by John Darer CLU ChFC MSSC CeFT RSP CLTC
What was the Joe Gargan Structured Settlement Scam?
The guilty plea of Joe Gargan, CEO of The Pension Company, to embezzlement of $8 million intended for the purchase of annuities to fund minor's settlements would give anyone who has done business with The Pension Company from 2014-2020 reason to be concerned. Gargan's despicable crime also cost the taxpayers to pay all over again, and more, because the annuities had to be funded all over again at a higher cost due to interest rate shifts. But it was a unique set of circumstances that brought it about and they are highly unusual.
Why traditional procedures to establish a structured settlement make a Gargan-Style theft impossible.
- Traditional procedures to establish structured settlements involve a check payable to the qualified assignment company not to the structured settlement broker.
- The structured settlement broker overnights the check to the lock box of the assignment company (or the lock box of the annuity issuer if the case is unassigned and the annuity is to be owned by the defendant or defendant's insurer).
- Within 24-72 hours of premium receipt the life insurer issues confirmation of payment. The defendant, the insurance company and the plaintiff's lawyer should receive:
- Copies of all structured settlement funding checks (Plaintiff's Attorney)
- Confirmation of payment from each of the annuity issuers.
- The Defendant's insurer or Defendant (if self insured) should also have the canceled check or wire confirmation.
Why Was There a Need For An Escrow in The First Place?
The peculiarity of the Gargan case is that The Pension Company, Inc. was entrusted with settlement monies to buy annuities on behalf of a hospital in Westchester County New York. Where hospitals have insurance but have exhausted their aggregate limits, or one oi its layers of insurance involves an insolvent insurer, or they are unable to get liability insurance (or adequate liability insurance) and the plaintiffs desire a structured settlement the hospital must pay settlement out of their operating account and it can take some time to fund a structure. A search on PACER shows a Bankruptcy case in the Eastern District of New York shows a matter in which The Pension Company Inc is listed as Escrow Agent for the Interfaith Medical Center Liquidating Trust.
SIDE BAR What is an Aggregate Limit?
The declarations page of your liability insurance policy will show the limits of liability for various different types of losses covered under the policy. Limits are generally stated on a per claim (or per occurrence)/aggregate basis. For example if you have $1,000,000/$3,000,000 limits it generally means $1,000,000 per claim and $3,000, 000 in aggregate for multiple claims in the policy term. So if a hospital has multiple claims with a policy year, or a single claim that exhausts its limits limits, it could be forced to pay for, a make up the difference from its operating account.
Safeguarding of Funds in An Escrow Trust
There are several options available to ensure the safeguarding of funds in an escrow trust. First is utilizing an institutional trustee versus an individual acting as a trustee. An institutional trustee will have supervision, segregation of duties, financial controls, and insurance that an individual trustee will not have.
State trust law generally provides that a "Trust Protector" can be appointed to act as an independent third-party to supervising the institutional trustee of the escrow or trust. Additionally, a Trust Protector can be empowered to review and approve all trust distributions and other types of transactions.
There can be varying levels of duties and powers assigned to a Trust Protector to reflect the specific needs of the arrangement and level of supervision required. Additionally, the title may be modified to reflect better the particular circumstances (trust advisor, distribution protector, etc.)
It is common for an entity that has a pending liability to create an escrow trust as an informal sinking fund. However, caution should be exercised such that the escrow trust remains the asset of the funding entity to avoid potential economic benefit and constructive receipt doctrine complications for the ultimate beneficiary arising from a "formally funded" trust.
A formally funded account could create a “vested legal right” to funds and trigger the economic benefit and constructive receipt doctrines and thereby prevent the ability to obtain a qualified structured settlement. Ensuring that the escrow trust remains "informally funded" is generally easily accomplished by ensuring that the escrow trust assets remain subject to the claims of creditors of the funding entity while preventing the funding entity from utilizing the funds for other purposes.
Alternative to Escrow Trust
At least one major life insurance company will accept structured settlement annuity premium payments in installments.
Qualified Settlement Fund
A qualified settlement fund is another potential solution, but on a New York case, a QSF involving a single claimant does not afford a choice among any of the traditional structured settlement annuity issuers. The Westchester New York hospital case involved a single minor claimant. You will not be able to use annuities issued by New York Life, US Life Insurance Company in the City of New York, Metropolitan Tower Life, First Berkshire Hathaway Life Insurance Company, Pacific Life and Annuity Company or The Prudential Insurance Company of America as qualified funding assets out of such a qualified settlement fund.
Outside of New York, Independent Life Insurance Company's qualified assignment company has shown a willingness to accept qualified assignments on settlements that other insurance companies would consider single claimant cases.
This author believes that there is a risk in dealing with settlement planners pushing a menu of services within a one stop shop "kaleidoscope" of related and self administered qualified settlement funds, self administered qualified assignment companies, factoring origination, factored structured settlement payments streams as annuity investments for injured parties and attorneys which do not address (or do not adequately address) the conflicts of interest.
Requiring the escrow agent to have a Fidelity Bond with suitable limits is another viable solution. Such bonds are not expensive and are a cost of doing business.
United States Government cases
There are many layers of approval that are required when it comes to the approval of a claim and requisitioning of funds that are unlike dealing with insurers.
This author understands that the United States has been analyzing its processes and controls and is taking, and has taken steps to improve processes and controls since the discovery of Gargan's admitted crimes.
SIDE BAR 2
Gargan had been on the DOJ list of Annuity Brokers since at least 2004, presumably was assigned work and presumably performed his work satisfactorily for quite some time (until he perpetrated his crimes).
Plaintiff Broker Question
Some have suggested on list serves and in Facebook groups that Joe Gargan's crimes might have been prevented if there was a plaintiff broker on the case, however upon information and belief there was a representative from a well known firm on the Westchester case involved on behalf of the plaintiff. While there are many good reasons for a plaintiff lawyer to work with a settlement planner, it didn't prevent crooked Joseph E. Gargan from wiring hundreds of thousands of dollars from The Pension Company escrow account into his own personal account in April 2020, with the knowledge that the Feds had been on his tail for over a year.