by Structured Settlement Watchdog®
Sales of Structured Settlement Payment Rights to Injury Victims
- A meaningful number of settlement planners are advising the purchase of unregulated structured settlement derivatives (sometimes using the improperly labeled "secondary market annuities" or by the acronym "SMA") as part of allocations of settlement monies.
- Many of the planners who advocate this practice are members of the Society of Settlement Planners which, by contrast to the National Structured Settlements Trade Association, has no prohibition on factoring activities by its members. This is not a criticism per se, but a statement of fact. Nevertheless there are members of the NSSTA who engage or have engaged in this practice.
- Structured settlement derivatives are sometimes marketed as a substitution for structured settlement annuities. Some promoters have effectively even taken a page from the play book of structured settlement factoring companies by marketing the structured settlement derivatives against structured settlement annuities, even falsely positioning what is not an annuity as an equivalent asset class. The Wall case about how structured settlement derivative investors,were utterly screwed out of their money, demonstrates the risk of such investments and eviscerates the notion that derivatives or mislabeled SMAs are an equiv alent asset class. See
- Unlike payees of structured settlement annuities, investor payees cannot name a beneficiary in any transfer paperwork, or with the annuity issuer. Any certain payments go to their estate and must go through probate. You can direct the executor of your estate to have the structured settlement derivative payments it receives go to the beneficiaries. Another option is to have the acquired payments owned by a trust which bypasses probate and instruct the trustee to distribute payments to the beneficiaries. What additional costs does that bear?
- Few participants in this area openly advertise their involvement in this activity for a variety of reasons and some may sashay around the spotlight by having such unregulated investments purchased by a trust. Perhaps some fear that they will lose appointments with structured settlement annuity issuers of those annuity issuers knew that they were competing against the annuity issuers annuities with structured settlement derivatives sliced and diced from the same company.
- One technique that has become apparent from a letter written by a settlement planner to a personal injury lawyer that i have seen is to set up a qualified settlement fund, including a single claimant qualified settlement fund, which will set up a directed account at a bank to buy and service the payment streams which may come from several sources) and then parse out payments to the injury victim, or to the injury victim's trust. an the lawyer's understanding is that the settlement planner pays all the costs to establish and administer the qualified settlement fund, even if that qualified settlement fund is in existence for many years.
- There are forces in the industry pushing for a fiduciary standard. One wonders whether some will contend that a fiduciary standard includes involves mislabeled structured settlement derivatives if the yields are higher than structured settlements that are actually annuities, are insurance products, that do qualify for statutory protections.
- There is already little errors and omissions coverage available for factoring companies that originate the deals that result in structured settlement derivatives being available. If structured settlement derivatives that are being misrepresented as 'secondary market annuities" are not annuities, what are they? Are settlement planners and financial planners disclosing their activities with structured settlement derivatives to their errors and commissions carrier? Have they confirmed that such activity is not excluded by their policy. If deemed unregistered securities such investments would likely be excluded under a professional errors and commissions policy, according to a provider of financial services errors and commissions insurance familiar with structured settlements and the factoring industry. Cases such as Wall are likely to have an affect the availability of such coverage.
Settlement Professionals Inc. confirmed through a statement made by its president on January 27, 2017, that it engages in sales of structured settlement payment rights to injury victims, including to or for the benefit of a minor. This was no big secret to industry observers as a video featuring one of its associates confirms same. But the fact that there has been marketing of such investments as 'a structured structured annuity solution' to injury victims and their lawyers beginning in at least September 2011, despite recently admitting in writing that such investments are "not a regulated insurance product", is troubling.
Further troubling is evidence is the use of the loose use of the term "investment grade'. in connection with the marketing of structured settlement derivatives. When a bond is rated investment grade, its issuer is considered able to meet its obligations, exposing bondholders to minimal default risk. While annuity issuers themselves have ratings, and securitizations of such rights sold to institutional investors may have ratings, structured settlements payment rights are not annuities and have not been rated by any rating service. These structured settlement derivatives have transaction risks that do not exist with structured settlement annuities. Somerset Wealth, purveyor of structured settlement derivatives marketed as "SMA", has indefinitely suspended sales due recent developments, that include lawsuits seeking to overturn structured settlement transfer orders. The important takeaway is that "these lawsuits, if successful, could result in folks who purchased FSS’s (factored structured settlements) not receiving all of the payments they purchased". That is exactly what happened in the Wall case above, to devastating effect! At the SSP meeting more examples will be given.
As an advocate for injury victim's rights, Meligan passionately advocates the solution despite common knowledge that on the other end of the deal it is possible that some other injury victim may have got shafted for pennies on the dollar. Perhaps there is a rationale that they are no longer plaintiffs and it's nobody Jack knows, the seller faceless, because he's one or two steps removed, so the implication is that it's OK, 'will gladly give those payment streams a new, loving home' (in one of Meligan's marketing letters). One could argue that the payments are needed for the survival of the minor. So metaphorically speaking, is acquiring structured settlement payment rights like a heart transplant, where someone that is dying donates their organs so that someone else shall live, or is it like eating chicken, beef, or pork while in blissful ignorance the horrors of the slaughterhouse. (WARNING: Not for the squeamish), or somewhere in between?
An indication that SPI recognizes this issue appears to be acknowledged In a promotional video on " Secondary Market Annuity Income Streams" published by the Orlando, FL associate of Settlement Professionals, Inc., in late 2015. The presenter says that SPI works with "reputable companies that care about the seller". But there is a built in conflict. The payment rights are acquired at a discount. That discount spread is variable. The fact is that the higher the discount rate, the better it is for SPI's client investor and the worse it is for the seller. Some might say an injury victim is still an injury victim even after the case settles. If Jack Meligan were to be advising someone considering selling their structured settlement payments and there was no other alternative but to sell, surely he would seek to squeeze the cash now pusher as hard as he could for the lowest discount rate which all things being equal, results in the highest payment to the seller.
I once asked Jack how he resolves that conflict. I'm still waiting for an answer.
I reiterate and it should be noted that SPI is not the only settlement planning firm using this asset class, it just happens to be one where details have recently surfaced in court documents on an Arizona case where Jack and SPI were involved.
Jack Meligan marketing letter on Structured Settlement Derivatives reveals 'Goose/ Gander Scenario' of relevance to AIG Structured Settlement Class Action Oglers.
In a September 13, 2011 letter soliciting structured settlement derivatives ("professional settlement planners have 'more than just one structured settlement annuity solution"), Meligan states "just like a structured settlement annuity, there are no fees to the client not even transaction fees. the client gets the promised return, and no bills or fees.' I guess by that standard AIG should have nothing to worry about then and Steven W. Berman should pack up his tent. Jack doesn't do QSF's on every case. The obvious question is how does Settlement Professionals, Inc, and/or Meligan get paid then when a structured settlement annuity is placed. Hmm, commission? And if the industry zealot Meligan is stating that "there are no fees to the client' with a structured settlement annuity where is the Big Stick going? It's another goose gander thing worth exploring, in my opinion. and just for the record, how about a structured settlement derivative. how does Meligan, SPI, the originator and the intermediary get paid?
Jack being Jack will attack my settlement expert business model when he gets defensive. In his most recent missive it must've slipped his mind that when I interviewed Jack for a December 2011 podcast on Legal Broadcast Network, referring to the nascent mainstreaming of the Society of Settlement Planners to refocus on settlement planning rather than politics, Jack said "What does it matter where the settlement planner's assignment comes from if the beneficiary is the injury victim or his/her family?" .
To his credit Meligan agrees that structured settlement payment rights are not annuities, while to his detriment chooses to refer to them as secondary market annuities anyway, just like the structured settlement secondary market. Secondary Market Annuity is an improper label for structured settlement derivatives. This has even been questioned of Somerset Wealth, by Maryland Congressman Elijah Cummings. These lawsuits, if successful, could result in folks who purchased FSS’s not receiving all of the payments they purchased. Companies in the secondary /tertiary market that use the term often insinuate that such payment rights may be covered by State Insurance Guaranty funds despite they are not an insurance product, but a derivative.
Shifting gears for a minute to the subject of inducements...
Does The Timing of An Inducement Govern the Legality of A Rebate?
The relevant part of the Arizona statute says
"Except as otherwise expressly provided by law, no person shall knowingly permit or offer to make or make any contract of life insurance, life annuity or disability insurance, or agreement as to such contract other than as plainly expressed in the contract issued thereon, or pay or allow, or give or offer to pay, allow or give, directly or indirectly, as an inducement to such insurance or annuity, any rebate of premiums payable on the contract, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the contract"
- It is an immutable fact that Settlement Professionals, inc. offered an inducement. He offered to pay the cost of the QSF. Jack Meligan admitted this in writing on a list serve, to over 100 people on January 27, 2017 at 3:11pm.
- It appears that the inducement came prior to the time an annuity from American National was on the table, as clearly appears evident from Court documents in the subject case in the 5th and 6th Supplemental Petitions.
- In a November 1, 2013 letter to Larry J Cohen, a Phoenix AZ lawyer, Meligan refers to dates which are of significance to the question at hand, namely the March 12, 2013 mediation, a mid April 2016 meeting with plaintiff and his mother in Prescott AZ. the ANICO annuity illustration is part of the Plaintiffs submission in the 6th Supplement on November 4, 2013. To wit... in answer to the following question "Can a QSF be purchased at the same or lower price than a structured annuity with a company that is as sound as those proposed by Liberty? ' Lifetime payments are available at this time for a lower cost than Liberty from other companies, among them American National Insurance Company. See attached Liberty Life and American National quotes, exhibits 1 and 2. American National offers SPIA's without the Settlement Assignment. This means that returns are taxable but as TS substantial deductible lifetime medical expenses are expected to exceed any taxable income by a wide margin, tax free income is not as important as maximizing income. American National is rated "A" by AM Best Company, and "A" from Standard & Poors'.
- The plain reading of the statute does not say that a sale has to be consummated, or when.
I think this issue deserves research because arguably an inducement may be a deciding factor in a prospective client choosing to do business with a settlement planner, structured settlement broker, financial adviser or insurance agent or broker. Guidance on this issue and others could be provided via regulation that has long been needed on sales practices on both the buy and sell side of structured settlement factoring transactions.
Say Settlement Professionals Inc. or any other broker goes to Mass Torts Made Perfect and meets Joe Blogs Esq and pitches them on a QSF in the latest medical device multi-district litigation, can they legally offer to pay the cost of the Qualified Settlement Fund with an understanding he/she it get dibs on the claimants to that fund, the comprehensive settlement planning for whom may include insurance products? One novel idea that began being promoted about 6 years at a QSF conference in Phoenix involved having a QSF be a plaintiff on a case. in such cases a considerable amount of time can pass between settlement filing and resolution. If QSF fees are paid by the settlement adviser, who is ever going to find out if insurance products were sold 4-5 years later.
Does the Payment of the Costs of a Qualified Settlement Fund then Put a Settlement Planner in a current or future conflict situation where he/she/it consciously avoids recommending or considering a suitable product solution because the adviser could run Afoul of Anti-Rebating laws?
For example when there is a subsequent sale and purchase of an insurance product or an investment product. it does not have to be a life annuity, it could be life insurance, long term care, indexed annuity, health insurance etc. Does SPI only pay the cost of a QSF if there is no insurance sale contemplated?
Fiduciary Standard and Settlement Planning
A number of settlement planners are pushing for a fiduciary standard. Some of the issues presented here should be part of that discussion, in my opinion.
More information on the Structured Settlement Watchdog®