EEA Life Settlements Fund PCC Limited
PO Box 282
Regency Court
Glategny Esplanade
St Peter Port
Guernsey, GY1 3RH
t: +44 (0)1481 740900
f: +44 (0)1481 716868
18 March 2015
Dear Mr Trinkwon
EEA Life Settlements Fund PCC Limited (the "Fund")
I refer to your letter of 28 February 2015 and the enclosed document, which you refer to as
Working Paper 7D. In this response, I do not propose to address each and every point you have
raised — many of them have already been raised in earlier correspondence to which the Board
has responded. To the extent that I do not address any particular issue in this letter, it should not
be taken that I accept the point made. I do, however, have some general observations on your
letter.
In Sections 2 and 8 of the Working Paper you continue to dispute the LE estimates provided to the
Fund, even though those are provided by independent life expectancy providers (rather than by
ViaSource), and demand, on that basis, that BacoValuations (who have previously approached
the Board on a number of occasions soliciting work) be appointed as investment adviser in place
of ViaSource. The Board strongly disagrees with your conclusion and recommendations in that
regard. It also disagrees that it would be appropriate to provide you with the further information
sought.
DT Comments :
a) We did not dispute the (Fasano) LE estimates obtained during mid-2013. We do
dispute EEA’s assertion that all 550 outstanding policies (at the time) were actually
reviewed by Fasano. As stated in our WP7D, this is based on analysis of the actual
maturities that have occurred since then, and the current average life expectancy of
the remaining portfolio.
b) We have not demanded (on that or any other basis) that BacoValuations replace
ViaSource as the Investment Advisor to the Fund Manager. We have recommended
that ViaSource be removed as the Investment Advisor (because of repeated poor
performance and conflicted interests) and we have separately recommended that
BacoValuations be engaged as a “Consultant” to manage the run-down of the
remaining portfolio, based on their claimed “unique” expertise and experience
running off the LifeMark portfolio, among other things.
Registered office: Regency Court, Glategny Esplanade, St Peter Port, Guernsey, GY1 1WW. Registered in Guernsey number 43302
c) The additional information that we are seeking is merely the basic information about
the assets (i.e. polices) that our Fund is invested in. This would enable us to carry out
our own assessment of the viability of the Fund and it’s run-off projections, bearing in
mind the complete lack of credibility attached to any of the Board’s (or ViaSource’s)
previous predictions and the ongoing lack of expected maturities and cash-building.
As I have explained previously, the Fund's Manager has already provided shareholders with a
substantial amount of information relating to the Fund and will continue to do so.
DT Comment : EEA keep repeating this mantra, but the reason that we keep asking for
more information about the remaining policies and related run-off predictions is
because EEA don’t include this information in the “substantial” amount that they do
distribute.
The Fund's Offering Memorandum and Supplements do not entitle you (or investors) to receive the
additional information requested. Nor can you reasonably expect that such information should be
provided. The same point applies to your request for detailed information regarding future
cashflow predictions (section 3). It is the responsibility of the appointed investment adviser to
collate, review and then advise upon such data. There is no obligation on the Board to provide
this information to investors (or other third parties) so that they can perform the same function.
DT comment : There might not be a legal obligation to provide such information, but
investors are entitled to know when they might expect to get their money back, and
how much. The predictions in the 2013 Restructuring Circular have turned out to be
significantly wrong, as have the subsequent (minimal) predictions in the 2013 Annual
Report and subsequent Portfolio Statistics. If the Fund was trading normally then this
lack of credible predictions would be sufficient grounds for many investors to redeem
their shares immediately, but this option is not available to the remaining investors.
The Working Paper advocates a major change to the Fund's investment objective and strategy by
proposing a liquidation of the Fund over a short time period (you suggest three years) (sections
3.2, 6.1, 7.1). This suggestion runs contrary to the restructuring proposal, which as you will recall
received overwhelming support from the voting shareholders.
DT Comment : We agree that 95.5% of shares voted were in favour of the restructuring
(though under duress and mis-leading threats of “firesale liquidation” which we
complained about at the time). However, 58% of the total shares elected for Run-off
Cells and (see separate argument below) possibly half the remaining 42% elected for
Continuing Cells based on a view that this would lead to redemptions after the 23month lock-up period. This was also within the context (for all shareholders) that
“…The Lock-Up Period [23-months] corresponds to the period predicted by the
current model (on a “two times life expectancy” basis) as the period at the end of
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which [November 2015] approximately 28 per cent [$363m] of the Current
Underlying Investments [$1297m] will have reached maturity, such percentage
increasing to approximately 42 per cent [$545m] three years after the Effective
Date [November 2016] and to approximately 62 per cent [$804m] five years after
the Effective Date [November 2018] …”
As the Board admitted at the 2014 AGM, maturities and cash receipts have not been
occurring as expected and investors are entitled to know why, and what the Board
proposes to do to rectify the situation. EEA does not have an open-ended mandate to take
forever to run-off the portfolio or for increased losses to the investors.
The restructuring proposal gave shareholders a choice: to be part of a Run-Off Cell, such that
their shareholding would be redeemed over time from available cash (derived principally from
maturity proceeds), or to be part of a Continuing Cell, giving ongoing exposure to the asset
class. Your proposal would have the effect of overriding the election already made by
shareholders who chose to have an ongoing exposure to the asset class.
DT Comment : This is not true. The (minority) of Continuing shareholders who wish to
remain exposed to the Life Settlements Asset Class would also benefit from faster cash
accumulation from the existing portfolio and a quicker re-investment into the New Irish
Fund. No investors benefit from a prolonged run-off with exposure to increased
premium payments and other charges / expenses.
In that regard, I note that the figures suggested (at sections 3.2 and 9) regarding the proportion
of shareholders who you say are looking to redeem at the earliest opportunity are not based on
any representative sample and are therefore nothing more than speculative.
DT Comment : The 58% of Run-off (i.e. redemption) shares is a matter of record. The
further “half” (i.e. 21%) of Continuing shares is subjective, but based on asking the
Continuing investors who have joined the EEA Investors’ Group. If EEA has more
accurate or relevant estimates then we would be happy to hear about them. We note
that 28% of Continuing shares were involved in the recent request to redeem 5% of
their holdings, and this was after zero publicity (by EEA) for the original option in
November 2014 and a convoluted re-request process at 25% reduced NAV in January.
The 28% figure might therefore be viewed as supportive of a 50% estimate for full
redemption requests at the end of the lock-up period in November 2015.
Your proposal would require, at the very least, a further restructuring proposal to be formulated
and voted upon by shareholders. The Board does not consider such a course of action (or — as
suggested in section 9.2 — a further opportunity for shareholders to switch from Continuing to
Run-Off Cells, or vice versa) to be appropriate in circumstances where shareholders have only
recently approved the Fund structure and approach now in place.
DT Comment : We disagree that a formal restructuring would be necessary. The Board
would merely be trying to restore the maturity predictions and cash positions that were
the basis for the 2013 Restructuring, in the light of the subsequent failure of the
portfolio to mature as expected. In fact, this is part of the logic that EEA used to explain
/ justify the obtaining of market-based valuations in their 2nd February 2015
Announcement. The Directors already have a discretion to re-open the Continuing
versus Run-off election, as they already did between 18th and 31st October 2013.
As regards the appointment of Maple Life, there are several inconsistencies in the observations
that you have made. On the one hand, you state in sections 5 and 6 of the Working Paper that the
Board was right to appoint Maple Life as an independent valuation agent for the purposes of
reaching an independently-calculated present market valuation of the portfolio (which can then be
used to assist the Fund's investment manager in determining whether particular policies should
be sold), but you then go on to demand that the Board should disregard any such valuation for
the purposes of calculating the net asset value.
DT Comment : Our argument is that valuations obtained on the basis of selling (all) the
policies is not a fair and accurate basis for valuing a portfolio whose objective is (still) to
hold all (or most) policies to maturity. The previous NAV calculation method (FVTPL)
was appropriate for this purpose, but for reasons which EEA are reluctant to address,
the LEs and other maturity assumptions used continue to be seriously wrong, making
both valuation methods irrelevant.
You further suggest that valuations by Maple Life should themselves be independently tested and
that (in addition) you should receive further detailed information to enable you to check Maple
Life's workings or conclusions. The Board disagrees that such an approach would be
appropriate. As you acknowledge, Maple Life is a leading valuation firm in the relevant market
and you do not dispute its credentials. The Board is entitled to rely on Maple Life for independent
valuation advice.
DT Comment : We didn’t ask for any additional information about the Maple Life
valuations. We simply recommended that
“ EEA should address the questions and concerns … and inform us of the answers
so that we can form our opinion of the credibility of the Maple Life valuations. The
Fund Manager (and the auditor) should consider periodically checking a sample of
Maple Life valuations against a wider database of transactions such as the one from
AA Partners Ltd in Zurich, Switzerland. “
In section 9 of the Working Paper you have proposed that, notwithstanding the advice received
from Maple Life, the Board should disregard that advice and instead allow shares to be redeemed
by reference to earlier NAV calculations (which differ in approach and outcome from those now
advised by Maple Life). The Board does not agree with that approach.
DT Comment : As explained above, our contention is that the Maple Life valuations are
designed for policies to be sold on the tertiary market. This is not an appropriate basis
for the Fund NAV or share redemption / dealing prices. The previous FVTPL valuation
is still the most appropriate methodology for the current “hold to maturity” investment
objective, but all valuations will need to be corrected for the apparent errors in the
underlying portfolio LE and maturity assumptions.
Regarding communications which are said to have taken place between representatives of the
Manager and the FSCS, in order that I may make enquiries with the Manager I should be grateful
if you would provide further details of precisely what is said to have been discussed, by whom,
with whom and when.
DT Comment : I have referred this back to the original claimant and his
representative, and have also reviewed additional letters received by claimants from
FSCS. I have also exchanged emails with a contact at FSCS and it appears that they
have now shifted their ground. Although they still classify the EEA shares as “illiquid”
they are now claiming that because EEA is publishing a NAV then there is “some
value” remaining and therefore they can’t settle the claims until losses can be
crystallized. This is different from the position adopted by the FSCS during the Fund
suspension, and different from the position adopted by the UK Financial Ombudsman
Service (FOS) and the UK Courts when dealing with mis-selling claims against
Financial Advisors (e.g. TBO), where they have declared the EEA shares to currently be
“worthless” for compensation purposes. We will pursue these matters directly with
the FSCS and claimants concerned and will come back to you if and when it appears
that some specific assistance from EEA would be helpful. Obvioulsy, having to wait 510 years or more to crystallize any losses when a mis-selling claim has been accepted
as valid is just adding insult to injury for the investors concerned.
Concerning fees and charges, as I have explained previously, these have at all times been
calculated (on a monthly basis, by reference to the relevant monthly NAV) on the basis of the
Fund's Offering Memorandum and Supplements. Whilst the Board keeps fees and charges under
review, it does not consider it appropriate to adopt the suggestions made in section 11.
DT Comment : We reluctantly note the Board’s position. Alison Simpson stated at the
2012 / 2013 AGMs that valuation based fees had been calculated and paid for 2011,
2012 and 2013 on the basis of the June NAVs as per normal practice.
The points you make regarding investor communications are noted. All investors are able to
access the information on the Fund's website, if necessary by making arrangements through their
platform or intermediary. The Board does not consider it appropriate or in the interests of
shareholders to remove the password protection in respect of such information. Further, the
Board does not consider it appropriate (or necessary) to amend the existing processes for
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disseminating information via intermediaries. As you will appreciate, the existing processes are
required by the regulatory restrictions affecting the Fund's marketing activities.
DT Comment : We reluctantly note the Board’s position. Many investors do not have
Advisors or other intermediaries and the dissemination of information by nominees and
platforms is very erratic, as we have previously mentioned. We see this as not so much
a matter of meeting minimum legal obligations as following good or best practice and
corporate governance.
The Board notes but does not agree with the various complaints and suggestions made regarding
corporate governance, the investment adviser, Fund Manager, Marketing Agent and auditors.
DT Comment : We reluctantly note the Board’s position.
As regards the Working Paper more generally, as previously stated, the Board's view is that
shareholders should make their own investment decisions based solely on information provided
by the Fund (available at http://www.eeafmg.qg/eea-life-settlements-fund/) and any advice
provided by their independent financial advisers. If shareholders (or anyone else) rely on your
group's publications for the purposes of taking any investment decisions, they do so entirely at
their own risk. For the avoidance of any doubt, it should not be taken that the Board in any way
endorses the position advocated by the investor group in its various publications.
DT Comment : We note the Board’s position and always inform our members with
appropriate disclaimers. We do not provide financial advice.
Finally, I note that you have informed the Guernsey Financial Services Commission (GFSC)
directly of your complaint.
For completeness, please be advised that further information
regarding complaints is available via a section of the GFSC's website entitled Complaints and
Standards — Complaints Against Regulated Financial Services Businesses:
http://www. qfsc.qq/The-Commission/Complaints-And-Standards/Pages/Complaints-AqainstReg ulated-Financial-Services-Businesses.aspx.
DT Comment : Thank you. We are already familiar with the GFSC Complaints procedures.
Yours sincerely,
Mark Colton, Chairman