When it comes to high finance, New Mexico is still the Wild West. Shady characters come from all over to take big risks in a casino-like, almost lawless market.
One such story is told in a lawsuit filed late last month in the 1st Judicial District Court in Santa Fe. It begins in 2006, when five wealthy, elderly Texans came here to form the Austin Crude Holding Company. One of the men, John Brown, had a stake in oil and gas leases in Louisiana that could produce 25 million barrels of oil. But to drill, the oilmen needed money.
Enter Lance J Thayer, a Texas-based financial planner then doing business in New Mexico. Thayer allegedly suggested the men take out life insurance policies, then have him sell the policies for cash.
Who would buy a stranger's life insurance?
Investors smelling money on the men's eventual deaths. It's commonplace in the growing, loosely regulated "life settlement" business. According to the National Association of Insurance Commissioners, this morbid secondary market has grown to $4 billion a year.
Four partners in Austin Crude—Donald E Higgins, Vernon K Patterson, Fred Sams and Royce L Vernon—purchased a total of $80 million worth of life insurance, expecting to sell the policies for $2.4 million. They paid nothing up front because Thayer secured a loan to cover the premiums.
According to the complaint, Thayer got Institutional Marketing Consultants of Colorado to enlist First National Bank of Santa Fe as "insurance manager" for the scheme. However, IMC's employee never provided the bank with proof of her authority to act on behalf of Austin Crude, and the bank never asked for such proof. (Jennifer Lind, senior vice president and marketing director at First National, didn't return SFR's call by press time.)
IMC then found Dinero Corp., a Santa Fe company set up by Connecticut insurance executive Michael Krasnerman, to provide financing for the premium payments at 18 percent interest, with the policies as collateral.
"The transaction is structured so the loan is very impracticable to pay off," Stephen Royce, Austin Crude's attorney, says.
Krasnerman's attorney, Dan Goldman, tells SFR the Austin Crude claim is "frivolous." Krasnerman played a part in a scam pursued by former New York Attorney General Eliot Spitzer in 2006. According to Spitzer's lawsuit and The New York Times, Krasnerman took bribes from another life settlement company in a plot to defraud policyholders.
The New Mexico lawsuit says Thayer colluded with Krasnerman, IMC and First National to profit from a series of transactions that left Austin Crude holding the bag. "Everybody else is making money," Royce says.
Thayer allegedly delayed the sale of the policies by promising the men more money—up to $16 million—"if they just hang in there." Now, the men owe more than $13.5 million to Krasnerman, who has sued them for damages—and the right to sell the $80 million policies—in federal court.
New Mexico is one of 20 states that doesn't regulate life settlements. A decade-old state law covers "viatical" settlements, which are similar, but intended for people with life-threatening illnesses. By contrast, life settlements allow any elderly, wealthy person to "go out and buy a policy and flip it," Royce says.
The National Association of Insurance Commissioners has raised concerns over abuse like that alleged by Austin Crude. On Sept. 24, NAIC Vice President Commissioner Susan Voss told a congressional committee that "stranger-owned life insurance" policies were being repackaged and sold as investment securities, "much as securitization of mortgages helped dramatically expand that marketplace."
As early as 2002, experts called life settlements an "invitation to skullduggery." In an article for the American Academy of Actuaries, retired Indiana University professor Joseph Belth writes that viatical and life settlements create "an incentive for murder."
A Google search for "life settlement" and "New Mexico" returns 14,200 results, many promising quick cash by becoming a policyholder—or a broker.
New Mexico Superintendent of Insurance Morris J Chavez didn't return a message by press time. "We are looking into this," New Mexico attorney general spokeswoman Lynn Southard tells SFR in an email.
