Ponzi Collapsed, as Ponzis Do, Investors Say
MINNEAPOLIS (CN) - Operators of a purported life settlement investment fund bilked investors of $1.2 million in a Ponzi scheme and used the money to buy luxury homes and an airplane, a Lithuanian company claims in court.
MC Wealth Management sued four people and three companies in Federal Court.
According to the lawsuit, Defendant Kenneth A. Landgaard, of Alexandria, Minn., is the founder and manager of defendant Tranen Capital; defendant Arthur L. Bowen, of Boston, is an attorney and a director of Tranen; Tranen is based in the British Virgin Islands but operates from offices in the United States; defendant The Leo Group, of Tipton, Ind., is a trust fund manager of the remaining assets of Tranen; defendants Randy W. Bagley and Brock Bagley are managers of Leo; Brock is Randy's son, according to the complaint.
The plaintiff claims that Tranen is the mere alter ego of Landgaard and Bowen.
MC Wealth Management claims that "from its inception, Tranen had its very roots steeped in fraud and deceit."
"Specifically, the initial assets (life insurance policies) purchased by Tranen with investor funds were not actual 'purchases.' The true facts were that Tranen lacked the actual funds to purchase beneficial interest in policies outright, but instead entered into what amounted to 'options to purchase the policies.'"
MC Wealth claims that because Tranen could not afford the beneficial interest purchase, it agreed to service the policies by paying the premiums and servicing any debt against the policies in exchange for an agreement to acquire the beneficial interest "if and when" Tranen could afford to purchase the beneficial interest.
"While such transactions on its face may not be improper," MC Wealth Management says, it "believes that Tranen reported to its then-investors that it in fact had 'acquired' these assets, and showed them on its financial books as valuable assets." Tranen made these misrepresentations so as to secure additional investor funds "by giving the appearance of a healthy viable company and investment opportunity," according to the complaint.
Tranen purchased life insurance policies during their contestability period - the two-year period where enforceability is contestable and such policies have little or no resale value or secondary market value, as they are not supposed to be bought or sold, according to the complaint.
These types of transactions, known in the industry as wet paper transactions or STOLI transactions (stranger originated life insurance policy), have been the recent target of state and federal investigations, many of which are continuing, MC Wealth claims.
MC Wealth claims that Tranen made these contestable purchases because the purchase price was only 1 percent to 3 percent of the face value, i.e., the death benefits of the policy.
"In other words, Tranen could purchase the beneficial interest in a $10 million life insurance policy for somewhere between $100,000-$300,000 and report the same on its books to its investors, with the hope and design of reselling the policies after incubation through the two year contestability period," the complaint states.
MC Wealth claims that Tranen did not disclose the "the suspect, illegal, and fragile nature" of its assets.
The final defendant, Torrey Pines Services LLC, knowingly serviced Tranen's STOLI/wet paper transactions in exchange for compensation, according to the lawsuit.
MC Wealth claims that sometime in or around the latter half 2011 "the Tranen focus changed" and the defendants "collectively and consciously decided to continue their bilking of investors' funds to the tune of millions of dollars, while simultaneously giving less concern or care for the actual condition of the Tranen assets, health of the assets, or actual existence of the assets. Instead, the focus was directed at 'lining their own pockets.'"
Landgaard and Bowen then proceeded to buy real estate, luxury autos, a million-dollar airplane, and treated themselves to "lavish lifestyles which included luxury vacations and international travel," according to the complaint.
Landgaard and Bowen stopped making premium payments, the policies began to lapse, and investors learned that Landgaard and Bowen were "grossly inept, and unable to properly operate the business," MC Wealth claims.
An audit revealed multiple irregularities, according to the complaint:
"Tranen Management redeemed their own shares in the Fund (having doubled their money) while postponing and delaying redemption requests from investors;
"Tranen Management loaned themselves money from the Fund, and then paid it back when upon redemption of their shares, effectively short cutting the 90-day notice requirement;
"There is a $10 million receivable for polices to be sold by some third party unaccounted for;
"There is a 'loan to affiliate' of $16 million, nearly 10 percent of the Fund value at that time of the audit;
"The discount rate on the policies was claimed to be between 8 percent and 18 percent however the market rate of return was 18%;
"Multiple lapsed and sold polices were included in the list of assets;
"There was only a showing of $2 million in cash, yet premiums owing were showing at $18 million per year; and
"Fund expenses are at 6 percent, about triple what would be expected."
At least three other, similar lawsuits have been filed against Tranen.
MC Wealth claims says that Landgaard and Bowen, "under now mounting pressure and in an attempt to deflect the scrutiny of investors and further complaints," announced their resignation, naming The Leo Group and its principals, Randy and Brock Bagley, as the new directors, to manage the remaining assets of Tranen.
MC Wealth claims that The Leo Group and its principals "have been selected by Landgaard and Bowen specifically because of their past and ongoing business relationship. ... Bowen and Landgaard can and will control Leo Group by and through R. Bagley and B. Bagley, as they had done in their operation as managers of Tranen."
MC Wealth Management seeks an injunction, damages of $1.2 million, with interest, and punitive damages for fraud and conspiracy.
MC Wealth Management is represented by Michael Minenko with Minenko & Hoff in Edina, Minn., and David Beitchman with Beitchman & Zekian in Encino, Calif.