Both the Securities and Exchange Commission and the U.S. Attorney's Office have brought actions against Costa Rica-based Provident Capital Indemnity, LTD, an insurance and reinsurance company that purported to provide bonds guaranteeing life insurance settlements, but was instead allegedly perpetrating a $670 million fraudulent scheme. Provident's President, Minor Vargas Calvo, and the company's outside auditor, Jorge L. Castillo, were both arrested last week and were individually named in both actions.

Provident provided financial guarantee bonds on life settlements, meant to offer protection to investors in life insurance policies. Should the life insurance policy holder live beyond his or her life expectancy, Provident would pay the death benefit. This provides a fixed maturity date for investments that would otherwise be open-ended, because the bond obligated Provident to pay investors the face value of the underlying insurance policy by a date certain if the insured outlived his expected date of death. The bonds were a component of numerous third-party life settlement offerings.

From 2004 until early 2010, Provident issued nearly 200 such bonds, with a face value of $670 million dollars. According to the SEC complaint, however, Calvo and Castillo misrepresented Provident's ability to satisfy its obligation under the bonds, by misrepresenting the assets that backed the bonds, the company's credit rating, the availability of reinsurance, and whether the company's financial statements were audited. Specifically, Vargas and Castillo told investors that Castillo had audited Provident's accounting statements properly, when he had not, and had listed assets on the statements that did not exist, in order to entice investment.

As we previously reported, here and here, the SEC has formed a Life Settlement Task Force that has called for greater investor protection of life settlements, in which a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The SEC has also recently updated its Investor Bulletin on life settlement investments, which can be found here.

The indictment in the criminal case, United States v. Provident Capital Indemnity, et al, 11-cr-0014 (E.D.Va.) can be found here.

The complaint in the civil action, SEC v. Provident Capital Indemnity, et al, 11-cv-045 (E.D.Va.) can be found here.

The press release from the US Attorney's Office can be found here, and the press release from the SEC can be found here.