A prolific pension fraud scheme that spread to the insurance industry before being shut down by federal investigators continues to produce fresh lawsuits.
And it also continues to claim new victims -- the latest being Shurwest, a successful Scottsdale, Ariz., independent marketing organization. Shurwest filed for Chapter 11 bankruptcy Aug. 31 after executives realized “there’s not going to be anything left,” one of its attorneys said.
According to bankruptcy documents, Shurwest faces 38 pending lawsuits in state and federal courts.
“We indicated to some of those outside counsel and some of the folks at Shurwest that there may be a way to bring all this litigation into one forum,” said Michael McGrath of Mesch Clark Rothschild, a Tuscon, Ariz., law firm handling the bankruptcy filing. “So that we don’t simply blow each other's brains out litigating this until there's nothing left in the cupboard.”
Most of the plaintiffs are aggrieved policyholders nationwide who were victimized by a pension settlement fraud scheme that was adapted to the sales of hundreds of indexed universal life policies. IUL is one of the industry’s most popular life insurance products.
But one lawsuit is not like the others.
Minnesota Life sued Shurwest July 12 in the U.S. District Court for the District of Minnesota. Minnesota Life, which also faces several lawsuits by policyholders, refunded premiums and rescinded more than 200 IUL policy sales once it discovered the fraud.
Agents altered applications on more than 1,000 policies sold through Shurwest between 2014 to 2018, Minnesota Life claims in its lawsuit.
Shurwest quietly rebranded as The Quantum Group in 2019, the Minnesota Life lawsuit claims, and the insurer wants the new company held liable for its losses.
A spokesman for Minnesota Life said the insurer does not comment on active litigation.
Scott Alan Kohn, 67, remains in the Spartanburg County Detention Center in Spartanburg, S.C., where he has been held since November 2019. His trial on federal charges of conspiracy to engage in mail and wire fraud was delayed by the COVID-19 pandemic.
Kohn faces 20 years in prison for the federal offenses. In March, a federal judge ordered a $501 million judgment against Kohn in a civil case. Kohn is no stranger to prison, having pleaded guilty in 2006 to felony charges of trafficking in counterfeit goods. He served a 15-month term in federal prison.
Kohn formed Pensions, Annuities, and Settlements in 2011, which would later be known as Future Income Payments. The U.S. Attorney's office for South Carolina said FIP was merely a pension theft that morphed into a Ponzi scheme. Kohn lived well for a while off the scheme, at one point reportedly owning a $4.8 million oceanfront home in California.
Prosecutors say his scam was simple: Using various marketing efforts, FIP and Kohn solicited pensioners by offering the ability to receive a lump sum in exchange for a portion of their future pension payments. FIP called the practice “structured cash flows” and the company used brokers and insurance producers to find investors - often retired veterans, teachers and firefighters.
Unknown to many investors, the future pension payment terms required them to pay what often equated to an annual interest rate exceeding 100% over a five-year term.
At some point, FIP and Kohn added another layer to the scam, prosecutors said. Investors were urged to fund IUL policies with their FIP payment, ostensibly to replace the pension as a retirement plan. However, prosecutors said the new layer just created another opportunity for rogue agents and FIP reps to further gouge investors through hidden and high fees.
Melanie Jo Schulze-Miller worked for Shurwest from June 2012 to May 2018, court documents say. At some point, she was named national sales director of life insurance for the company. She also knew Kohn and began incorporating his “structured income payments” scheme into her sales strategies, according to court documents.
According to court documents, Schulze-Miller earned more than $1.2 million in commissions directing business to FIP. She cooperated with investigators and pleaded guilty in December to felony conspiracy to defraud. Schulze-Miller agreed to forfeit nearly $180,000 and one vehicle, a 2017 Infiniti, as part of her plea deal.
The question for the courts is whether Shurwest was aware of Schulze-Miller’s activities and, even if they didn’t know, whether they are still liable. What is known is that Schulze-Miller formed her own company called MJSM Financial, which handled many of the fraudulent sales, according to court documents.
Shurwest maintains that Schulze-Miller went rogue and committed fraud on her own. At least one judge accepted that argument in a July 2020 ruling.
U.S. District Judge Susan R. Bolton sided with Shurwest in a lawsuit brought by its insurer, Landmark American Insurance. Landmark failed to show that Shurwest participated in Schulze-Miller's conduct, the judge ruled, or that it had been aware it would face lawsuits before it bought its policy.
A federal judge in Minneapolis will face a similar liability claim brought by Minnesota Life.
On Oct. 9, 2012, Shurwest was appointed as an independent general agency to sell Minnesota Life products. The relationship seemingly worked well for many years. Courts documents put 2016 as the year things went south. Shurwest agents allegedly began pushing FIP strategies that year, at Schultze-Miller’s direction, court documents say.
Among its claims, Minnesota Life alleges that Schulze-Miller and Shurwest-affiliated agents “scrubbed” IUL applications and altered them to overstate the income and net worth of the applicants, while obscuring the “structured cash flows” arrangement.
Minnesota Life claims the policy applications were altered on more than 1,000 policies sold through Shurwest between 2014 to 2018. The insurer said 222 of those policies were linked to an investment in FIP.
“Nobody at Shurwest conducted a further review of the applications after prospective policyholders submitted their applications to Ms. Schulze-Miller and her team,” the lawsuit reads. “The applications were submitted directly from Ms. Schulze-Miller and her team to Minnesota Life without any further evaluation or oversight by Shurwest.”
But Shurwest’s attorneys say their client cannot be liable for something they didn’t know anything about.
“Minnesota Life has looked at us and said, ‘If we're liable, then you have to be liable,’” said attorney Michael McGrath. “But I think, at least the Minnesota life lawyers we deal with, understand that, like them, we too, are a victim. We had a rogue employee who set up a business we didn't know anything about.”
Scheme Falls Apart
According to its lawsuit, Minnesota Life began receiving policyholder complaints early in 2018. After discovering the FIP funding scheme, the insurer offered to rescind all those policies and refund premiums. A total of 210 IUL policies had been rescinded as of the lawsuit filing, Minnesota Life said.
Minnesota Life prohibits the use of structured cash flows to fund life insurance policy premiums because the insurer loses money on each sale of an IUL policy that results in an early lapse, Minnesota Life explained in the lawsuit.
“Financial underwriting guidelines are designed to prevent the sale of policies that are not affordable or are excessive in terms of needs and goals,” the lawsuit reads. “Had the applications for IUL policies submitted through Shurwest truthfully disclosed the source of funds for premium payment, Minnesota Life would not have issued the policies.”
As the calendar turned to 2019, Shurwest and Minnesota Life both made moves. Shurwest began branding itself as The Quantum Group. The two companies appear to share the same address, phone number and employees, Minnesota Life noted in the lawsuit.
The top executive for The Quantum Group, Jim Maschek, partner and president of distribution, also signed Shurwest bankruptcy documents as its representative. Maschek listed himself as the president of Shurwest. He referred a reporter to McGrath and Mesch Clark Rothschild.
According to the Better Business Bureau, Shurwest incorporated in 1993. Mark West served as president and Ronald Shurts as vice president. Shurts signed bankruptcy documents as general partner in the IMO. Neither man is listed as an executive with The Quantum Group on its website.
In March 2019, Shurts and Minnesota Life reached an agreement for Shurts to pay Minnesota Life $200,000 up front, and then $50,000 per month, later increased to $75,000 per month, the insurer said in its lawsuit. The money was intended to reimburse Minnesota Life for commissions paid on the rescinded sales.
“That agreement was ongoing, and I don’t know if payments stopped in July or if they stopped in August, but they can't continue now that we're in bankruptcy,” explained Isaac Rothschild of Mesch Clark Rothschild.
According to bankruptcy documents, Shurwest lists Minnesota Life as a creditor owed $2.15 million. That is the amount Minnesota Life claims it is owed in commissions it paid for fraudulent IUL sales, McGrath said.
In June 2020, Minnesota Life terminated Shurwest’s brokerage general agency contract.
Meanwhile, South Carolina courts continue to try to unravel the FIP fraud. Greenville, S.C., lawyer Beattie Ashmore was appointed by a judge to try to recover the money that the investors lost. He filed nearly 90 lawsuits seeking about $30 million from financial advisors and insurance agents throughout the nation, the Greenville News reported in December.
Ashmore did not return a call or email for an update on those efforts.
“We understand that there are victims out there,” McGrath said. “And they are people that we wish to direct to the FIP receivership case back in South Carolina, because they have indeed been harmed.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.