DFW investors learn the unspoken risks of betting on death [Fort Worth Star-Telegram, Texas]
By Barry Shlachter, Fort Worth Star-Telegram, Texas | |
McClatchy-Tribune Information Services |
The 69-year-old CEO plodded through a detailed history of his company,
The secondary life insurance market, once the preserve of big institutional investors, has been broadened by companies like
The down-to-earth CEO, whose mismatched brown sport coat, thickly knotted tie and red shirt gave him an everyman look, offered little indication at the sales meeting that
News that profits in the latest quarter had dropped 18 percent was followed Jan. 5 with a lawsuit filed by the
"Every time they put out a press release," Pardo said of the
The
Last summer, after a two-year investigation, the
And investors have also brought lawsuits.
"It appeals to your greed," Gallo said, referring to sales pitches that emphasize the age and poor health of the insured. "At no time was the risk indicated."
In a quarterly filing
In
None of this has helped
The sales pitch
Pardo, who flew a helicopter gunship in
Repeatedly, he assured the
"It's a battle," Pardo told the estimated 200 prospective investors, saying the insurance industry was conniving with the
He didn't mention losing cases to
There was no way to determine how convincing Pardo and other speakers proved that winter night at the
Clearly, the 2{-hour presentation was complicated and exhausting. A speaker warned that only half the listeners would grasp a data-heavy video presentation on why the stock market was doomed, and predicted that the rest of the audience would nod off. He was right. Chins hit chests and snoring was audible on some rows.
Accompanied by a thick folder, the spiels emphasized the rewards of investing through
The listeners included at least one doctor and many elderly couples as well as people who already had bought life settlements, or viaticals. They were told that stocks were headed for collapse, that the housing crisis proved that real estate was a hopeless investment and that bank certificates of deposit gave little return.
As for life settlements, they could return 5 to 12 percent a year, the audience was told. One speaker called out to a colleague who shouted back that a particular portfolio had paid back more than 20 percent. A worst-case scenario was about 2.5 percent paid annually over 18 years. Not great, but better than holding shares during a stock market crash, the pitchman said.
In the audience were couples who had invested more than
Now, years beyond the policies' three- or four-year life expectancy predictions, no policies had paid out for some investors. This meant they were obliged to pay premiums to keep their portfolios alive.
One
When they approached a speaker, he advised them to sell one of their five policies but warned that they wouldn't get back their full investment.
According to the
Cassidy, the doctor who made the life expectancy estimates, did OK too. He was paid
Cassidy, a 1974 graduate of the University of Texas Medical Branch at
The sickest and oldest
Instead, a salesman steered them to life settlements from
The
"We said, 'Give us the oldest ones in the worst health.' We thought that would be the best strategy,'" recalled
Despite the couple's choosing the sickest and oldest people insured, none of the death benefits have "matured," meaning the insured party hasn't died, and the
When the policies are purchased, the price
But Cassidy relied on census tables rather than the standard actuarial practice of using data tailored to insured populations, the
The
"I was the squeaky wheel," Linda said of her effort to get assistance. That
"We didn't get all the information upfront that we needed," she said. "We got it after the fact -- after we purchased them."
The feds' new tactic
At the
But the feds are using a different legal strategy this time.
Instead of arguing that Pardo is not licensed to be trading securities, it is zeroing in on insider trading allegations and Cassidy's methodology, alleging that his generally short estimates artificially inflated
The
If accurate life expectancy estimates had been used on 2,260 life settlements sold from 2000 to 2010, the average projected return to investors would have been 0.4 percent, the
Amid this mess, Pardo, who owns slightly more than 50 percent of voting stock, has done quite well for himself.
In fiscal 2011, he earned
His Cessna Citation X, which is the fastest civilian aircraft available and costs
Pardo's family also benefits. The company paid
Six years, no payouts
Gallo, the suburban police officer who describes himself as a novice investor, rolled over his entire 401(k) retirement account --
He said Harrison assured him it was a safe investment and never mentioned that premiums might need to be paid at some point. The CPA stressed, Gallo recalled, that one or two policies would surely pay off early, the rest later.
Six years later, none has. And Gallo says he'll be financially stretched to find
"
Harrison told the
"What was suitable five years ago is not suitable today. And I feel bad for Jose," said Harrison, a licensed insurance agent. He said he no longer believes that the life expectancy estimates cited on the more than 40 policies he sold to 11 clients were objectively made. "I believe they are biased. But I don't have proof."
Harrison said he is working to help clients sell some of their fractional policies to cover premiums.
"If the investment performed the way they said it would, it would have delivered double-digit returns," he said. "It all comes down to life expectancy."
Only three of the 40 policies he sold -- less than 10 percent -- have matured, he said. But they still held value, he insisted.
"They weren't investing in
Harrison, who has stopped selling death benefits, said he himself was not given a full picture of how
Moreover, if a salesperson enlisted others to market Life Partner investments, he or she received 1 percent of their override sales, and another 1 percent for the sales of others who were in turn brought in.
"It was MLM -- multilevel marketing -- which is not unusual," Harrison explained. "But they recruited hairdressers and car mechanics to sell. You didn't need to be insurance licensed; I believe I was the exception to the rule."
He said
Selling was not a big challenge.
"Someone could go to a
817-390-7718
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