Did U.S. Senator William Nelson (D-Fla.) allow a $130 million fraud to occur during his tenure as Florida insurance commissioner because of his ties to a corrupt insurance firm? That question is being raised in a class action filed by four Florida investors against the Florida Insurance Dept. They accuse the agency of negligence for failing in the late '90s to shut down a controversial outfit run by campaign contributors to Nelson, the Sunshine State's insurance commissioner at the time.
The suit alleges that the case represents "yet another chapter in today's saddening trend of government regulators turning a blind eye to obvious corporate malfeasance."
While Nelson isn't identified by name as a defendant, the suit focuses on Nelson's alleged ties to the founders and executives of the now-defunct American Benefits Services and an affiliate, Financial Federated Title & Trust. The two companies were among the many high-flying "viatical insurance" outfits that exploded on the scene in the late 1990s. Nelson was elected to the Senate in 2000, and he strongly denies all the claims against him.
"GUARANTEED RETURNS." Here's how the companies were supposed to work: Financial Federated bought insurance policies from terminally ill individuals -- usually AIDS patients -- who, faced with mounting medical bills, would agree to sell their life insurance policies, usually for about 65% of their value. After Financial Federated cut deals with the ailing policyholders, American Benefits Services would resell the policies through a loose network of more than 600 financial planners and insurance agents. The investors would then receive the policy's full payout when the insured died. The hook: American Benefits dangled "guaranteed returns" of 28% over two years and better than 40% over the life of the policy.
When state and federal authorities moved in on Financial Federated and American Benefits in July, 1999, however, they discovered that little of the $130 million in funds raised from more than 5,000 private investors had been used to purchase policies from the ill.
Instead, investigators charged the principals behind the two firms with operating a massive Ponzi scheme in which more than $100 million of the funds raised from private investors had actually been spent on gated mansions, exotic sports cars, and a 32-foot sailboat called "Manipulation." The American Benefits scandal became the subject of intense media coverage, including a 1999 front-page article in The Wall Street Journal, and prompted a wave of state reforms.
DYING BUSINESS. Tough new regulations in Florida in the wake of the scandal drove many firms out of business. Meanwhile, new AIDs treatments were extending the lives of patients. But all this came after small investors lost millions of dollars by investing in viatical policies that proved to be bogus. Now, some of those investors are training their sights on the state insurance regulators who, they claim, were negligent in allowing the frauds to fester.
In the latest lawsuit filed by Seattle-based attorney Benjamin A. Schwartzman, four investors allege that Nelson and his top aides failed repeatedly to move on warnings from the agency's own staff investigators that ABS might be operating outside the law.
The suit claims that, as early as November, 1998, Nelson's staff attorneys were warning their bosses that American Benefits was "operating without the appropriate licensure." The following February, the same staffers warned their superiors that American Benefits was "admittedly running a Ponzi scheme" by simply paying off its first investors with funds raised from later investors, the suit claims. What's more, "it is very possible that the Department of Insurance's lack of attention was due to the influence and contacts that ABS had with top [insurance department] officers," Schwartzman charges.
SMOKING GUNS? Schwartzman alleges that if Nelson was slow to shut down ABS, it may be because he had a closer relationship with the outfit than he has acknowledged. Schwarztman provided BusinessWeek Online with documents that purport to show Nelson had periodic contacts with the two masterminds behind the fraud: Financial Federated founder Frederick C. Brandau, an entrepreneur known for handing out gold coins to friends, and American Benefits Services President Ray Levy, a former New York cop. Levy, the owner of "Manipulation," said he was drawn to sell viatical policies after his adult son died of AIDS. Both Levy and Brandau are now serving prison time on fraud convictions.
The documents came from the files of West Palm Beach (Fla.) attorney Norm Taplin, a longtime supporter of Nelson who represented ABS and Financial Federated in the late 1990s. And they show Taplin billing his two clients for numerous meetings that he arranged for them with Nelson in 1998 and 1999. One of the meetings lasted as long as five hours, and another occurred over a weekend.
According to Taplin's files, American Benefits also arranged to fly Nelson on the company plane from Miami to Boca Raton for a private dinner on Oct. 5, 1998, with Brandau, Levy, and their attorneys. According to a receipt from Nick's Italian Fishery & Chophouse, Brandau, Levy, Nelson, and the other 10 participants rang up a $1,917 bill that night, all paid for by American Benefits.
"UNDER REVIEW." Also in Taplin's files: A photo of Levy posing with Nelson, and a birthday card addressed "to Ray," and signed "Bill Nelson." In addition, Schwartzman says Levy told him in an interview from prison that he and Brandau had both attended an Election Night party at Nelson's home in November, 1998. Through his attorneys, Taplin declined to comment.
A spokeswoman for the Florida Insurance Dept., Tammy Torres, declined comment on the lawsuit, saying the matter was "still under review by the department." For his part, Nelson denies any relationship with the executives and defends his oversight of American Benefits during his tenure as insurance commissioner, which ran from 1995 to 2000.
Through an aide, Nelson acknowledges that his staff met periodically during 1998 and 1999 with American Benefits executives -- but only as part of a broader effort to push through legislation regulating the firm and the many other unregulated viatical outfits that had sprung up across Florida in the preceding year. The aide also disputes any suggestion that Nelson was slow to shut down American Benefits.
FIGHTING BACK? "The allegation that we didn't do anything is crazy," says Nelson's Senate Press Secretary, Dan McLaughlin, who also served under Nelson while he was insurance commissioner.
McLaughlin says if Florida insurance regulators appeared slow to crack down on American Benefits, it was only because the company was "fighting us every step of the way" -- refusing, for one, to honor search warrants on grounds that they would be revealing confidential medical records. McLaughlin also notes that as soon as federal and state investigations into fraud at American Benefits and Financial Federated finally came to light in mid-1999, Nelson donated the $3,500 in campaign contributions that he had earlier received from the company to a Miami charity. "He didn't know these guys from Adam," says McLaughlin.
As for the documents from Taplin's files, McLaughlin disputes much of what is claimed by plaintiffs' attorney Schwartzman. For one, the Nelson aide maintains that the picture is just a photo taken at a public function. "Anytime Nelson goes to a fund-raiser or reception, there's a photographer and a line of people. There must be 10,000 photos like this,") says McLaughlin. And he says the birthday card may be a fraud. "Except for Christmas, Bill Nelson simply doesn't send out greeting cards," he says.
"FALSE ENTRIES." After checking Nelson's schedule from previous years, McLaughlin told BusinessWeek Online that, in some instances, Nelson simply wasn't at the meetings -- or even in the same city -- as claimed in Taplin's billing records. And in a few instances where Nelson's schedule does concur that he met with Taplin, the aide says Nelson's notes show that the meeting was actually arranged by Taplin to discuss matters involving other clients.
For instance, while McLaughlin confirmed that Nelson met with Taplin on Aug. 28, 1998, he says Nelson's records show the purpose was for Taplin "to introduce him to clients who were employees of 3M Corp." Says McLaughlin: "There's no question that there are false entries in these [billing] records."
For the investors to win damages against the state of Florida, they must prove that the meetings actually occurred. Even then, winning damages is no sure thing. That's because in most states, government agencies have historically been protected by "sovereign immunity," which prohibits private individuals from seeking damages from the government.
NO AGENDA. In recent years, however, some states have enacted laws allowing certain claims to be brought against them, such as negligence suits brought against some state agencies, particularly against child-services agencies that place foster children into private homes.
Schwartzman says he's registered as a political independent and has no partisan agenda. He's hoping that a judge will find "the facts so egregious" that the case goes to trial. If that happens, at the least, Schwartzman has raised a number of questions that Nelson may have to answer in court. By Dean Foust in Atlanta