In the Courts

The target “straw buyers” of this network were individuals between 69 and 85 years old, in good enough health to obtain standard rates, but who were still old enough to be attractive to investors who would cash in upon these people's deaths. After coordinating the requisite medical tests and obtaining an assessment from the insurance company, the defendants would market the policies to potential investors. In many instances, the defendants falsified the straw buyer's financial information in response to insurance company questions designed to detect STOLI policies.

The heart of the defendants' appeal was a sufficiency of the evidence argument, which stemmed from the government's alleged failure “to prove that they contemplated harm to the insurers that is cognizable under the mail and wire fraud statutes.” The government's burden was to prove that the “defendants' misrepresentations pertained to the quality of services bargained for” or “exposed the lender or insurer to unexpected economic risk.” Therefore, the misrepresentation must go to an “essential element of the bargain.” The defendants suggested that the government's evidence of “cognizable harm” was insufficient in the following respects.

First, the Second Circuit addressed the sufficiency of the evidence related to the economic differences between STOLI and non-STOLI life insurance policies. The government's evidence consisted of testimony by two insurance executives defrauded by the defendants. The executives testified to the risks associated with STOLI policies, including shorter life expectancy of the insured, lower premium payments, lower lapse rates, and greater use of grace periods. The defendants suggested that this testimony was inadequate because “no statistics were offered to support [the witnesses'] belief[s].” The court held that both witnesses justified their testimony with specific explanations, in addition to being executives in the industry with decades of experience.

Second, the Second Circuit analyzed whether any economic differences between STOLI and non- STOLI policies were “essential elements of the bargain.” The defendants argued that, even if economic differences did exist between STOLI and non-STOLI policies, they were nonetheless not guilty, because the insurers got exactly what they bargained for and “there was no discrepancy between benefits reasonably anticipated and actual benefits received.” For example, the defendants noted that they did not lie about the straw buyers' health or age, which were two essential elements in determining life expectancy. The circuit court, however, was not persuaded, and suggested that far more factors than age and health play a role in life expectancy and, as a result, what price to charge for the policy. To this point, the defendants further argued that any possibility of a lapse was merely a “windfall,” rather than an “essential element.” In response, the Second Circuit stated, “we see no reason why the expected probability of default is not a legitimate financial consideration that the insurer is entitled to predict based on accurate information of the applicant.”

In the Courts and Business Crimes Hotline were written by Mayer Brown associate Colleen Snow.

Second Circuit: Three Insurance Brokers Convicted for Elaborate Defrauding Scheme

On Oct. 26, 2015, the U.S. Court of Appeal for the Second Circuit affirmed the jury conviction of three insurance brokers on conspiracy to commit mail and wire fraud charges arising from a complex insurance fraud scheme. U.S. v. Binday, Nos. 14-2809-CR, 14-2832-CR, 14-2873-CR, 2015 WL 6444932 (2d Cir. Oct. 26, 2015).

The insurance brokers were convicted of inducing insurers to issue life insurance policies that were to be sold to third-party investors. The scheme centered on “stranger-oriented life insurance” (STOLI) policies, whereby a broker obtains insurance for a “straw buyer” “for the purpose of resale to an investor with no insurable interest in the life of the insured ' essentially, it is a bet on a stranger's life.” Thus, the policy is intended for resale before it is issued, a policy which many insurance companies ' including the ones involved in this case ' refuse to issue. In return, the brokers received a commission on these STOLI policies that would not otherwise have been issued had the insurance companies realized the true purpose of the policies.

The target “straw buyers” of this network were individuals between 69 and 85 years old, in good enough health to obtain standard rates, but who were still old enough to be attractive to investors who would cash in upon these people's deaths. After coordinating the requisite medical tests and obtaining an assessment from the insurance company, the defendants would market the policies to potential investors. In many instances, the defendants falsified the straw buyer's financial information in response to insurance company questions designed to detect STOLI policies.

The heart of the defendants' appeal was a sufficiency of the evidence argument, which stemmed from the government's alleged failure “to prove that they contemplated harm to the insurers that is cognizable under the mail and wire fraud statutes.” The government's burden was to prove that the “defendants' misrepresentations pertained to the quality of services bargained for” or “exposed the lender or insurer to unexpected economic risk.” Therefore, the misrepresentation must go to an “essential element of the bargain.” The defendants suggested that the government's evidence of “cognizable harm” was insufficient in the following respects.

First, the Second Circuit addressed the sufficiency of the evidence related to the economic differences between STOLI and non-STOLI life insurance policies. The government's evidence consisted of testimony by two insurance executives defrauded by the defendants. The executives testified to the risks associated with STOLI policies, including shorter life expectancy of the insured, lower premium payments, lower lapse rates, and greater use of grace periods. The defendants suggested that this testimony was inadequate because “no statistics were offered to support [the witnesses'] belief[s].” The court held that both witnesses justified their testimony with specific explanations, in addition to being executives in the industry with decades of experience.

Second, the Second Circuit analyzed whether any economic differences between STOLI and non- STOLI policies were “essential elements of the bargain.” The defendants argued that, even if economic differences did exist between STOLI and non-STOLI policies, they were nonetheless not guilty, because the insurers got exactly what they bargained for and “there was no discrepancy between benefits reasonably anticipated and actual benefits received.” For example, the defendants noted that they did not lie about the straw buyers' health or age, which were two essential elements in determining life expectancy. The circuit court, however, was not persuaded, and suggested that far more factors than age and health play a role in life expectancy and, as a result, what price to charge for the policy. To this point, the defendants further argued that any possibility of a lapse was merely a “windfall,” rather than an “essential element.” In response, the Second Circuit stated, “we see no reason why the expected probability of default is not a legitimate financial consideration that the insurer is entitled to predict based on accurate information of the applicant.”

In the Courts and Business Crimes Hotline were written by Mayer Brown associate Colleen Snow.