Law360, New York (July 14, 2017, 2:27 PM EDT) -- This article is part of a monthly series featuring attorneys' fascinating experiences in court. Here, Joseph Wielebinski of Munsch Hardt Kopf & Harr PC recalls the Life Partners bankruptcy case, which involved allegations of fraud, a $2.4 billion “life settlement” portfolio and over $1.5 billion in claims.
For over 30 years, Wielebinski’s practice has concentrated on bankruptcy, creditors' rights and financial restructuring, and he is active throughout the United States in a variety of complex insolvency and bankruptcy matters. He has represented numerous victims in matters involving complex financial fraud, theft, money laundering and other white collar crimes. He is Texas counsel for the joint liquidators of Stanford International Bank in Antigua and was lead counsel for the official unsecured creditors committee in the Life Partners case.
Strange days in court. To appreciate the irony, one needs a little background. In 1992, Life Partners Inc. (LPI) began developing a multilevel marketing network to sell a life insurance derivative known as a “viatical.” By 2015, LPI convinced 1,800 sales agents to raise approximately $1.8 billion from over 22,000 investors to fund the purchase of viaticals and a successor product called “life settlement.”
These life insurance products essentially pit investors against life insurance companies. The investors fund the purchase of a life insurance policy from the insured, and then hope that the insured dies soon (or at least not longer than their estimated life expectancy). If that happens, then the investors collect the death benefit after paying only a few premiums. In reality, the only time that this worked was in the AIDS epidemic of the late 1980s, when young males could purchase cheap life insurance without a medical exam. Insurance carriers soon became wise to this scheme. But, LPI and those working with them turned to the investing public, promising that they had identified insureds who had only a short time to live, and promising big returns if the investors funded the purchase of the policy. The incredible part is that, when the insureds did not die as projected, many investors stuck with the investment and continued to pay premiums year after year, thinking that the fabled early maturity was just around the corner.
In 2010, the Wall Street Journal published a page-one article focusing on LPI’s practices and raised several red flags. In 2012, the U.S. Securities and Exchange Commission filed suit. In 2014, it obtained a favorable verdict. In January 2015, Life Partners filed bankruptcy to avoid the SEC putting LPI into a receivership.
In February 2015, I stood before the bankruptcy court representing the unsecured creditors (investors) committee — three investors and selected by the United States trustee’s office to represent the interests of all similarly situated investors and other unsecured creditors. The committee was asking for the appointment of a Chapter 11 trustee to displace LPI from management of the remaining 3,500 life insurance policies in the portfolio.
The bankruptcy courtroom was filled with interested investors. They hung on every argument, and every word of testimony. But, when LPI management made its arguments, which was largely directed to arguing that the allegedly fraudulent business model worked just fine, they cheered. It felt like a one-sided football game ... and the judge (being sympathetic to the investors’ plight and their inexperience with bankruptcy) was not inclined to stop them.
After a six-day trial, the bankruptcy court displaced management and a Chapter 11 trustee was appointed. Once the trustee was appointed, it only got worse. Whenever we would go to court, there would often be 100-200 investors in attendance. On several occasions, the judge had to move to a larger courtroom or use two similar-sized courtrooms linked by telephone. And now there were 20 or 30 attorneys representing small groups of investors who were challenging every step we were trying to take to save the portfolio. Again, the investors in the courtroom applauded whenever opposing counsel made a point that differed from our position. To compound the situation, the judge routinely invited investors to come to the podium to give their comments on particular issues. This went on for several months.
Eventually the trustee and the committee, working closely with a group of attorneys representing some of the more vocal investors, developed the outline of a workable solution that resulted in a joint plan of reorganization that was eventually confirmed (after a five-week trial) and despite three competing plans. The joint plan would use the insurance portfolio to fund meaningful returns to investors.
But some investors were still unhappy. Why? Although we saved their investment, we were viewed as having taken away their dream. It was one that could exist only in a fraudulent world. Lured by LPI, sales agents and investors alike thought: (1) that they could beat the insurance companies, (2) that they could outperform Wall Street, and (3) that the Securities and Exchange Commission was just some sort of misguided government agency ... and the trustee and committee were their puppets. They did not want to hear that they had been defrauded. Many of them still don’t. Perhaps it is a form of “Stockholm syndrome.”
But it happens. In fact, it happens often. Not just in the case of LPI, but routinely. The SEC brings an enforcement action, demonstrates fraud, and the investors come into court defending the perpetrator. They speak on his behalf. They rail against the system when he loses. They are convinced that the government (and others working to remedy the situation) has destroyed their investment.
It makes for many strange days in court.