Beyond Structured Settlements

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.

Former Executives Sue J.G. Wentworth

Former J.G. Wentworth (JGW) executives and Directors, Michael Goodman and Gary Veloric, (Plaintiffs) have filed a Complaint in the Court of Chancery of the State of Delaware against current 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.

In addition to Miller, other Defendants include: Paul S. Levy, Francisco J. Rodriguez and Alexander R. Castaldi (Defendant Directors); J.G. Wentworth, Inc. (Wentworth Inc.); J.G. Wentworth LLC (JGW LLC); JGW Holdco LLC (Holdco); JLL JGW Distribution LLC (JLL Distribution); JLL Partner Fund V L.P. (Fund V, and together with JLL Distribution, JLL Entities); and JGWPT Holdings LLC (JGW Peachtree).

The Complaint alleges:

• Plaintiffs and other principals sold the J.G. Wentworth family of companies in 2005 to JLL Distribution, an affiliate of private equity firm JLL Partners, Inc.
• Although Plaintiffs continued as senior officers thereafter, JLL Entities henceforth controlled all J.G. Wentworth affiliate companies.
• Anticipating an eventual public stock offering, JLL Entities in 2007:
  • Formed 1) Holdco to own all the J.G. Wentworth subsidiaries; and 2) Wentworth, Inc. as a vehicle for the public offering. Wentworth Inc.also served as Managing Member of Holdco and never had any assets of its own except for its interest in Holdco.
  • Determined they could maximize the value of their JGW investment by separating the value of equity from the value of various tax benefits.
    • For tax purposes, factoring companies recognize: 1) revenue over the term of the structured settlement payment rights they purchase; and 2) operating expenses when they occur.
    • This timing difference generates potential tax deferrals which, for LLCs like the JGW affiliates, are passed through to individual members.
    • Various exchanges of membership interests among JGW affiliates increased the tax basis of certain assets and resulted in additional tax benefits for Wentworth Inc.
  • Implemented a TRA in conjunction with the sale of stock in Wentworth, Inc. to participants (including Plaintiffs) in a private offering.
    • TRAs are frequently used to monetize tax benefits in IPOs because public stockholders may not pay full value for a company's tax attributes.
    • TRAs allow pre-IPO equity owners to receive the value of a company's tax attributes as those tax attributes are utilized following an IPO.
• Under the TRA, Wentworth Inc. agreed to pay to Plaintiffs and other principals 85% of its tax benefit upon certain circumstance including a change in corporate control.
• Because Wentworth, Inc. (a holding company) had no assets of its own, Holdco (another holding company) agreed in its LLC Agreement to provide Wentworth, Inc. with the money needed to satisfy the TRA obligation.
• Following the 2008 financial crisis, Wentworth, Inc., Holdco and JGW LLC filed for Chapter 11 bankruptcy with a prepackaged plan of reorganization.
• The Bankruptcy Plan expressly stated that Plaintiffs' interests in the TRA and the debtors obligations to Plaintiffs remained "unimpaired" and Holdco, JGW LLC and Wentworth Inc. became jointly and severally liable for the TRA obligations.
• J.G. Wentworth and Peachtree Financial Solutions merged in 2011 leaving JGW LLC as the surviving entity with JGW Peachtree as a subsidiary.
• To avoid TRA payments to Plaintiffs, Wentworth Inc.'s controlling stockholder and Directors structured the JGW Peachtree entities so that Holdco would not be able to fund the TRA payments.
• Without making any TRA payments to Plaintiffs, JGW Peachtree distributed $459.6 million to its principals in 2013.
• Defendants have advised Plaintiffs that no TRA payments will be made because:
  • The TRA obligations were extinguished in bankruptcy.
  • The TRA obligation is limited to Wentworth Inc. which is insolvent.
  • Wentworth Inc. has not earned enough money to pay taxes and therefore cannot receive the tax benefits.
  • Loaning money to Wentworth Inc. is not feasible because Wentworth Inc. is insolvent.
• JGWPT Holdings, Inc.'s November 8, 2013 public offering of common stock (or alternatively the 2011 merger with Peachtree) constitutes a "change in control" triggering the TRA payments due plaintiffs under the TRA.

The Complaint additionally sets forth:

• Causes of action against the various Defendants including: Breach of Contract; Breach of Implied Covenant of Good Faith and Fair Dealing; Breach of Fiduciary Duty; Aiding and Abetting Breach of Fiduciary Duty; and Unjust Enrichment.

• Prayer for relief seeking: to enforce the terms of the Wentworth Inc. TRA and the Holdco LLC Agreement; to award damages including interest, costs and expenses; and to impose a constructive trust or equitable lien of $35 million on the proceeds of the JGWPT Holdings, Inc. IPO.

For a copy of the Complaint, see the structured settlement wiki. For a recent J.G. Wentworth update, see this prior S2KM blog post.

New York Transfer Orders Falsified

Industry sources have informed S2KM that a New York law firm has falsified court orders approving structured settlement transfers in as many as 100 cases - and possibly more.

Some, if not most, of these cases apparently involve J.G. Wentworth (JGW) whose parent company JGWPT Holdings Inc. (JGWPT) completed its initial public offering of common stock November 8, 2013 with a decreased number of shares and a lower price range than originally expected.

As a result of its public offering, JGWPT raised $136.5 million, selling 9.75 million Class A shares for $14 each, according to a company statement. JGWPT is now listed on the New York Stock Exchange under the symbol JGW.

JGWPT's amended S-1 statement, filed October 28, 2013 in anticipation of its public offering, includes the following statements under a section titled "RISKS RELATED TO OUR BUSINESS OPERATIONS":

"We depend on a number of third parties for the successful and timely implementation of our business strategy and the failure of any of those parties to meet certain deadlines could adversely impact our ability to generate revenue.

"Our ability to purchase structured settlement payments and lottery receivables depends on the entry of related court orders. Our ability to complete a securitization and operate our business depends on a number of third parties, including rating agencies, notaries, outside counsel, insurance companies, investment banks, the court system, servicers, sub-servicers, collateral custodians and entities that participate in the capital markets to buy the related debt. We do not control these third parties and a failure to perform according to our requirements or acts of fraud by such parties could materially impact our business. For example, 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, in which case we would need to take additional steps to attempt to cure the deficiencies. We may or may not be successful in curing these deficiencies and, if successful, there may nonetheless be a delay in our receipt of payment streams pursuant to the court orders and if unsuccessful, we may have to repurchase such payment streams from our securitization facilities. Any delay in the receipt of, or the invalidation of, a significant number of court orders or any delay in the closing of a securitization would significantly and adversely affect our earnings." (Emphasis added).

This falsification of New York transfer orders raises a number of questions:

• Who was responsible?
• Why did they falsify the orders?
• How many cases are involved?
• What will be the consequences?
• Will the Internal Revenue Service impose IRC 5891 excise taxes?

For additional S2KM reporting about the structured settlement secondary market, see the structured settlement wiki.