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Securities and Exchange Commission v. Secure Investment Services

July 28, 2008

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
SECURE INVESTMENT SERVICES, INC.; AMERICAN FINANCIAL SERVICES, INC.; LYNDON GROUP, INC.; KIMBERLY SNOWDEN; AND LINDA NEUHAUS, AS ADMINISTRATOR AND PERSONAL REPRESENTATIVE OF THE ESTATE OF DONALD F. NEUHAUS, DEFENDANTS.*FN1



The opinion of the court was delivered by: Garland E. Burrell, Jr. United States District Judge

ORDER

Evidentiary hearings were held in this action June 30, 2008 and July 28, 2008, on Michael J. Quilling's thirteen motions to abandon life insurance policies on which Mr. Quilling, the appointed Receiver for Secure Investment Services, Inc., American Financial Services, Inc. and Lyndon Group, Inc. (collectively, "the estate"), has paid 100% of the premiums since being appointed Receiver, even though the estate does not have 100% interest in the policies.

I. Background

Plaintiff Securities and Exchange Commission sought and received appointment of Mr. Quilling as the Receiver in this civil enforcement action, in which Plaintiff alleges Defendants engaged in a fraudulent scheme involving the sale to investors of interests in life insurance policies on the lives of other individuals.

Twenty-four policies are wholly owned by the estate, and the Receiver estimates there are potentially 660 claims which could be filed against these policies by investors who were sold interests in the policies, but the exact amount will not be known until claims are filed and processed. When the Receiver was appointed there were a total of twenty-seven wholly owned policies, but three of these policies have matured since the Receiver's appointment (meaning the insured died and the estate received or is in the process of receiving the life insurance proceeds).

There are an additional twenty-two policies which have multiple fractional owners; the estate is among the owners. The Receiver testified that there are between 200 and 500 different investors who potentially have claims against those twenty-two policies. In the pending motions the Receiver seeks to abandon the estate's interest in thirteen of these twenty-two policies so that he is authorized to discontinue paying the premiums on the abandoned policies.

II. Policies Sought to be Abandoned at June 30 Evidentiary Hearing

One of the policies the Receiver seeks to abandon is the BIE-F&L policy. Forty people and entities have fractional ownership interests in that policy. The estate owns 1.25% of that policy, and has been paying 100% of the premiums for that policy since August 2007, paying $124,800 in premiums. The face value on that policy is $4 million. The amount of premiums needed to keep the policy in force is $41,000 per quarter. The current death benefit available should both insureds die would be $4,032,444. This is what is called a second to die policy; it insures both the husband and the wife, and they both must die before a death benefit is paid. The amount of anticipated death benefit for the estate was $50,506.76 when the premiums were paid. The Receiver testified the amount he has already spent on premiums is almost three times what the policy is worth to the estate.

To try to resolve this premium expenditure problem, the Receiver started sending letters in February to other investors in the policy in which he asked them to consider transferring their ownership interests to the estate, so that the estate would acquire sufficient ownership interest to justify continued payment of premiums to keep the policy from lapsing or to provide the estate with enough ownership interest for the Receiver to be in a position to sell the policy. Such transferees could be given claims against the estate. Some investors agreed to the transfer, and the total ownership interest the estate had in the policy sometime before the hearing was 56.6%, which equals a death benefit of approximately $2,282,000.

The Receiver also proposes to abandon the KIL-D Policy. There are approximately twenty-three owners of the policy. At the time the Receiver was appointed the estate owned 4% of the policy. The quarterly premium was about $12,784; the estate has paid $41,700 in premiums to keep the policy from lapsing. The face value on that policy is $925,000. The current death benefit available to the estate if the insured died would be $37,053.88. The Receiver made the same offer to the investors referenced above to resolve the payment of premium problem, and the estate's ownership percentage increased to 64.45%, which equals a death benefit of approximately $596,000.

The Receiver also proposes to abandon the SHO-I(1) Policy.

There are approximately twenty-three owners of the policy. At the time the Receiver was appointed the estate owned 4.49% of the policy. So far the estate has paid about $64,000 in premiums. The planned premium payment per quarter is $18,750, which is $76,800 a year. The face value on that policy is $1.5 million. The current death benefit available to the estate if insured died would be $67,470. The Receiver made the same offer to the investors referenced above to resolve this estate payment of premium problem, and the estate's ownership percentage increased to 42.913%, which equals a death benefit of approximately $643,695.

The Receiver also proposes to abandon the SLE-K(1) Policy. There are approximately fourteen owners of the policy. At the time the Receiver was appointed the estate owned 0.97% of the policy. So far the estate has paid about $44,837 in premiums. The face value on that policy is $666,666. The current death benefit available to the estate if insured died would be $6,500. The premium payment per quarter is just less than $8,000. The Receiver made the same offer to the investors referenced above to resolve this estate payment of premium, following which the estate's ownership percentage increased to 63.25% of the policy, which equals a death benefit of approximately $421,000.

The Receiver also proposes to abandon the SLE-K(2) Policy. There are eight owners of the policy. At the time the Receiver was appointed the estate owned 0.1% of the policy. So far the estate has paid about $22,500 in premiums. The face value on that policy is $666,666. The death benefit available to the estate if insured died would be $695.73. The premium is $33,260 a year. The Receiver made the same offer to the investors referenced above to resolve this estate payment of premium problem, following which the estate's ownership percentage increased to 10.63% of the policy, which equals a death benefit of approximately $70,893.

The Receiver also proposes to abandon the SLE-K(3) Policy. There are fourteen owners of the policy. At the time the Receiver was appointed the estate owned 2.6% of the policy. So far the estate has paid about $54,000 in premiums. The face value on that policy is $1 million. The death benefit available to the estate if insured died would be $26,000. The premium is $58,000 a year. The Receiver made the same offer to the investors referenced above to resolve this estate payment of premium problem, following ...


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