S&P, Wells Fargo face class action over fraudulent life expectancies for life settlement investments

by Jim Orr

A group of investors has filed a class action lawsuit against the ratings agency S&P Global, life expectancy provider 21st Services, Wells Fargo Bank, and other entities over the sale of life settlement investments.  The lawsuit alleges that S&P misled investors in the Lifetrade Fund by giving the fund an investment-grade rating for years despite the riskiness of life settlements purchased by the fund and despite the fact that the life settlements were priced based on fraudulent life expectancy estimates by 21st Services. The lawsuit also alleges that Wells Fargo, co-trustee for the fund and a lender to the fund, breached its fiduciary duty by putting its own financial interests ahead of its obligation to protect the assets of the fund and its investors.

The Lifetrade Fund specialized in life settlements, a type of investment in which life insurance policy holders sell their interest in an existing policy in exchange for an immediate cash payment. When the insured individual dies, the investor receives the death benefit payable under the policy. The value of life settlement investments depends on the life expectancy of the insured individual: the shorter the life expectancy, the more valuable the policy.

According to the lawsuit, S&P misled the investors by issuing a high rating for Lifetrade even through the agency knew the life settlements purchased by the fund were risky investments. The investors allege that S&P falsely misrepresented the security of life settlement investments, leading them to falsely believe that they were as safe as corporate bonds. In fact, according to the lawsuit, S&P had issued a confidential report in which the agency said that life settlements were actually too risky to rate. But instead of alerting investors of these concerns, the lawsuit alleges that S&P continued to issue an “Af” rating for Lifetrade which indicated the fund provided strong protection from losses.

According to the investors’ lawsuit, the life settlements purchased by Lifetrade were sold to it by Portsmouth Settlement who was the largest supplier of policies to the fund.  Investors alleged the policy sales were based on fraudulent life expectancy estimates from 21st Services. By using understated life expectancies, Portsmouth and the fund were able to make the policies appear more valuable than they actually were. A lawsuit filed against 21st Services in 2004 – more than two year before S&P’s first involvement with Lifetrade – accused the company of issuing fraudulent life expectancy estimates, causing investors to suffer “enormous financial losses.” The Lifetrade investors allege that S&P should have been aware of these allegations at the time it first began issuing ratings for the fund.

According to the lawsuit, 21st Services was able to continue profiting from these fraudulent life expectancy estimates because of its relationship with Portsmouth Settlement.  Because Portsmouth earned more money in commissions the more policies it purchased with money from Lifetrade investors, and because the more policies being considered and sold, the more life expectancies that would be ordered, both companies had a financial incentive to continue the sale and purchase of life settlements based on the fraudulent estimates.

The Lifetrade investors also alleges that Roy Smith, the managing director of the fund, knew about the fraudulent life expectancy estimates, but continued doing business with 21st Services and Portsmouth Settlement because of the profits he and other affiliates were receiving from the fund. Between June 2006 and January 2011, the investors allege that Smith and other insiders skimmed up to $130 million from the fund in the form of fees, commissions, and other undisclosed profits.

Lifetrade eventually lost the entirety of the $685.8 million raised from investors, as well as an additional $178 million borrowed from Wells Fargo. When Lifetrade had difficulty in paying off a loan from Wells Fargo due to the poor performance of the fund, Smith and other insiders surrendered policies with a face value of $912 million to Wells Fargo in order to satisfy a bank debt of about $193 million.

The lawsuit alleges that by accepting policies with a value of $912 million to satisfy the $193 million debt, Wells Fargo breached its fiduciary duty, as “custodian” of the fund, to protect the interests of investors. Even though Wells Fargo knew the Lifetrade investors were the victims of fraud – and despite its own conflict of interest – the bank agreed to extinguish the $193 million debt in exchange for the $912 million in Lifetrade policies without informing investors that the exchange had taken place.

Lawsuits Filed by HO&P on Behalf of Life Settlements Investors

If you or your company were the victim of wrongful actions related to life settlement investments, you may be able to file a lawsuit in order to recover some or all of your losses. The first step in taking legal action is to speak with a law firm with the experience in life settlement litigation to advise you regarding your legal rights and guide you through the first steps in taking legal action.

The law firm of Heygood, Orr & Pearson has frequently represented individual investors and corporations in lawsuits involving life settlements. In some of these cases, insurance companies refused to pay the death benefits on valid life insurance policies by claiming that the transaction was a STOLI (or “stranger originated life insurance”) policy.  Heygood, Orr & Pearson has also handled lawsuits involving life settlement investors who were misled about the value of their investments by life settlements companies. In other cases, our firm has represented clients who were overcharged for investments based on fraudulent life expectancy estimates. Heygood, Orr & Pearson has also filed lawsuits on behalf of brokers involved in the purchase or sale of life settlements.

For a free legal consultation about filing a life settlements lawsuit, contact the lawyers at Heygood, Orr & Pearson by calling our toll-free hotline at 1-877-446-9001. You can also reach us by following the link to our free case evaluation form and answering a few brief questions about your situation to get started.

by Jim Orr

Jim Orr is a licensed attorney and a partner at HO&P focusing on business and personal injury litigation. Jim was selected multiple times to the Super Lawyers List and has tried 70+ cases to verdict.