1. SEC Charges Offshore Company in Massive Life Settlement Bonding Fraud; 2011-15; January 19, 2011
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SEC Charges Offshore Company in Massive Life
Settlement Bonding Fraud
FOR IMMEDIATE RELEASE
2011-15
U.S. Attorney and DOJ Announce Arrests in Simultaneous Criminal
Action
Washington, D.C., Jan. 19, 2011 — The Securities and Exchange
Commission today charged Provident Capital Indemnity Ltd. (PCI), its
president, and its purported outside auditor with conducting a massive life
settlement bonding fraud.
Additional Materials
SEC Complaint
According to the SEC’s complaint filed in U.S. District Court for the Eastern
District of Virginia, PCI is an offshore company located in Costa Rica that
provides financial guarantee bonds on life settlements and claims to protect
investors’ interests in life insurance policies by promising to pay the death
benefit if the insured lives beyond his or her estimated life expectancy.
From at least 2004 to March 2010, PCI issued approximately 197 bonds
backstopping numerous bonded offerings of investments in life insurance
policies with a face value of more than $670 million. The PCI bonds were a
material component of numerous third-party life settlement offerings in the
U.S. and abroad.
The SEC alleges that PCI, its president Minor Vargas Calvo (Vargas), and
purported outside auditor Jorge L. Castillo misrepresented PCI’s ability to
satisfy its obligations under its bonds. They made material
misrepresentations about the assets that backed PCI’s bonds, PCI’s credit
rating, the availability of reinsurance to cover claims on PCI’s bonds, and
whether PCI’s financial statements had been audited.
The U.S. Attorney’s Office for the Eastern District of Virginia and the Fraud
Section of the Department of Justice’s Criminal Division also announced
simultaneously a parallel criminal action against the defendants and the
arrests of Vargas and Castillo.
“PCI’s bonds helped market investments in insurance policies, but neither
PCI’s word nor its bond could be trusted,” said Stephen L. Cohen, an
Associate Director in the SEC’s Division of Enforcement. “Accountants who
let companies use their audit reports as a rubber stamp can expect to be
held accountable.”
According to the SEC’s complaint, a life settlement investment is illiquid and
open-ended without a bond because the investment’s payout date and
return are dependent upon the date of the insured’s death. PCI’s bonds
offered a fixed maturity date for the investments because PCI’s bond
obligated PCI to pay investors (directly or indirectly through the life
settlement issuer) the face value of the underlying insurance policy by a
date certain if the insured lived past his life expectancy date.
http://www.sec.gov/news/press/2011/2011-15.htm[28-12-2011 20:12:26]

2. SEC Charges Offshore Company in Massive Life Settlement Bonding Fraud; 2011-15; January 19, 2011
The SEC alleges that PCI, Vargas and Castillo represented to life settlement
issuers, and in turn, the investing public, that Castillo had audited PCI’s
financial statements in accordance with generally accepted accounting
standards. The complaint alleges that Castillo never conducted an audit of
PCI and instead issued clean audit reports at Vargas’s bidding, thereby
supporting the illusion that PCI had materially larger assets and greater
financial wherewithal to support its obligations under the life settlement
bonds. PCI’s “audited” financial statements reflect what appears to be a
fictitious “Long Term Asset” that has comprised some 70 percent to 80
percent of PCI’s total reported assets from at least 2003 to present.
The SEC’s complaint alleges that PCI’s “audited” financial statements were
provided to Dun & Bradstreet (D&B), which issued PCI a favorable rating of
“5 A/S” based exclusively on PCI’s reported net worth. PCI then
misleadingly represented in its marketing materials that D&B’s rating is a
reflection of “successful customer satisfaction” and “the ability to maintain
one of the insurance industry’s lowest loss ratios.” According to the SEC’s
complaint, PCI and Vargas also have represented that PCI was backed by a
“bouquet” of reputable reinsurers that would backstop PCI’s obligations
under its life settlement bonds. PCI did not have that bouquet of
reinsurance.
Last summer, an SEC Life Settlement Task Force established by Chairman
Mary Schapiro released a report noting that the market for life settlements
has grown over the past decade and calling for greater regulatory
coordination and investor protection. The SEC’s Office of Investor Education
and Advocacy today issued an update to its Investor Bulletin on life
settlement investments that was originally published following the release of
that report.
The SEC charged the defendants with violations of Section 17(a) of the
Securities Act of 1933, Section 10(b) of the Securities Exchange Act of
1934, and Exchange Act Rule 10b-5, and alternatively charged Castillo with
aiding and abetting PCI’s and Vargas’s violations of Securities Act Section
17(a) and Exchange Act Section 10(b) and Exchange Act Rule 10b-5. The
Commission also named Desarrollos Comerciales Ronim S.A., PCI’s
managing general agent, as a relief defendant.
Mika Donlon, Michael Fuchs and Josh Felker together with accountants
Regina Barrett and Deborah Russell conducted the Commission’s
investigation, which is continuing. The SEC’s litigation effort will be led by
Suzanne J. Romajas.
The SEC thanks the U.S. Attorney for the Eastern District of Virginia, the
Fraud Section of the U.S. Department of Justice's Criminal Division, the
Virginia Financial and Securities Fraud Task Force, the United States Postal
Inspection Service, the Federal Bureau of Investigation, the Internal
Revenue Service Criminal Investigation Division, the Costa Rican Unidad de
Analisis Financiero, the Ontario Securities Commission, the Gibraltar
Financial Services Commission, the Texas State Securities Board, The Texas
Department of Insurance, and the New Jersey Bureau of Securities for their
assistance.
# # #
For more information about this enforcement action, contact:
Stephen L. Cohen
Associate Director, SEC Division of Enforcement
202-551-4472
C. Joshua Felker
http://www.sec.gov/news/press/2011/2011-15.htm[28-12-2011 20:12:26]

3. SEC Charges Offshore Company in Massive Life Settlement Bonding Fraud; 2011-15; January 19, 2011
Assistant Director, SEC Division of Enforcement
202-551-4960
Suzanne J. Romajas
Assistant Chief Litigation Counsel, SEC Division of Enforcement
202-551-4473
http://www.sec.gov/news/press/2011/2011-15.htm
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