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http://www.ft.com/cms/s/0/e1b068b2-0557-11e5-8612-00144feabdc0.html#axzz3bgLO6Pfw
May 29, 2015 4:49pm
Guernsey-based “death bond” fund heading for court battle
Judith Evans, FT Money - Investments
Investors in a collapsed multimillion pound “death
bond” fund are preparing for possible legal action
after talks with the fund’s board reached a
stalemate. The crisis at the Guernsey-based EEA
Life Settlements fund comes after the City
regulator slapped a record £75m fine on the exchief executive of Keydata, a firm that likewise
invested in the unwanted life insurance policies of
US pensioners — a controversial form of
investment briefly popular among UK retail
investors.
While the Keydata case involved the disappearance of more than £100m of investors’
assets, there is no suggestion of such misappropriation at EEA.
But investors’ money has been trapped for four years in the EEA fund after it fell foul of
liquidity problems, having attracted £600m of investment. A group representing some 300 of
those investors, with £60m of holdings, said that EEA and the fund’s board had failed to
listen to their concerns about its ongoing investment and run-off strategy. The EEA
Investors’ Group is now in talks with lawyers about legal action against EEA, while still
hoping for a resolution involving management and the Guernsey regulator.
“We have members who are destitute because of this,” said David Trinkwon, who runs the
group. One couple in their 80s have sold their house and car in the effort to stay afloat as
their life savings are trapped in the fund, said Mr Trinkwon.
Members of the group invested amounts from £10,000 to £8m. For some, this represented
their entire pension savings, invested at the suggestion of financial advisers who were
receiving commission of up to 5 per cent.
Like the Keydata fund, EEA Life Settlements bought the life insurance policies of US
pensioners who no longer wanted them, paying premiums on the policies and then cashing
in when policyholders die. A 2009 fact sheet said the EEA fund was “low-risk” and “doing
what it says on the tin”.
The fund was sold as an uncorrelated investment targeting annual returns of at least 8 per
cent, but it suspended redemptions in 2011. Under EEA’s estimates, it will take another five
to 10 years to return investors’ money.
Investors say the fund’s manager has mishandled a restructuring of the vehicle and issued
overly optimistic projections of likely returns. At the same time, they accuse it of using a
valuation system that has led to large writedowns: most recently, in January, investors were
told that their holdings had been marked down by 26 per cent.
©2015 Financial Times and EEA Investors’ Group
The investors’ group is seeking a gradual liquidation of the fund over five years, but says
their plea has been ignored. They now want the Guernsey regulator to put the fund in
administration and seek the return of an estimated $186m paid in fees and charges.
If it does not do so, the investors’ group plans to initiate legal action against EEA. This may
be on the basis of a series of claims it says were made by EEA about the fund when it was
originally marketed. EEA has fought back against investors’ accusations, saying it “strongly
refuted the suggestion that they misrepresented the fund to investors”.
The company said it “acted at all times to achieve medium to long-term capital
growth . . . and have actively overseen and managed the portfolio’s composition with that
overriding objective in mind”. EEA never guaranteed returns, it said, adding that valuations
of the fund were based on an independent assessment.
So-called “life settlements” were briefly popular before the Financial Services Authority —
the City regulator that preceded the Financial Conduct Authority — issued a warning against
their sale to retail investors in 2011.
Investors raced for the exit, but the asset class is illiquid and the EEA fund suspended
redemptions within days. Since then, investors have been offered limited opportunities to
apply for redemptions of up to 5 per cent of their holdings, with the outcomes depending on
cash available within the fund.
While Keydata’s investors have received payouts from the Financial Services Compensation
Scheme thanks to its status as a regulated firm, investors in EEA’s offshore fund cannot
access this form of redress.
About 30 investors have secured compensation from their financial advisers through the
Financial Ombudsman, typically on the basis that the EEA fund was unsuitable for them or
had been billed as lower-risk than it really was.
The investors who have been compensated through this channel so far represent a fraction
of the total, but Tobias Haynes of Regulatory Legal, a law firm representing dozens of
investors, said: “This is definitely the safest route for investors who were advised to buy the
fund.”
Another group of investors is seeking to take legal action against the FCA at the European
the fund, but lawyers have questioned whether this can succeed.
The Guernsey Financial Services Commission said it had been in touch with the fund and
investors’ group for “some time”, and had invited complaints from anyone unhappy with a
product or company falling under its remit. It also noted that shareholders voted to approve
the restructuring of the EEA fund.
“The commission is an evidence-based regulator and treats all complaints very seriously to
determine whether they raise any conduct, financial crime or prudential concerns,” it added.
©2015 Financial Times and EEA Investors’ Group
EMAILS TO EEA RE THE EEA FT STATEMENT
From: David Trinkwon [mailto:[email protected]]
Sent: 03 June 2015 08:31
To: Mark Colton
Cc: EEA Secretary
Subject: FT Article
Dear Mr Colton
I refer to last Friday / Saturday’s FT article, which included a statement attributed to “The Company”
but was apparently issued by your Media Agent, Martin Stott at Bulletin PR. We consider that the
statement, as reported, was inaccurate and mis-leading and have sent the following email to Martin.
Please confirm that “The Company” referred to was EEA Life Settlements Fund PCC and that the
statement was duly authorised by the Board and/or the Manager.
Kind Regards
David Trinkwon
=========================================================================
From: David Trinkwon [mailto:[email protected]]
Sent: 03 June 2015 00:37
To: '[email protected]'
Cc: 'Judith Evans'
Subject: FT Article
Hello Martin
I understand that you issued the EEA comment to Judith Evan’s FT article last Friday / Saturday
regarding the EEA Life Settlements Fund. For the record, I am sending the following comments
regarding your statement. In my view, it would be appropriate for you to issue an apology and
retraction or correction, not least to Judith.
EEA INVESTORS’ GROUP COMMENTS ON EEA STATEMENT IN FT ARTICLE
The company said it “acted at all times to achieve medium to long-term capital
growth . . . That might have been EEA’s original intention, and what it said on the tin (as
Peter Winders and the published Fact Sheets frequently said).
The Fund only “achieved” 8-12% pa apparent capital growth in the short term
until 2011 by overstating the valuations until it was belatedly challenged by the
auditor, Ernst & Young in early 2012.
After the subsequent mortality review and 20% devaluation in mid-2013 the
effective annual growth since 2008 was only 2-3% pa right through until
©2015 Financial Times and EEA Investors’ Group
November 2014, (depending on currency – prior to 2012 returns had been
hedged against currency fluctuations).
Since the December 2014 revaluation by Maple Life (wholly inappropriate in our
view) the effective capital growth (decline) to March 2015 has been negative 2.3
– 3.5% pa since 2008, depending on currency. Not a very illustrious
achievement, and nowhere near 8% pa compound growth.
... and have actively overseen and managed the portfolio’s composition with that
overriding objective in mind.
EEA have purchased 926 policies since inception, and have only disposed of
five (in 2011 and 2012). The total gross maturity value was $1865m and the total
cost (purchase plus premiums to March 2015) was $1100m, leaving $765m of
potential “profit” to cover expenses and pay returns (capital plus “growth”) to
the investors. EEA have paid $100m of net redemptions to investors in 2011,
2014 and so far in 2015.
EEA have paid a total of $210m in fees, charges and expenses to March 2015
and estimate a further $160m of future premium payments (although we believe
that this should be nearer to $600m). There is no published estimate of future
expenses although we have estimated $75m or more based on EEA data.
EEA have also lost (so far) $10m -20m in maturity value through loss of cover
or surrender of unsuitable policies (after paying premiums). We believe that the
total such future losses could be more than $120m over time.
This leaves anywhere between $200m and $600m to return to investors over
the 5-10 (or 10-15) years of future maturities.
Shareholders currently still have almost $800m of original capital on the EEA
books.
In its March 2015 statements, EEA said that $1100m of maturities were
outstanding, but when future premiums and expenses are taken into account
this would reduce to $500m - $900m returned to the remaining investors,
depending on whose assumptions and predictions are used.
More than 80% of the remaining policies are on people 80 or 90 years old and
insured for more than $2m per life, and these policies are notoriously liable to
mature much later than expected (or run out of cover).
The current Maple Life valuations (which are based on the same flawed policy
assumptions and Life Expectancy estimates as the 2013 EEA revaluation)
imply that if all policies were sold tomorrow they would raise $600m in cash for
the investors (minus this years’ expenses of $10m). This is still far short of the
$800m needed to reimburse the shareholders’ original investment, never mind
any “capital growth”
©2015 Financial Times and EEA Investors’ Group
If EEA’s objective was to actively manage the composition of the portfolio to
achieve capital growth over the medium to longer term then they have failed
miserably, and it was nothing to do with the FSA announcement. In fact the
FSA were correct – but went about it their task in a totally reckless, late and
incompetent manner.
EEA never guaranteed returns, it said, adding that valuations of the fund were based
on an independent assessment.
The Managers, distributors and promoters of the Fund kept telling investors
and IFAs that this was a low risk, absolute return, non-correlated investment,
with maturities happening faster than expected and paying $71m of
performance fees based on an illusory 8% pa benchmark return.
The valuations were never based on an independent assessment. In fact, EEA
regularly boasted that their specialist expertise was more appropriate than
conventional valuations and actuarial methods. This was one reason given by
the European Life Settlements Association (ELSA) that they wouldn’t accept
EEA LSF for membership.
The original medical reports and life expectancy estimates were obtained from
a segment of the industry rife with manipulation, incompetence, fraud and
corruption, and then used to feed into a valuation model using subjective
factors and methods controlled by conflicted Directors whose associated
companies benefitted from valuation based fees and charges (and still do).
Even the 2013 revaluation (which was supposedly more through and reliable)
has turned out to be far short of the mark in terms of credibility, maturity
performance and predictions and has now apparently been abandoned in
favour of the inappropriate Maple Life valuation.
Kind Regards
David Trinkwon
Director, Medley Systems Ltd
Coordinator – EEA Investors’ Group
Tel : +44 (0) 7802 538315
Skype : david.trinkwon
Email : [email protected]
Web : www.EEAInvestors.com
©2015 Financial Times and EEA Investors’ Group