirements.
  • Expediting hearing dates before preferred judges.
  • "Competing bids" from the same company.
• How prevalent are these business practices?
• What have NASP, NSSTA and/or other primary market participants done to address these issues? What should they do?

Falsified Orders

• Reports indicate a former paralegal at the New York law firm Paris & Chaikin falsified as many as 100 transfer orders?
• What happened? What is the status?
• How will these events impact the secondary market and its various participants including: the law firm, its secondary market clients, the annuity providers and the structured settlement recipient/transferors?

Anti-Assignment Restrictions

• Recent (Brenston) and current class action (Sanders) cases in Illinois address the impact of "anti-assignment" restrictions on transfers of structured settlement payment rights.
• What is the status of these cases and related litigation? What are the issues?
• Does the recommended assignment language in NSSTA's Model Qualified Assignment and Release Agreement solve this problem - or is some other solution necessary?
• What case-specific responsibilities do structured settlement brokers, settlement planners and other plaintiff advisers have related to anti-assignment restrictions?

Primary Market Responses

• MetLife recently adopted controversial new business practices whereby it opposes transfers that involve split payments as well as court-approved servicing arrangements.
• What is MetLife's rationale and objective?
• How are these business practices impacting the secondary market?
• The Florida state legislature is considering a bill that would add a maximum discount rate (similar to North Carolina) to its existing protection act..
• Is this a good idea?
• How has the North Carolina provision impacted the secondary market in that state?
• Why haven't more annuity providers offered commutation-like alternatives to third party factoring transactions? What impact would such alternatives have on the existing primary and secondary markets?

RLS Arbitrations

• RLS (formerly Rapid Settlements) has attempted to use the Federal Arbitration Act to side step state structured settlement protection statute requirements.
• What is the status of the related RLS litigation?

Conclusion

• What other secondary market issues do you see as important for the future of structured settlements?
• What opportunities exist for primary and secondary structured settlement market cooperation? What is preventing this cooperation?

For background about these secondary market issues, see the structured settlement wiki and more specifically these prior S2KM blog posts:

• Structured Settlements 2013 - Secondary Market
• Secondary Market Update - February 3, 2014
• Sanders v. JGWPT Holdings

For more detailed analysis of secondary market issues, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Secondary Market Update

This structured settlement secondary market report updates S2KM's most recent secondary market reporting:

• Structured Settlements 2013 - Secondary Market
• Asta Funding Acquires CBC Settlement Funding

Falsified New York Transfer Orders

S2KM previously reported that a New York law firm had falsified court orders approving structured settlement transfers in as many as 100 cases - and possibly more. Industry sources have identified the responsible law firm as Paris & Chaikin where a former non-lawyer employee, apparently created the fraudulent, court-related documents. The primary transfer companies represented by Paris & Chaikin in these transactions were J.G. Wentworth, and its affiliate Peachtree Financial Solutions, as well as Stone Street Capital.

Paris & Chaikin has retained Pery D. Krinsky , according to industry sources, as outside ethics counsel for assistance with these cases. An online 2013 Speaker Biography states in part: "Pery’s ethics-based defense litigation practice focuses on: attorney ethics matters, representing judges before the Commission on Judicial Conduct, criminal defense matters, art law ethics & litigation matters, and representing law school students before the Committees on Character & Fitness. Pery serves as the Chair of the Ethics Committee of the Entertainment, Arts & Sports Law Section of the N.Y. State Bar Association. Pery also serves as Chair of the Committee on Professional Discipline of the N.Y. County Lawyers’ Association."

Ongoing investigations of these fraudulent transfers are being conducted by the New York State Courts and the New York County District Attorney's Office. Primary and secondary market representatives with whom S2KM has discussed these fraudulent transfers disagree on how they are impacting judicial attitudes toward structured settlement factoring transactions and factoring companies in New York.

Proposed Amendment to IRC 5891

Representative Matthew Cartwright (D-Pa) has introduced H.R. 3897, a bill which, if enacted into law, would amend IRC 5891 and impose standards and procedures which are substantially different than currently provided by the Model State Structured Settlement Protection Act (Model Act) and almost all of the 48 related state statutes.

The most controversial provision of H.R. 3897 appears to be proposed new paragraph (5) under current subsection (b) titled "Transaction Requirements" which would provide in part: "(A)" In General - A transfer of structured settlement payment rights shall be treated as satisfying the requirements of this paragraph only if the transfer meets the following requirements:

• "(1) The annual discount rate of the consideration for the transfer, determined by taking into account charges, fees and other expenses, does not exceed the prime rate plus 5 percentage points.
• "(2) The aggregate amount of the charges, fees and other expenses payable by the payee do not exceed 2 percent of the value of the consideration to the payee (net of such charges, fees and other expenses)."

This H.R. 3897 language is similar to provisions in the North Carolina structured settlement protection act. North Carolina is one of only three states which currently impose statutory ceilings on discount rates. A recent bill to amend the Florida structured settlement protection act likewise proposes a discount ceiling similar to North Carolina.

Note: following years of conflict, the primary market National Structured Settlement Trade Association (NSSTA) and secondary market National Association of Settlement Purchasers (NASP) reached an agreement in 2000 to support a combined federal and state legislative solution for structured settlement transfers which resulted in IRC 5891 and the Model Act. It is S2KM's understanding this agreement remains in effect.

Peachtree Settlement Funding v. Cathy Brenston

In 2013, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, held that an Illinois state court, which had previously approved transfers requested by Brenston:

• Had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and
• Had no authority under the Illinois protection act to approve the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions.

The Illinois Supreme Court subsequently denied Peachtree's petition for appeal of this decision leaving both primary and secondary structured settlement market participants uncertain about the case's precedential meaning and scope. In an Amicus curiae brief, NASP asserted the Appellate Court decision could render the Illinois transfer statute "a practical nullity"

S2KM has learned that a companion case involving Peachtree and Brenston remains on appeal in the 3rd District Illinois Court of Appeals and will be argued February 27, 2014. The parties had previously stayed their appeal waiting for the Illinois Supreme Court to rule on the 4th District case.

In a recent Florida case, summarized in this Drinker Biddle Structured Settlement Alert, a Sumter County Circuit Court Judge cited the Brenston case as authority in ruling that an April 2011 transfer order was void ab initio, and that resulting arbitration awards were “impotent and without substance.”

For additional information about structured settlements and anti-assignment provisions, see S2KM's prior blog post "Anti-Assignment Restrictions".

METLife Split Payment Policy

During NASP's 2013 Annual Conference, NASP Executive Director Earl Nesbitt reported that MetLife has begun actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.

Primary market proponents of MetLife's new policy argue that at least 27 state structured settlement protection acts prohibit partial transfers. In addition, they maintain that servicing contracts represents an annuity provider obligation and that post-transfer problems can occur from subsequent, multiple transfers resulting from such occurrences as divorces, child support obligations and improper transfers by trust beneficiaries.

In response, Nesbitt believes this "Hobson's choice", forcing injury victims to sell all or nothing, will cause "deep trouble" for MetLife and other annuity providers who may adopt MetLife's split payment policy. Nesbitt argues that annuity providers are protected by stipulation agreements and administrative fees. He predicts litigation, legislation and attorney general investigations could result.

Stock Market Prices

• JGWPT Holdings, Inc. - JGWPT Holdings IPO, which occurred November 8, 2013, was poorly received with JGWPT Inc. reducing the initial offering price of its common stock from $19-$22 per share to $14.00 which then traded down to the high $12s. Since then, the common stock, which now trades on the New York Stock Exchange (symbol: JGW), reached a high of $18.00 per share and closed Friday January 31 at $16.992 per share.
• Asta Funding Inc. - Asta, a publicly traded company (Nasdaq: ASFI), acquired an 80% ownership interest in CBC Settlement Funding, LLC ("CBC"), a structured settlement factoring company on December 31, 2013. Following announcement of the purchase on January 7, 2014, Asta's stock price closed during regular trading hours at $8.28 per share. The stock closed Friday January 31 at $8.20 per share.

For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.

Structured Settlements 2013 - Secondary Market

While Berkshire Hathaway quietly assumed leadership among primary market structured settlement annuity providers during 2013, J.G. Wentworth (JGW) continued to consolidate its control of the secondary market with the same "subtlety" and ubiquitousness that have characterized its late-night television advertisements.

Various industry experts estimate JGW's secondary structured settlement market share, following its 2012 merger with Peachtree Financial Solutions (Peachtree), now totals somewhere between 50% and 75%, and the combined JGW/Peachtree's share of industry profits now exceeds 80%.

JGWPT Holdings Inc. IPO

JGW's 2013 apogee occurred November 8 when JGWPT Holdings Inc.'s IPO produced what is currently the only publicly traded structured settlement company. The IPO was poorly received with JGWPT Inc. reducing the initial offering price of its common stock from $19-$22 per share to $14.00 which then traded down to the high $12s.

The stated purposes for JGWPT's IPO were to pay down some of JGW's $572 million debt and to provide its pre-IPO equity holders (JLL Partners) an opportunity to earn additional profits. Post-IPO, JLL Partners continues to hold a 39% economic interest and a 63% voting interest in JGWPT while four of its partners sit on the company's Board of Directors.

JGWPT's common stock, however, now trades on the New York Stock Exchange (symbol: JGW) and closed Friday (December 27, 2013) at $17.10 per share. At least one analyst has informed S2KM he believes the stock is currently worth at least $20 per share based upon JGW's "dominant franchise", access to securitization markets, low costs relative to competitors and "incalculable returns on capital", among other factors.

Problems and Controversies in 2013

As S2KM reported in this prior blog post, JGW, which was founded in 1995, had experienced a tumultuous history prior to 2013 - and problems and controversies continued to plague the company during 2013:

• Abandoned Sale - Bloomberg News reported in January 2013 that JLL Partners had abandoned plans to sell the company after bids failed to meet expectations. Earlier reports had indicated that JLL Partners was seeking a $1 billion purchase price for JGW from private-equity firms.
• Ratings Downgrade - Moody's Investors Service (Moody's) announced in February 2013 a downgrade of its Corporate Family Rating (CFR) for JGW from B3 to Caa1. Under Moody's credit rating scale, "Caa1" signifies a long-term rating "rated as poor quality and very high credit risk." Moody's CFR ratings for JGW are separate and distinct from financial agency ratings applicable to JGW structured settlement securitizations which historically have been rated as high quality and low risk investments.
• Shareholder Distribution - Moody's announcement confirmed "JGW is undergoing a leveraged recapitalization that will result in a tripling of the company's corporate debt as it pays its shareholders a very substantial dividend....Net proceeds from the $425 million Senior Secured Term Loan issuance will be used to finance a $309 million capital distribution to JGW's shareholders as well as to repay an existing $142 million term loan."
• Falsified Court Orders - JGWPT's amended S-1 statement, filed October 28, 2013 in anticipation of its public offering, included the following statement under a section titled "RISKS RELATED TO OUR BUSINESS OPERATIONS: ... there have in the past and may be in the future deficiencies in court orders obtained on our behalf by third parties that result in those court orders being invalid, including as a result of failures to perform according to our requirements and acts of fraud,..." That statement apparently references as many as 100 falsified court orders in New York approving JGW structured settlement transfers.
• Brenston Case - The Illinois Supreme Court denied Peachtree Settlement Funding's petition for appeal of the 4th District Illinois Court of Appeals' decision in the Settlement Funding v. Cathy Brenston case. The earlier Court of Appeals decision held the Illinois state court, which had previously approved transfers requested by Brenston 1) had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and 2) had no authority under the Illinois protection act to approve the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions. In an Amicus curiae brief, the National Association of Settlement Purchasers (NASP) asserted the Appellate Court decision will render the Illinois transfer statute "a practical nullity"
• Competitor Outrage - During NASP's 2013 annual conference, in remarks apparently directed at JGW, former NASP President Robin Shapiro expressed personal outrage about "troubling reports concerning the structured settlement factoring business" including:
  • Falsified transfer orders.
  • Inter-state forum shopping.
  • Short-cutting waiting periods and disclosure requirements.
  • Expediting hearing dates before preferred judges.
  • "Competing bids" from the same company.
• NASP Conference - In addition to Shapiro's comments, NASP's 2013 annual conference focused on controversial issues which have historically divided the primary and secondary structured settlement markets. In her keynote remarks, NASP President Patricia LaBorde encouraged diverse perspectives and re-inforced NASP's policy of politically unobstructed learning. "We want to hear from all structured settlement stakeholders - even if they disagree with us or don't like who we are," LaBorde stated. "We are here to listen. We are here to improve."
• METLife Split Payment Policy - During his NASP presentation, Executive Director Earl Nesbitt reported a controversial new business practice that is troubling JGW and other transfer companies. MetLife apparently is now actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.
• Educational Forums - In addition to the NASP conference, JGW competitor Strategic Capital sponsored an online structured settlement "expert roundtable" which examined secondary market business practices and issues. S2KM Managing Director Patrick Hindert participated in the expert roundtable and also served as moderator for NASP's annual primary market panel discussion.
• Former Executives' Lawsuit - Another 2013 JGW nadir occurred in October when two former JGW executives and directors filed a Complaint in the Court of Chancery of the State of Delaware against current JGW CEO David Miller, three current JGW Directors and multiple JGW affiliate companies seeking to enforce a Tax Receivables Agreement (TRA) under which they claim they are owed approximately $35 million. A copy of the Complaint, which is posted on the structured settlement wiki, highlights JGW's complex organizational history as well as a shareholder focus disconnected from the welfare of its customers.

SEC Addresses Structured Settlement Transfers

Responding in part to concerns about secondary market business practices, the Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy issued an Investor Bulletin in 2013 titled "Pension or Settlement Income Streams: What You Need to Know Before Buying or Selling Them".

The Investor Bulletin highlights questions potential sellers and investors should ask before proceeding with proposed structured settlement transfers and includes a number of additional warnings and resource links.

A responding article , written by two industry leaders, characterized the SEC Bulletin as "misleading and in some cases inaccurate concerning the sale of structured settlement payment streams and factored structured settlements as an investment vehicle." The authors assert the SEC Investor Bulletin should have clarified the following features of structured settlement factoring transactions:

• "Always court ordered"
• "No negative tax consequences to the seller"
• "Investors' rights"

Secondary Market Growth

Despite problems and controversies, the U.S. structured settlement secondary market appears to have experienced additional growth during 2013. Based upon various industry sources, and subject to future revisions based upon subsequent information, S2KM estimates the 2013 structured settlement secondary market has increased approximately 7% compared with 2012 resulting from approximately 12,800 transfers and $385 million PV of secondary market purchases.

Adding these 2013 numbers to prior historic estimates, S2KM estimates:

• Approximately 149,000 structured settlement transfers have occurred since 1986;
• Involving approximately 74,000 recipients - many of whom have made multiple transfers;
• With approximately $4.4 billion PV in aggregate sums paid to those recipients.
• For an average of approximately $30,000 per transfer.

For comparison, S2KM estimates the primary market has sold approximately $139 billion PV of structured settlement annuities to approximately 800,000 recipients since 1975 with an average premium of approximately $174,000.

For additional S2KM reporting about the secondary market, see the structured settlement wiki. For additional S2KM 2013 annual reports, see:

• Part 1 - Primary market.
• Part 2 - Settlement planning.

J.G. Wentworth Update

November was an "interesting" month for JGWPT Holdings Inc. (JGWPT), the leading purchaser of structured settlement payment rights, which markets under the names of J.G. Wentworth (JGW) and Peachtree Settlement Funding (Peachtree).

Significant developments included: 1) falsified transfer orders in New York; 2) an initial public offering (IPO); and 3) a refusal by the Illinois Supreme Court to review the 4th District Illinois Court of Appeals' decision in the Settlement Funding v. Brenston case.

Also during November, at the most recent National Association of Settlement Purchasers (NASP) Annual Conference:

• Former NASP President Robin Shapiro expressed his personal outrage about "troubling reports concerning the structured settlement factoring business." At least some of Shapiro's criticism appeared to be directed toward some JGWPT business practices.
• NASP Executive Director Earl Nesbitt reported a controversial new business practice that is troubling JGWPT and other transfer companies. MetLife apparently is now actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.

As S2KM previously reported, JGW, which was founded in 1995, had already experienced a tumultuous recent history prior to November:

• On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
• Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
• During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
• According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
• Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
• By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
• Also in 2011, JGW merged with Peachtree in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
• On January 30, 2013, Moody's Investors Service announced a downgrade of its Corporate Family Rating (CFR) for JGW from B3 to Caa1. Moody's also issued the same downgrade for JGW's $425 million senior secured term loan and $20 million senior revolving credit facility issued by Orchard Acquisition Company, a subsidiary of JGW.

Estimates of secondary market experts interviewed by S2KM in late 2012 of the post-merger 2012 market share of the JGW and Peachtree varied from a low of 50% to a high of 75%. These experts also believed JGW/Peachtree's share of the estimated 2012 U.S. secondary structured settlement market profits of $120 million was $100 million, or 83%.

JGWPT Holdings Inc.'s Amended Form S-1 Registration Statement, filed October 28, 2013 prior to its November 8, 2013 public offering of common stock, provides more recent financial and marketing information about JGW's holding company. Selected data:

• JGWPT's 2012 revenue sources included: structured settlements (89% of revenues), lotteries (6%), presettlement funding (3%), and non-structured settlement annuities (2%).
• For the year ended December 31, 2012 and the six months ended June 30, 2013, JGWPT:
  • Generated revenue from structured settlement purchases totalling $416 million and $222 million.
  • Generated cash from the net financing activities of its warehouse financing and permanent securitization financing facilities totalling $314.8 and $131.3 million, not counting $29.9 million generated from its most recent July 2013 securitization.
  • Used cash of $225.7 million and $163.3 million in its operating activities.
• During 2013 prior to it IPO, JGWPT distributed $459.6 million to its "common interest holders" resulting in members' capital of $38.4 million and negative tangible equity of ($96.2 million) as of June 30, 2013.
• Since 1995, JGWPT has
  • Spent approximately $585 million in marketing through multiple media outlets including $216 million during the past three years.
  • Purchased more than $9.1 billion of structured settlement payments. Its average customer has completed two separate transactions.
• During an average four week period, JGWPT generates more than 510 million advertising impressions which result in 80% of its target audience viewing its advertisements five or more times during that four week period.
• Kantar Media estimates that JGW and Peachtree have each spent approximately five-times more than their nearest competitor on television advertising since 2008 and together have spent over 80% of the total amount spent by all participants in the U.S. secondary structured settlement market.
• JGWPT's customer databases included more than 121,000 current or prospective structured settlement recipients as of July 31, 2013 entitled to approximately $31 billion of unpurchased structured settlement payments.
• JGWPT's nationwide attorney network covers over 3,000 counties. Approximately 95% of the proposed structured settlement purchases JGW and Peachtree present to a judge have been approved.

The stated purposes for JGWPT's IPO were to pay down some of its $572 million debt and to provide its pre-IPO equity holders (JLL Partners) an opportunity to earn additional profits. Post-IPO, JLL Partners continues to hold a 39% economic interest and a 63% voting interest in JGWPT while four of its partners sit on the company's Board of Directors.

JGWPT originally anticipated raising $300 million by selling 12.2 million Class A shares at a price between $19 and $22 each. When demand didn't materialize, the IPO opened at $13 per share and fewer shares were offered.

JGWPT's stock trades on the New York Stock Exchange (symbol: JGW) and closed today (December 2, 2013) at $16.45 per share. At least one financial analyst with whom S2KM has spoken believes JGWPT's stock remains substantially undervalued and is worth at least $20 per share.

For additional S2KM reporting about J.G. Wentworth and the structured settlement secondary market, see the structured settlement wiki.

Outrage or Solutions?

Responding to S2KM's prior blog post titled "New York Transfer Orders Falsified", one primary market structured settlement leader has written to S2KM asking "where is the outrage?"

The initial answer is likely "almost everywhere" within both the primary and secondary structured settlement markets - recognizing, of course, that this story has just recently been made public most significantly in JGWPT Holdings Inc.'s Amended S-1 Statement, filed October 28, 2013 prior to its November 8, 2013 public offering of common stock.

Until the facts of this apparent fraud become public (possibly through subsequent lawsuits), many key questions remain unanswered for most industry participants. Among those questions:

• Who was responsible?
• Why did they falsify the orders?
• How many cases are involved?
• Among collateral case participants, who knew, or should have known, what and when?
• What will be the consequences?
• Will the Internal Revenue Service impose IRC 5891 excise taxes?

Although outrage may seem justifiable as an appropriate industry response:

• Who should be the target of the outrage?
• What possible and realistic solutions exist?

Robin Shapiro's NASP Presentation

S2KM first learned about the falsified transfer orders at last week's NASP conference . During a luncheon presentation, former NASP President Robin Shapiro expressed his personal outrage about "troubling reports concerning the structured settlement factoring business." In addition to falsified transfer orders, Shapiro also highlighted and criticized other secondary market business practices:

• Inter-state Forum Shopping - "It has been reported that some factoring companies are signing up out-of state sellers to do deals in jurisdictions where judicial scrutiny is known to be limited -- listing what turns out to be a PO Box as their residence address."
• Short-cutting Waiting Periods and Disclosure Requirements - Some factoring companies require sellers to "sign contracts and backdate [Shapiro's emphasis] disclosures so as to make it appear, at least in a paper file, that the seller was afforded the statutory 10 day wait between disclosure and signing."
• Expediting Hearing Dates Before Preferred Judges - "Counsel for originators file multiple 'John Doe' court petitions as place-holders in a busy court, amending later with specific names and amounts, to secure an expedited hearing date and perhaps a hearing before a preferred judge."
• "Competing Bids" from the Same Company - Consumers "get what appear to be 'competing bids' from two brands that are really one and the same company. The consumer thinks they've shopped around. Later, when the consumer discovers the truth, they feel tricked. And they complain - online and elsewhere."

"Perhaps most disturbing", Shapiro stated, is the public disclosure in JGWPT Holdings Inc.'s Amended S-1 Statement. "Think about that", Shapiro stated. "There may have been and may be "an unknown number of court orders that are "INVALID."' (Shapiro's emphasis).

Settlement Funding v. Cathy Brenston

Shapiro did not address Settlement Funding v. Cathy Brenston during his NASP presentation. NASP Executive Director Earl Nesbitt, however, provided conference attendees with a detailed report about this high profile and controversial case during his NASP conference case law update. Currently subject to a petition for review by the Illinois Supreme Court, this case (which also involves a J.G. Wentworth affiliate) concerns "invalid transfers" but not "falsified transfers"

In the Brenston case, a 5th District panel, sitting for the 4th District Illinois Court of Appeals, previously held that because Brenston’s settlement agreement contained an enforceable anti-assignment provision, the transfer court had a duty to enforce that provision and “it had no authority under the Act to approve” the transfer petitions. If upheld, the Brenston decision could prove more damaging to the structured settlement industry than the New York falsified transfers.

Shapiro's Proposed Solution

"If not addressed," Shapiro stated, "this kind of stuff is going to provoke a regulator and investor reaction that none of us is going to like. The answer is not simply making speeches here or making 'representations' that the rules are being followed. We're past that."

At his own factoring company, Shapiro has retained independent third party due diligence firms to sample and audit its receivable files and to provide independent third party verification of its compliance - "going forward AND back."

"As independent reviewers," Shapiro stated, "these auditors will be able to look where they want and test whatever they want. We don't have anything to hide. But we intend to let them know where to look and what to look for to expose corner-cutting."

Business Practices and Models

Bad business practices can destroy the structured settlement industry - whether they occur in the primary or secondary market.

Although outrage may seem appropriate, solutions are needed.

As industry leaders inevitably renew their advocacy for improved business practices and business models, they might benefit by reading (or re-reading) "Getting to Yes" which at one time represented a guidebook of sorts for the primary structured settlement market.

Perhaps the "Getting to Yes" method can be useful to help a divided structured settlement industry address problems that impact all industry stakeholders:

• Separate the people from the problem.
• Focus on interests not positions.
• Invent options for mutual gain.
• Insist on using objective criteria.

For additional information about secondary market business practices, see section 16.02[2] of "Structured Settlements and Periodic Payment Judgments" (S2P2J) and the structured settlement wiki.