IMPORTANT BULLETIN

Beginning on February 26, 2008, the Receiver mailed several hundred form letters to various individuals requesting that they execute a document which would transfer their partial ownership interest in a particular policy to the receivership estate. The Receiver believes this to be necessary because, to date, although the receivership estate only owns a small percentage of a particular policy, the Receiver has been paying 100% of the premiums in an effort to protect the investors. Unless the partial ownership interests are transferred to the estate, it is very likely that the Receiver will be forced to seek approval from the Court to allow him to do one of two things (1) abandon the estate’s small fractional ownership interest in a particular policy and leave it up to the investors to find a way to pay the premiums or (2) require the investors to pay their share of the premiums. Because of the substantial effort and cost which would be required of the Receiver to monitor and collect premiums from several hundred investors, more than likely he will recommend that the policies be abandoned which, in all likelihood, would result in the policy lapsing and the partial ownership interests of the investors becoming worthless in a matter of a couple of months.

Understandably, the letter has generated questions from the investors who received the letter. This bulletin is designed to address some of the more common questions.

Frequently Asked Questions About the Receiver’s Letter

What is this multiple owner policy stuff all about?

Based upon information provided by the insurance companies to date, 27 of the policies are owned 100% by one of the companies operated by Don Neuhaus and each investor is shown as a partial beneficiary of the death benefit on the records of the insurance company. That is the normal way life settlement companies work. With respect to the remaining 22 policies, however, Don Neuhaus deviated from the norm and had each investor registered as a partial owner of the policy on the records of the insurance company. These policies are referred to as the “multiple owner policies.”

Why haven’t I received a letter?

If the records currently available to the Receiver show that your investment is reflected as a partial ownership interest in a particular policy (as opposed to simply a beneficial interest) on the books of the insurance company then a letter has been sent to you. If the records reflect that you are listed as only a beneficiary (as opposed to a partial owner) then a letter was not sent to you because there is nothing for you to transfer.

How does the Court’s order pooling the policies affect the multiple owner policies?

All of the ownership interests held by the receivership estate, whether it be 100% or 1% of a particular policy have been pooled (put into one pot for the benefit of all investors). Arguably, the ownership interest of the investors in the multiple owner policies have not been pooled because their interest does not belong to the receivership estate. In the early stages of the receivership it was not known that there were multiple owners as opposed to only beneficial interest in the policies so investors were told that all interests had been pooled. Now, as to the multiple owner policies, it is clear that a portion of the death benefit of those policies has been pooled but not all of it.

Why should I transfer my partial ownership interest to the receivership estate?

Currently, the receivership estate owns just a small fractional interest in the multiple owner policies. On average, that interest would entitle the receivership estate to only 7% of the entire death benefits that might be paid. However, since these receivership proceedings began on August 24, 2007, the Receiver has been paying 100% of the premiums on those polices using money borrowed from a bank. Obviously it is not in the receivership estate’s best financial interest to continue paying premiums for the benefit of others and the Receiver does not intend to continue this practice. The Receiver and the Examiner have discussed this situation at length and believe that, as an investor, your interests are best served by transferring your fractional interest in a particular policy to the receivership estate in exchange for a claim against the entire pool of receivership estate assets. This is based upon the following considerations:

1. It guarantees that you will be entitled to receive a distribution. Based on current circumstances, the Receiver believes that eventually he will be able to make a distribution to investors who have approved claims. Transferring your fractional ownership interest in a single policy to the receivership estate will do two things. First, it will make you eligible for an approved claim against the entire pool of receivership estate assets. Second, those fractional interests will become part of the asset pool thereby increasing the final amount of distribution either because the insured dies and the benefits are paid into the receivership asset pool or because the policy will be sold.
2. It protects you from throwing good money after bad. Many investors have already submitted transfer forms to the Receiver because they cannot contribute any more money to a risky investment that may lapse before it ever pays off. Simply put, transferring your ownership interest to the receivership estate costs you nothing and requires nothing more from you in the future.
3. It eliminates the risk of lapse. Investors who want to keep their ownership interest in a single policy place their fate in the hands of other investors they do not know. In order to realize a return, all investors in a single policy would have to make timely premium payments in the correct amount for as long as it takes for the policy to mature. Failure by one participant or disputes between a few would likely result in the policy lapsing before death benefits were ever paid. Therefore, the Receiver and Examiner urge investors to transfer their interests to the receivership estate, where experienced individuals will mange the policies with a large enough line of credit to keep them in force.

What happens if not all the investors in a policy transfer their interest?

If there are investors in a policy who refuse to transfer their interest, there is a strong likelihood that the Receiver will abandon the receivership estate’s small interest in the policy and leave it up to the other investors to find a way to pay the premiums. This could eventually result in the investors being unable to timely pay the full amount of the premium payment and the policy will lapse and become worthless. Also, the Receiver will recommend to the Court that any investor who refuses to transfer their ownership to the estate, not be allowed a claim against the receivership estate as to that particular ownership interest.

How long will I have to continue paying my share of the premium?/

Until the insured dies or if there are two insureds until both of them die. The age range for the insureds involved in the multiple owner policies range from 64 years old to 94 years old with an average age of 84 years old, so the premium obligation could last a very long time. In addition, the premium will increase each year as the insured gets older.

How much will the premiums increase in the future?

No certain amount can be stated and in any event it varies from company to company. The Receiver is in the process of obtaining three, five and seven year premium illustrations from the insurance companies. Those illustrations are projections only and the insurance companies will not guarantee that they are accurate. In many instances, however, the premiums increase about 10% per year.

I was told money was placed in escrow to pay the premiums. What happened to that money?

The short answer is that money was not placed in escrow. That is the reason the SEC filed its lawsuit alleging fraudulent activity and that is the reason criminal charges have been filed. The only funds currently available to the receiver to pay premiums are funds he is borrowing from a bank.

I called the insurance company and they told me the premium was a different amount than the amount stated in the letter. Why is that?

Since the Receiver did not participate in that call, there is no way to know for sure. However, it is probably related to the stated amount of premium (the amount on the bill sent by the insurance company) versus what is known as the COI (cost of insurance) which is usually less. In an effort to pay as little as possible and yet keep the policy in force, the Receiver only pays the COI.

What happens if I agree to pay my share of the premium?

If you paid your share of the premium then you would continue to own your percentage and collect that percentage of the death benefit after a death occurred. This assumes that all other owners pay their share of premiums as well so that the policy remains in force. However, if the Receiver abandons the receivership estate’s interest in the policy, someone will have to pay that share or the premiums as well.

What happens if some partial owners to do not pay their share?

Unless someone steps forward and pays their share, then the policy will lapse and your ownership interest will be worthless.

How would I go about paying the premium?

Assuming the Receiver abandons the policy, you would have to locate and contact the other owners and establish procedures to collect and forward the funds to the insurance company on a timely basis. Most policies lapse for non-payment of premium after 60 days. If a partial owner is late in paying their share, or if it gets lost in the mail, or they just don’t pay their share, then the other owners would have to pay it for them before the policy lapsed.

What is the fair market value of the policy?

In its current state with multiple owners, the policy is virtually worthless. No company in the industry would buy the policy as it is because of all the issues relating to collecting premiums from the other owners. If all the partial ownership interests are transferred to the receivership estate then the Receiver’s best guess is that the policy would sell for somewhere between 20%-30% based upon past experience.

Can’t the policy be sold with multiple owners?

No, and the Receiver would not waste time and money trying to do so. No one would buy a small fractional ownership interest in a policy, especially where there is no guarantee that the other owners would pay their share of the premiums.

What have you done to determine the health of the insureds?

The short answer is virtually nothing. Right now all the Receiver knows is the age of the person and that the person is alive since they aren’t dead. In the experience of the Receiver, it is an exercise in futility to call someone and ask about their health. Would you answer the question if someone called you? Do you think someone could force you to answer the question? Where there are signed HIPPA releases in the file, the Receiver, once all partial ownership interests are transferred to the receivership estate, will have his representatives attempt to contact the insured to see if they will provide updated medical information. If they refuse, there is very little that can be done.

But why aren’t you trying to determine information about the health of the insureds?

In addition to being an exercise in futility, it is not the driving force behind the decision the Receiver must make. Unless the partial ownership interests are transferred to the Receiver it does not make financial sense for the Receiver to waste time and money on these policies. If the interests are not transferred it is not fair to the investors in the other 27 policies where there is only one owner to spend estate funds on something that will not benefit them. In short, every dollar the Receiver wastes on the multiple owner policies is one less dollar that will be returned to the other investors.

How long are you going to wait on this transfer process to be completed?

Not long because it does not make sense to continue wasting money on the process if it is not going to be successful. In the next couple of weeks the Receiver will begin calling those investors who have not returned their forms. Once it becomes clear that investors in a particular policy will not transfer their interest, then the Receiver will likely request that the Court authorize him to abandon the policy. As stated above, if that happens, the ownership interests held by investors in that particular policy will likely become worthless in 60 days.

How do you expect the eventual distributions in the case to work?

Ultimately that will be decided by the Court, but usually it is based upon what the Receiver recommends. The first step is to ascertain and liquidate all assets belonging to the receivership estate. In this instance that consists of cash in bank accounts, lawsuit recoveries, sale of any physical assets, collection of death benefits while the case is pending and sale of the portfolio of policies which are completely owned by the receivership estate, less the costs of the receivership such as premiums. The net amount of funds constitutes the “pool” to be shared pro-rata by investors. The next step is to determine the amount of each allowed claim. Once all assets are liquidated to cash, and all claims are determined, each claimant will receive a pro-rata portion of the pool of money held by the receivership estate.

What does pro-rata mean?

Pro-rata means an equal share based upon the amount of your claim in relation to the other claims. The pro-rata percentage is calculated by dividing the total dollars being disbursed by the total of approved claims. That percentage is then multiplied by the amount of your allowed claim to calculate your distribution. For instance, if the Receiver has $10 million to distribute and there are $20 million of allowed claims, each investor would receive 50% of their allowed claim. So if you had a $20,000 claim you would receive $10,000.

How will those people having an ownership interest in a policy share in the pool?

Assuming the Court agrees with the Receiver, if you don’t transfer your ownership interest to the estate you won’t. Your only recourse will be to hope you can keep your policy in force and collect your share of the death benefits when the persons dies. If you transfer your ownership interest then you will have a claim for the amount of your investment against the pool of funds and you will receive a pro-rata portion of the pool of funds when it is distributed.