Special report: Inside Britain's deathbonds scandal

LONDON (Reuters) - Tony Tobin was 62 when his financial adviser suggested he invest his 71,000 pound ($113,300) life savings with Keydata Investment Services, an award-winning UK company offering a “low-risk” bond with an attractive income. Tobin and his wife Pam had sold the family home and moved to a permanent caravan park near Bognor Regis, a tired seaside town on England’s south coast. The couple had been forced to take early retirement because of ill-health and injury and were looking for ways to bolster the meager state pension they would collect at 65.

Pensioners Tony and Pam Tobin pose at their home in Pagham near Bognor Regis in southern England August 19, 2010. REUTERS/Luke MacGregor

In their search for secure, regular income, the Keydata product appeared tailor-made: an eight percent return over a 7-year period, with no exposure to the stock market and a brochure promising an “almost guaranteed return of your original capital after seven years”. Their financial adviser told them that their pension was just big enough to qualify for this recent introduction to the retirement income market.

The Tobins took the plunge. “This was my one and only private pension, saved for throughout my working life,” says Tony, leafing through files of carefully ordered papers. “There was nothing in the paperwork to suggest there was any major risk. We thought it was safe.”

They were wrong.

What the Tobins bought into in 2007 was a life settlement scheme, a relatively new and complex type of financial product based on purchasing the unwanted life insurance policies of wealthy Americans and then collecting the death benefits. The returns depended, in part, on when those Americans died. The fledgling secondary market for life insurance policies -- also dubbed “death bonds” -- started winning attention around 2005, especially in the United States. As people live longer, the idea of cashing in a life insurance policy early in exchange for a lump sum appeals to some looking to supplement their longer retirement.

But there was something worrisome about Keydata’s scheme. Even as the Tobins invested their savings, the FSA, Britain’s main financial regulator, was growing concerned about how Keydata was designing and marketing some its life settlement-backed products.

Two years later, after around 30,000 mainly elderly investors had plowed more than 450 million pounds ($705 million) into the business, the FSA shut Keydata down. Shortly afterwards, it discovered that one of the offshore portfolios Keydata had invested clients’ cash in had been plundered to the tune of more than 100 million pounds.

This is the incredible story of how that happened, a tale of intrigue that stretches from the staid offices of London and Luxembourg accountants to the tax haven of the British Virgin Islands, from the conveniently timed death of a buccaneering barrister in his tropical hideaway to magic potions derived from the Amazonian rain forest.

The scandal is the worst to hit Britain’s personal investment industry in two decades. It has sucked investors into a bitter battle involving Keydata’s millionaire founder Stewart Ford, the FSA, Britain’s Serious Fraud Office, administrators, auditors, independent financial advisers and opportunist hedge funds sniffing around the vestiges of the remaining assets. It throws a spotlight on the way in which attempts to regulate financial firms can compound rather than solve the problems -- and on what responsibilities regulators have to investors they are supposed to be protecting.

It also exposes the potential conflicts of interest that occur when different arms of large accountancy firms act as auditors, investigators and administrators.

And it raises questions about whether -- and when - the government ought to wade in to protect investors.

“Like many others not knowledgeable in the world of investments, we relied on the experts to advise us and on the official watchdogs to protect us from the situation we are now in,” says Andy Black, another pensioner who invested over 70,000 pounds in Keydata. “We have been let down, so far, on all counts.”


Life settlement products first appeared in the mid-1990s. Typically, the market is fed by elderly individuals with life expectancies of between 3 and 12 years. U.S. settlement companies buy these life insurance policies at a fraction of their face value, but above their cash surrender values, picking up the tab for insurance premiums and collecting on the death benefit -- or policy maturity.

Industry proponents say that as long as the models used to predict the deaths of underlying policy holders are broadly correct, a suitably large portfolio should offer a healthy return, despite the industry’s often eyewatering commissions and fees -- as much as 10 percent upfront -- and the lack of generally agreed rules about how to value portfolios.

There are two men at the center of this story, and they could not have come from more different backgrounds. Stewart Ford, founder and CEO of Keydata -- the UK investment company Tony and Pam Tobin bought their bond from -- was the youngest of three sons of an alcoholic mother. Ford, now 46, grew up in a Scottish childrens’ home. Dropped off for a weekend aged nine, he ended up staying until he was 17. The experience, he says, left him “dedicated to never going back to a place where someone else is controlling your life and I had nothing.”

Ford cut his teeth in business selling sandwiches, worked as a camera operator and spent three years at a printing company in Edinburgh. In 1997, he set up Keydata, an online and digital publishing company that provided fund research and performance ratings -- some of it from Reuters, now Thomson Reuters Corp -- to the investment fund industry. In 2001, Keydata branched out into investment products. At its height, the company had 2.8 billion pounds of assets under management.

Given an inauspicious start, Ford told Reuters over the course of two interviews in his heavy, Scottish brogue, “a very, very small percentage of people do alright in life. Call it lucky or otherwise, but I managed to achieve and do the right things.”

David Elias sprung from altogether more privileged roots. Born in Singapore, he studied at Pembroke College, Oxford, and trained as a barrister before taking a financial job in the City of London. Elias was charming, intelligent and likeable, according to people who knew him. “David was ... a true gentleman,” notes one former business associate, who, like many people Reuters spoke to for this story, did not want to be identified because they are not authorized to speak publicly or because they are still involved in ongoing disputes connected to the case.

Elias proved adept at building fortunes and losing them. A once-successful petrol charge-card business had collapsed in the late 1990s, leaving millions of pounds of debts, hordes of angry creditors in London and Elias in Singapore refusing to return to face them. Forays into magazine and restaurant guide publishing had also flopped, as had an attempt to start a Bucharest stock exchange.

Ford and Elias met in the summer of 2005. Elias was on a mission to find a UK distribution channel for SLS Capital, a Luxembourg-based life settlement company he part-owned. He was full of enthusiasm for the nascent life settlement market, which he said looked under-priced and offered a safe haven for investors seeking shelter from stock market volatility. He handed around an independent report by Wall Street firm Bernstein Research, which forecast that the secondary market for U.S. life insurance would grow more than ten-fold to $160 billion over the next few years.

Ford says Keydata directors looked into SLS and agreed to sell its bonds in Britain. He says SLS was majority-owned by CRT Capital Investment Banking Group, a Connecticut-based investment manager regulated by the Securities and Exchange Commission (SEC), the U.S. watchdog. (Elias would later buy CRT out.)

“We thought it was a very kosher, good-looking product. Simple as that,” Ford says.

Keydata began selling SLS-backed bonds in July 2005. British investors seemed to love the product. The company used slick marketing brochures that suggested “secure income plans” were endorsed by names such as HSBC, KPMG and Bank of New York Mellon.


Although a warrant for his arrest had been issued over his earlier bankruptcy, Elias was a frequent visitor to London, where he owned a penthouse overlooking the Thames and parked his Bentley.

But all was not well.

“Something seemed to change in 2006,” says a former business associate. “He went off at me one morning at 10am. He was already drunk. I stopped liking him then and we stopped our business shortly afterwards.

“We’re talking about someone who drinks for breakfast. He had memory lapses. It was shocking. As things went on, we heard stories that he flew to South Korea to meet fund managers and didn’t show up because he was happy drinking in the hotel.”

Elias’s problems were beginning to affect both SLS and Keydata. According to court documents, he visited Keydata’s UK offices in a “drunk and abusive state” in January 2006 after repeatedly reneging on promises to list SLS bonds in Luxembourg. This was necessary to ensure certain Keydata offerings could be sold in Britain as Individual Saving Accounts (ISAs) -- popular tax-efficient savings and investment products.

At around this time, SLS’s U.S. partners decided they wanted to stop new investments in the SLS life settlement portfolio. Ford saw this as an opportunity to grab a piece of the action. He set up a new Luxembourg-based company, called Lifemark, to replace SLS as the bond issuer. Acting as both the bond issuer and the UK distributor meant Ford could now claim commissions at both ends of the product chain.


Throughout 2007 and 2008, Elias’s investments grew increasingly erratic. In Malaysia, he set up Dragon Blaze, an exclusive club that leased jets and yachts designed for the super rich. Membership cost $1 million a year and bought a package of “seamless luxury and individualized perfection”. But as the credit crisis hit, the club struggled to attract interest.

Elias’s next big bet was to purchase 800,000 acres of Brazilian rainforest. He had been inspired by Swedish-born business partner Johan Eliasch, who had made millions in investment banking and sporting goods. An investment banker, and one-time adviser on deforestation and clean energy to former British prime minister Gordon Brown, Eliasch owns a chunk of the rainforest as well as sports goods group Head. Following Eliasch’s lead, Elias hatched an audacious scheme to launch Amazon-backed “carbon credit” Eurobonds, an idea he pitched unsuccessfully at the height of the financial crisis in 2008.

Ford says Elias was battling renal problems due to alcoholism at the time. He had seen a Singapore-based stem cell expert, who Elias claimed had saved his life with stem cell treatment. His Amazon adventure played into that. “He wanted to put together some kind of magical potion from the rainforest. I’m deadly serious about this,” says Ford, who would meet Johan Eliasch himself later.

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“Eliasch told me the story of David’s motives for buying the rainforest for medicinal purposes. He believed he was on the cusp of a medical breakthrough -- as well as for carbon credits.”


Life had changed for Ford, too. Having moved to Geneva in 2007, he was enjoying a lifestyle he could only have dreamed of back in the childrens’ home.

Between 2006 and 2009, Keydata, its salesforce of financial advisers and a British Virgin Islands-based company owned by the Ford family trust, earned almost 110 million pounds from Lifemark in commissions and fees, according to a notice to bondholders published in March 2010. Keydata staff working in London were struck by the company’s rising fortunes. One insider says that from around 2006, life became “fairly luxurious” in some ranks. Perks included a private jet to watch the World Cup final in Berlin for the day and glitzy charity parties in places such as Skibo Castle in the Scottish Highlands, site of Madonna and Guy Ritchie’s wedding.

Elias was also to benefit. Ford used his Dragon Blaze aircraft to fly to the United States and across Europe. “David was in desperate need of cash and he told me about the planes,” says Ford. “So I said I’d take the plane off him and charter it.” But today, Ford insists that he and Elias were never more than business associates. “He was a charismatic little man -… (but) it’s important to understand that David Elias was absolutely no friend of mine,” Ford says.


In September 2008, SLS -- the issuer of some of the life-settlement bonds -- started to default on bonds Keydata had sold on to UK investors. By this time, Elias had bought out his U.S. partner in SLS and was running the Luxembourg-based business himself. It was not going well.

In a court statement made last year, the Financial Services Authority’s investigating lawyer Rebecca Irving said Ford masked a four million pound shortfall by paying UK investors from other Keydata resources.

Ford told the court that the SLS contract with Keydata allowed for a period of grace of roughly two months before a default could be declared -- a so-called “cure period”. Ford said Keydata regularly had to bridge an SLS income gap from corporate funds.

September 2008 was grim.

As Lehman Brothers fell and the credit crisis took hold, Ford personally lent Elias around 5 million pounds. The loan was secured against assets owned by Elias, including his stake in a Dutch computer screen developer and the Amazonian land. In all, the assets had a total value of 110 million pounds: the value of the SLS portfolio.

Ford says he insisted on that high level of security as a way to protect Keydata’s investors. He had seen the greyness of Elias’s skin, he says, and recognized the signs of advanced alcoholism, which had killed his own mother. It quickly became obvious that Elias needed more cash. He said he wanted to pay back the SLS bonds early.

But it was all a sham. Elias had already secretly sold the entire SLS portfolio at a cut price to investment banks including Goldman Sachs and Credit Suisse in the first few months of 2008, making off with the proceeds under the nose of custodian Equity Trust, an offshore trust services provider that was supposed to protect investors’ funds. Equity Trust says it does not comment on client relationships.

It got worse. Ford discovered that the assets Elias had offered him as collateral for his personal loan had already been pledged to the Swedish-born millionaire Eliasch. “I was so angry with Elias because he defrauded me. I had engaged with him, one businessman to another, to try and help him personally get on his feet again because he said he had liquidity problems.”


That was not all Ford had to worry about. The FSA was closing in. The regulator’s concerns stemmed from Keydata’s use of KPMG’s name in its early brochures, which had claimed the accountancy firm provided services such as actuarial models, credit rating checks and monitoring of the portfolio of investments. KPMG sent a “cease and desist” letter to Ford demanding Keydata stop using its name, and copied in the FSA for good measure.

Stung, Keydata asked UK law firm Norton Rose to review its brochures. Norton Rose says the review is confidential, but according to a draft document obtained by Reuters, the law firm advised that “a number of references to KPMG are inaccurate”. Keydata modified its brochures.

But the FSA continued to scrutinize the company, according to the Keydata insider. The regulator questioned Keydata’s promotional materials, due diligence and whether it was sufficiently highlighting the risks associated with life settlement-backed products.

At the end of 2007, the FSA launched a formal investigation into Keydata because of “serious defects” in the tax status of a number of its products -- the ones Elias had failed to list in Luxembourg as required. FSA lawyer Rebecca Irving later called Keydata’s decision to launch SLS-backed bonds as ISA investments -- despite this fact -- as “reckless at best”. She also accused Keydata’s management of giving misleading information to the FSA.

In September 2008, the FSA put Ford under formal investigation for possible misconduct. In November, the regulator grilled him specifically about SLS’s bond performance, according to the FSA’s Irving. Ford did not volunteer information that Elias was having liquidity problems or that SLS had defaulted on income payments. These were omissions that Irving said showed he “lacked integrity”.

Although Ford insists he was helpful, it was “not in his nature” to talk to the regulator, according to one source familiar with the situation. “There was a healthy degree of hostility on both sides.”

The FSA brought in PricewaterhouseCoopers (PwC) to examine Keydata’s books. In its “solvency report”, PwC calculated that when it took into account Keydata’s potential tax liabilities, the company appeared to be insolvent on a balance sheet basis -- it did not have enough assets to cover them.

On a Friday afternoon in June last year, the FSA decided it had seen enough and effectively fast-tracked Keydata into administration. In a move reminiscent of the tactic which U.S. authorities used to bring mobster Al Capone to justice, the FSA honed in on the ISA tax dispute. It ordered the company to stop accepting new business and required it to retain its assets.

One leading London lawyer, who is not involved in this saga but also spoke on condition of anonymity, says that move was “an outrageously disproportionate response.

“This is all indicative of our new red-in-tooth-and-claw regulator,” he says. “They (the FSA) are quite happy to sidestep procedure where they feel it’s in the public interest. That’s fine if you have confidence that they get their judgments right. If they get their judgments wrong, and you see them trampling unjustifiably on the legitimate interests of firms, it’s worrying.”


Whatever the rights and wrongs of the FSA’s action, it had an immediate effect. Ford and his lawyers scrambled for a way out, making a last ditch plea for Keydata management to step aside and the business to be sold, which they argued was a quick and cost-effective way to ensure it would be left with adequate resources.

But the FSA rejected the plan and appointed Dan Schwarzmann and Mark Batten of PwC as administrators of Keydata to avoid what they called a “run” on the investment company and to minimize investor losses. Ford and his colleagues were outraged, insisting that Keydata was both solvent and nearing a deal with the tax authority.

“Still to this day we can’t get an answer from anybody as to why the FSA suddenly said: ‘Bang! We’re closing you down’,” says fellow Scot and former tabloid newspaper editor Jack Irvine, who works with Ford in London to fight his case.

The move also cut off the flow of fresh UK money into Lifemark, whose ability to pay the premiums on its portfolio of insurance premiums, interest on retail investments and overheads depended in part on recruiting new investors.

Some investors say the tough action by the FSA, under fire over its failures in the financial crisis, could be seen as an admission that it should have studied life settlement products more carefully. In February, the regulator described death bonds as complex, inherently risky and unlikely to be suitable for many investors.


With Keydata out of action, Ford and his colleagues at Lifemark believed they could use Swiss and Austrian brokers to sell bonds instead. Despite initial concerns about a possible cash crunch at Lifemark, highlighted in its last published accounts, the Commission de Surveillance du Secteur Financier (CSSF), Luxembourg’s regulator, authorized the firm to carry on its business.

Lifemark snapped up another $30 million worth of life insurance policies, seeking to build its portfolio to the size needed to provide regular maturities -- or enough dying Americans to generate the expected return.

The deal used up Lifemark’s protective cash buffer -- a 30 percent slice of its investments meant to ensure it could meet premium payments. Despite this, the Luxembourg regulator approved a prospectus for a new tranche of Lifemark bonds that would have allowed the company to replenish its coffers.

But a week later -- three weeks after the FSA shut Keydata -- the CSSF suddenly blocked the deal, triggering a cash crunch that has brought Lifemark to its knees and scrambling to meet monthly premiums of around $4.5 million on its $1.3 billion insurance portfolio. The CSSF’s change of heart, which came soon after a telephone call with the FSA, prompted accusations from Lifemark executives that the FSA was acting outside its UK remit.

“Those involved in Luxembourg, including in particular the Lifemark board, are in no doubt that the CSSF was doing the bidding of the FSA,” says the source familiar with the situation.

“This abrupt change of position by the Luxembourg regulators resulted in disastrous consequences for the Lifemark portfolio. This had been an investment managed in the expectation that there would be no sudden and irrational changes of mind by the regulators that would need to be taken into account.”

The FSA says winding up Keydata was in the public interest. In Rebecca Irving’s 2009 witness report -- the only FSA document available ahead of the conclusion of the investigations into Keydata and Ford -- she repeatedly accuses Ford of failing to volunteer information. His failure to tell the FSA about the predicted liquidity gap at Lifemark was “a particularly serious matter”, she says.


That may be true. But other FSA decisions have raised eyebrows. The appointment of PwC as administrator, for instance, has sparked a furious row between Ford and the FSA over apparent conflicts of interest. PwC’s “solvency review” played a major part in the court decision which allowed the FSA to wind up Keydata and appoint PwC administrator.

As administrator, PwC had hoped to secure a quick sale of Keydata. But having discovered the 103 million pound black hole linked to SLS it was forced to call in the Serious Fraud Office -- and has failed to extricate itself.

Since being appointed Keydata administrator, PwC has consequently racked up more than five million pounds in unpaid fees and is now a top-ranked Keydata creditor -- a position Ford says sits at odds with its duty to protect the interests of Keydata investors.

PwC’s Luxembourg arm also audited both Lifemark and SLS accounts and hosted the conference calls -- at the request of the investment bank buyers -- during which David Elias sold off the SLS portfolio. Elias did not break any laws by selling the SLS portfolio. But when he absconded with the proceeds, he did.

PwC’s Schwarzmann told Reuters in an email that the company had erected “ethical walls” between its UK and Luxembourg firms, which were separate entities. “We have robust risk management processes and, whilst I am not aware of any potential conflict of interest, we discussed this matter with the creditors’ committee and have agreed that for the time being no additional procedures are appropriate,” he added.

But perhaps nothing better illustrates the many hats that PwC has worn in this saga than the issue of the relationship between Keydata and Lifemark. In its solvency report, PwC had predicted that Keydata’s financial position would become even more tenuous as third parties (such as Lifemark) learned about its defective ISAs and terminated agreements.

As predicted, last October, Lifemark tried to terminate its Keydata contract. But PwC, in its new role as administrator for Keydata, appeared to reject that move and now insists that Lifemark owes Keydata some 4.8 million pounds in commissions.

PwC says the fate of Keydata and its investors hinges on a Lifemark restructuring or sale. In June, it brokered an emergency $2.5 million loan for Lifemark, which had entered provisional administration, from U.S. hedge fund CarVal Investors.

In a 14-page open letter to the media and PwC, Ford accuses PwC of “wrecking” the value he created for investors. PwC responds curtly: “The Serious Fraud Office is investigating certain activities of Keydata as well as the control and ownership of Lifemark... We do not wish to say anything which could prejudice these investigations and Mr Ford would be well aware of this.”


One of the problems troubling Lifemark’s life-settlement portfolio is fairly fundamental: the rich names on the insurance policies are dying too slowly, meaning hefty premiums are due for much longer and maturities are delayed.

Patrick McAdams, co-deputy chairman of the European Life Settlement Association, says all funds buying in the early days of the industry have been hit by the longevity of underlying policy owners. “You have people living longer than expected, which means you have to pay premiums for longer on policies, which puts a cash strain on your premium reserves, which forces people to go to market and sell -- and, of course, with the market they way it is, people have to take significant write downs,” he explains.

Ford, however, is convinced it is possible to structure a rescue package that would restore payments to investors. But he is frustrated that his efforts to broker a deal have been thwarted to date because, he says, the FSA considers him a “bad egg”. The FSA has declined to comment on ongoing investigations. Lifemark’s depleted cash balances, Ford says, will soon be partially replenished with around $75 million of mortalities. “I’m working and talking with people about raising cash,” he says. “If the powers that be think my money isn’t good enough, I want to encourage others to do it.”

But Ford’s optimism about Lifemark is not shared by Eric Collard of KPMG, who was appointed provisional administrator of Lifemark last November. Collard says Lifemark’s next liquidity crunch is looming. “The one million dollar question is thus: ‘Why is this portfolio not generating the expected level of revenue?” Collard wrote in an email to Reuters. “Is it due to a temporary delay in time which would be isolated or is it due to a more structural bias?’ The answer to this question will determine the impact on bondholders.”

Investors, some of whom called the FSA in 2007 for advice on Keydata before investing and were assured it was an established business, are outraged that the FSA did not warn people earlier and took two years from the start of its investigation to shut Keydata down.

Many of Keydata’s customers say payments became sporadic in 2009 and stopped altogether in January. They hope that the Financial Services Compensation Scheme (FSCS) -- Britain’s safety net for investors when regulated businesses fail -- will decide that Keydata is liable for their losses, as Luxembourg-based Lifemark is not regulated in Britain.

The FSCS has paid compensation to some investors in SLS-backed products up to a maximum of 48,000 pounds, and says it plans to announce this month whether around 23,000 investors in Lifemark bonds might also have a valid claim against Keydata. Whatever the decision, the onus will be on elderly investors to prove they have an individual case worthy of compensation. “Each investor will have had a different type of contact or interaction with Keydata,” the FSCS says. “Some people will have had certain brochures others won’t have had, some will have had letters ... received different emails, different literature -- so we have to look at each case on its own merit.”

One group of investors has appointed lawyers in Luxembourg in a last-ditch attempt to stop Lifemark being liquidated. Others are trying to raise a loan to help Lifemark weather its liquidity crises until policies start maturing. Many are pressing local parliamentarians to take up the battle and put pressure on a reluctant British government to investigate the affair.


The FSA says it hopes to conclude its investigations into Keydata and Ford in the first quarter of next year, while the Serious Fraud Office says only that its investigation is continuing, that it has traced a “sizeable proportion” of missing SLS funds, is expecting to receive help “from overseas” and is now focused on Lifemark.

Ford is not used to defeat. With his reputation in tatters and his fortune undermined, he’s out of shape and red-eyed. But still, he says, “I am someone who can make the impossible possible.” Asked whether he is prepared for legal suits and an FSA fine that is expected to eclipse the record 967,000 pound fine slapped on Turkish oil executive Mehmet Sepil for market abuse in February, he says: “Bring it on!

“I’m coming up to 47 years old and started working at eight -- that’s when my journey started,” he says. “And it was abruptly stopped by a group of people from Canary Wharf who didn’t know their arse from the elbow.”

Elias’s journey ended in May last year, when he died in Singapore in his mid fifties, from complications linked to pneumonia and alcoholism. The man who built a career on smooth talk and fast deals fooled people even in death. Speculation continues to swirl that he has changed his identity and remains holed up somewhere in southeast Asia. It’s the kind of rumor that, perhaps unsurprisingly, has long plagued the life settlement market.

“In this market, people have faked their own death,” says McAdams of the European Life Settlement Association, which is struggling to inject more transparency into the broader market to improve the image of its products. “Apparently there’s even a Ugandan death certificate but no body out there somewhere.”

In Elias’s case, former colleagues insist his body was flown from Singapore to Malaysia’s Labuan Island, where it was cremated. “I was at the funeral, saw the body in the casket,” Godfrey Underwood, a veteran pilot once employed by Dragon Blaze, said by telephone from his home in Malaysia. “It was covered with clear polythene. So unless Madame Tussauds did a really good job on a wax dummy, he was there.”

And the Tobins? Their monthly payments ceased altogether in May. Without the financial help of their children, they say, they would have to leave their modest home, which sits on a flood plain. Tony says he is confident the static caravan is fully insured, although when asked if that includes flood damage he visibly blanches.

“I’d better double check that,” he says nervously.

(Additional reporting by Razak Ahmad in Malaysia and Raju Gopalakrishnan in Singapore)

Editing by Simon Robinson and Sara Ledwith