The Securities and Exchange Commission is charging Pacific West Capital Group Inc. with securities fraud and other violations. The regulator contends that the investment firm and its owner, Andrew B. Calhoun IV, misled clients about life settlements.
According to the SEC, Calhoun and Pacific West raised close to $100 million over the last decade from more than 3,200 investors that bought life settlements in 125 life insurance polices. For more than two years, the two of them allegedly used proceeds from the sales to pay the premiums on life settlements that had been previously sold, while concealing that the life insurance policyholders were living beyond their projected life expectancy. Calhoun and his company are accused of make their life settlements seem more successful than they actually were even as they spent the primary reserves to pay policy premiums.
With life settlements, an investor purchases a life insurance policy share with the understanding that he/she will get part of the death benefit later. The investor is the one responsible for the premium payments and keeps the policy until the insured’s passing. Upon the insured’s death the investor is entitled to the policy’s death benefit.
The insured’s life expectancy plays a factor on the rate of return. The sooner the original policyholder passes away, the more to the investor’s benefit. If the insured lives longer than expected, the investor has to keep paying premiums, which decreases eventual earnings.
The Commission believes that Pacific West and Calhoun failed to give investors their right to fair disclosure about the risks involved with life settlements, purposely concealing and minimizing them instead. Among the risks that they failed to disclose was that investors’ premium payments would go up if the insured parties lived longer than anticipated. They told investors the policies would mature in four to seven years and to expect returns of up to 150%. The firm claimed that it never drew on premium reserves or made a premium call.
The SEC is charging Calhoun and Pacific West with violating federal securities laws related to securities registration, antifraud, and brokerage firm registration. The case also names as defendants PWCG Trust, which serviced and held the insurance policies, five pacific sales agents, and two of the agents’ companies, BAK West and Century Point. They are charged with securities registration violations and broker-dealer registration violations. The Commission wants permanent injunctions against the defendants and is seeking to impose a penalty and recover the alleged ill-gotten gains plus interest.
The Government Accountability Office has warned consumers about investing in life settlements because of a lack of clear oversight in many states. The North American Securities Administrators Association has said that life settlements are prone to different kinds of fraud, including Ponzi scams, bogus life expectancy assessments, false promises of big money with low risks, and inadequate premium reserves which end up costing investors.
Read the SEC Complaint (PDF)
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