by Structured Settlement Watchdog
Structured settlement derivatives have long been mischaracterized and sold as annuities to investors by members of the structured settlement secondary market taking advantage of the regulatory gap.
There has recently been a major back tracking and a stunning admission by Somerset Wealth, until recently a purveyor of structured settlement derivatives to investors, marketing its services via the website secondarymarketannuities(dot)com. Upon information and belief some of those investors are injury victims advised to make such purchases by settlement planners, directly, through the injury victim's trusts or IRAs.
Here's What Tom Hamlin of Somerset stated as fact in 2012 in Wealthvest 'How Secondary Market Income Annuities (SMIA) Can Help Your Business!"
'Secondary Market Income Annuities (SMIA) are sold by structured settlement annuitants through a court approved and regulated process to our affiliate partners at a discount in exchange for a lump sum payment"
Arguably Hamlin's published statement of fact was false and misleading because, when structured settlement annuitants enter into a structured settlement factoring transaction ( a term defined under the Internal Revenue Code at IRC 5891) they ARE NOT selling an annuity. This is a fact that Somerset admits to in 2016 (see below).
Here's what Somerset said in July 2011 [ Source: Wayback Archive]
"Our secondary market annuities are handled by specially-licensed brokers who perform careful inspection of assets to ensure they’ve been taken great care of".
Here's what Somerset says in November 2016 as part of its announcement suspending sales of structured settlement derivatives.
When you purchase an SMA that is a Factored Structured Settlement, (FSS) you are purchasing the rights to receive payments from a structured settlement that are funded by an annuity rather than the annuity itself. The entity that issues the annuity (and therefore responsible to make such payments) is usually a highly-rated insurance company. It is important to understand that while the payments are funded by annuities, FSS’s are not annuities [emphasis added]
What Are The Risks? 2011 [Source: Wayback Archive]
- SMAs must be backed by a financially stable insurance company that issued the annuity. It’s important the group is able to pay claims.
- The terms of the court that accompanies each transaction must be legal and viable.
- SMAs are not deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other federal government agency, although they may be partially guaranteed by State Guaranty Associations.
- SMAs are subject to interest rate risk. Market interest rates may rise while the rate of return on the secondary market annuity is locked in. One method of hedging interest rate risk is to build an annuity ladder by buying a series of secondary market annuities over an extended period of time.
- SMAs typically must be held to term and are not liquid purchases.
Note the use of State Guaranty Associations in the solicitation of annuities is unlawful in most states. No doubt if called out on it before, Somerset and others would defend themselves by saying they're not annuities (as they are now doing) despite calling them annuities for years and making millions in the process. The misuse of the term "annuity" was not lost on Congressman Elijah Cummings in his letter to Somerset in November 2015.
Maryland Congressman Questioned Whether "Secondary Market Annuities" Are Annuities Under Maryland Law
The Regulatory Sun Rise in Maryland and the Somerset Wealth Sunset of its Structured Settlement Derivative Sales
"While FSS’s have been safe and stable, there have recently been developments in the structured settlement industry that raise new risks which need to be considered, along with other factors described in this site, prior to purchasing a FSS. Specifically, the Attorney General of the State of Maryland has filed a lawsuit against a factoring company that originates FSS’s, the companies’ principals, and others associated with the company, to declare invalid certain court orders obtained in Maryland that approved the transfer of payments. The lawsuit alleges that a factoring company that purchased and resold the right to payments fraudulently misled annuitants who sold their rights to payments and the courts that approved the transfers, and did not follow the Maryland law that governs the sale of these rights to payments. In addition, court orders in other states have been attacked by litigious plaintiffs’ lawyers on behalf of sellers of payments who claim that their laws have been violated. Even law firms have been sued for fraudulently obtaining court orders. These lawsuits, if successful, could result in folks who purchased FSS’s not receiving all of the payments they purchased. While these actions are not wide-spread throughout the industry, in an abundance of caution, Somerset has decided, for the protection of purchasers of FSS’s, to suspend its FSS program until it is determined how the Maryland Attorney General and the other actions described above are resolved and what such resolution could mean for the future of FSS’s. Somerset intends to monitor these actions closely. In the meantime, Somerset will continue to educate investors on FSS’s so that in the event the suspension is lifted, they will have all of the information necessary regarding whether to decide to purchase FSS’s."
What is Not Being Said by Somerset Wealth is Significant
What Hamlin is not telling you is that Somerset Wealth customers may have acquired structured settlement payment rights (marketed as "secondary market income annuities") from a number of people that were allegedly forum shopped into states where they did not live. The deals were originated by a structured settlement factoring company which is no longer in business and then purportedly assigned to customers of Somerset, possibly including injury victims to which such purported purchases were recommended by settlement planners. Who is liable to the investor when the originator is no longer in business?
Will We Be Reading This Headline in The Near Future?
Motion to Vacate Court Order Invalidating Transfer. Two Personal Injury Victims Fight Over "Golden Egg", One the Structured Settlement Annuitant, the Other An Investor Who Advised by Settlement Planner to Buy Recycled Structured Settlement as Part of Their Settlement Plan When Settling Their Personal Injury Case.
If the seller moves to vacate the court order on the basis that a Court in Virginia, did not have jurisdiction and prevails, what happens to the investor, which in this case is another injury victim who was advised to buy the structured settlement payment rights by a settlement planner, who at the time is believed to have been contracted to a structured settlement firm that placed structured settlement annuities? Upon information and belief, in at least one case, the teensy weensy structured settlement factoring firm that originated the underlying deal has been dissolved.
What Are The Consequences and Who Will Pay?
As I addressed December 15, 2014 in Recycled Structured Settlements | A Conflict of Interest for Plaintiff Brokers?, structured settlement brokers, settlement planners who engage in the business of placing structured settlement payment rights as investments for injury victims or personal injury lawyers (for structured attorney fees) should be mindful of the risks associated with the transactions and fully disclose them to their clients.
I am aware that personal injury lawyers are solicited to purchase these instruments. They too should be mindful of a potential structured settlement factoring forum shopping apocalypse. This is a huge problem, the depth of which is being revealed as the layers of the secondary market onion are peeled back.