January 20, 2011 / 12:09 AM / in 7 years

U.S. charges offshore firm with bond fraud

WASHINGTON (Reuters) - Provident Capital Indemnity Ltd, its president and outside auditor are facing U.S. criminal charges for allegedly misleading investors in a life insurance settlement bond scheme.

The Costa Rica-based insurer, its president Minor Vargas Calvo, and outside auditor Jorge Luis Castillo were charged with committing wire and mail fraud, U.S. prosecutors said on Wednesday.

The U.S. Securities and Exchange Commission announced a parallel civil lawsuit against the defendants.

Vargas was arrested on Tuesday at John F. Kennedy International Airport in New York, while Castillo was arrested on Wednesday in New Jersey, said a spokesman for Neil MacBride, the U.S. attorney for the Eastern District of Virginia. Both had been indicted on January 5.

Lawyers for the defendants could not immediately be reached.

In both cases, the men are accused of misleading clients about Provident Capital's ability to make good on its bond obligations on life settlements.

The life expectancy guarantee bonds were marketed as a way to alleviate risk for investors in life insurance policies, when insured people live beyond their life expectancies.

U.S. officials charge that Provident Capital misled clients about numerous issues, including the assets backing the bonds, the company's credit rating, the availability of reinsurance to cover claims on the bonds, and whether its financial statements had been audited.

The bonds met a need in transactions where a life insurance policy owner sells the policy to investors in exchange for a percentage of the policy's value.

When the policy owner dies, investors can reap the full death benefit from the policy. The longer the insured person lives, the less money investors can make. Life settlement companies in some cases will pool together life settlements into securities and sell them to investors.

According to the indictment, Provident Capital began selling these so-called "life expectancy bonds" to investors in 2004. Prosecutors and the SEC charge that the company pledged to help investors mitigate the risk of losing money on the life settlements by promising to pay the death benefit if the people insured by the policy lived beyond their life expectancy.

Over the course of several years, U.S. officials said the company issued nearly 200 bonds backing life settlement offerings.

The criminal case is U.S. v. Provident Capital Indemnity Ltd et al, U.S. District Court, Eastern District of Virginia, No. 11-00014. The civil case is SEC v. Provident Capital Indemnity Ltd et al in the same court. (Reporting by Sarah N. Lynch; Additional reporting by Jonathan Stempel; Editing by Tim Dobbyn)

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