© Copyright 2007
US FlagFebruary 15, 2007 Edition
1stLifeSettlements


NO SURPRISE HERE - State Farm has just announced that it will stop writing new homeowner and commercial insurance in Mississippi. "It is no longer prudent for us to take on additional risk in a legal and business environment that is becoming more unpredictable," said Bob Trippel, State Farm senior vice president.  The avalanche of legal claims faced by State Farm following Hurricane Katrina was probably the deciding factor.  "Hurricanes can be insured against, but litigation can't," said Robert Hartwig, head of the Insurance Information Institute.  State Farm, which currently insures about 30% of the Mississippi homeowners market, said that it would continue to serve its current policyholders, but left open the possibility of nonrenewals if the situation gets worse.  State Farm is joining other companies, such as Allstate, Nationwide and AIG, in cutting back on coverage sold in coastal areas.

CLASS ACTION SCANDAL - Steven G. Cooperman, a former ophthalmologist, has agreed to plead guilty to a conspiracy charge, in which he received a personal check from a partner of the law firm Milberg Weiss & Bershad for $175,000 purported as an "option payment" for Picasso's "Nude Before a Mirror."  However, the check was a secret payment made to Mr. Cooperman for acting as a named plaintiff in a class-action lawsuit filed by Milberg Weiss. Last year, another former Milberg Weiss plaintiff, Howard J. Vogel, pleaded guilty to making a false declaration to a court in connection with secret payments he received from the firm, court filings state. Still, prosecutors have been unable to bring charges against their primary targets: Milberg's co-founder, Melvyn I. Weiss, and William S. Lerach. According to court filings, Mr. Cooperman received $6.4 million in payments from 1988 to 1999 for serving as a named plaintiff in about 70 class action and shareholder derivative lawsuits that netted Milberg Weiss more than $133 million in fees.

LESS REGULATION? – The SEC is apparently backing away from its tough regulatory stand with public companies. It has filed a brief in the Supreme Court asking for tougher legal requirements for shareholders to win their fraud lawsuits and is said to be looking at insulating accounting firms from expensive lawsuits by investors.  At the same time, we have leading New York politicians urging the easing or elimination of provisions of the Sarbanes-Oxley Act in order to protect New York City's standing as the "financial capital of the world."  Consider now some of the stories that surfaced in just the past two weeks (trust us, the list could be longer):
  • MUNI BOND FRAUD – The Justice Department is investigating how the proceeds of municipal bonds are invested between the time the money is raised and when it is spent on projects. The investigation is serious since it appears to involve possible criminal charges. So serious in fact that the Bank of America has agreed to cooperate in exchange for the Justice Department not bringing criminal charges. BOA seems to be taking over from Citigroup as the leading "scandal newsmaker." In a separate settlement, BOA will pay $14.7 million to the IRS for using bond pools to generate profits from tax-free municipal bonds.
  • FIDELITY FINES - NASD fined Fidelity $3.75 million for not maintaining registrations for 1,100 employees, allowing them to "park" their registrations, failing to assign registered supervisors to 1,000 registered employees and not complying with NASD email-retention rules. Fidelity paid a $42 million fine in December for improper gifts accepted by their traders, including several private chartered flights, tickets to the 2004 Super Bowl, Wimbledon and the US Open tennis tournament, tickets to concerts, and twenty bottles of expensive wine. The SEC is continuing a separate investigation.
  • INSIDER INFORMATION INVESTIGATION - The SEC is examining whether Wall Street banks have offered insider information to hedge funds and other major clients in exchange for business.  The regulatory agency is seeking information from the likes of Merrill Lynch, Morgan Stanley, UBS and Deutsche Bank.
As evidenced by the earlier CLASS ACTION SCANDAL story, we understand the need to limit "fraudulent shareholder lawsuits."  We also understand that no amount of regulation will eliminate all fraud and other illegal conduct.  At the same time, it's fair to ask what would be the end result of less regulation?  Opening the door once again to fraud on a massive scale?  Before making changes, legislators and regulators must study what is working, what is nothing more than burdensome, and then make appropriate changes to the law.  Much as "we love New York," protecting New York City's standing as the "financial capital of the world" isn't reason enough to relax regulation.

STRANGE BEDFELLOWS - The launch of a new initiative, "Better Health Care Together," found Wal-Mart CEO Lee Scott sharing a stage with Andrew Stern, president of the Service Employees International Union (SEIU), with which Wal-Mart frequently clashes.  The unlikely alliance, which is calling for universal health care for all Americans by 2012, was formed in response to America's healthcare crisis.  The announcement endorsed four broad principles for "achieving a new American health care system by 2012," but offered no specifics, such as healthcare funding sources.  The Wal-Mart announcement is available at http://www.walmartfacts.com, while the SEIU announcement can be found here.

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BERNANKE REPORT - Federal Reserve Chairman Ben S. Bernanke's semiannual monetary-policy report to Congress presented a healthy economy and strong job market, which doesn't match the Democratic Party's picture of a stagnant economy. There are some indications that the Feds might raise interest rates again to keep the economy on track.  In addition, Mr. Bernanke is planning to discuss with Congress ways to reverse America's growing wealth gap.

BEN STEIN, THE PRESIDENT AND EXECUTIVE PAY – What do Ben Stein and the President have in common? Apparently quite a bit. Ben, speechwriter for presidents, game show host and actor, recently attacked executive pay packages. "It is a national disgrace...a form of fraud and misconduct. If we allow people at the top to loot everyone else, those frauds will deprive Americans of their shared values." He further called the current rates of executive pay packages a "slap in the face of the United States worker" and a "form of terrorism in the executive suite." George Bush, speaking to a group of business leaders on Wall Street, wasn't quite as "in your face," but declared "America's corporate boardrooms must step up to their responsibilities. You need to pay attention to the executive compensation packages that you approve."

MORE ON EXECUTIVE PAY - The topic is shaping up to be the No. 1 issue at this year's annual meetings of public companies. Research done by Harvard professor Lucian Bebchuk shows that compensation of the top five officers at the country's public companies between 1993 and 2002 totaled about $250 billion -- nearly 10% of aggregate profits. We don't want to see government action to stop this insanity, but it does have to be stopped.

FOREIGN INVESTORS SPURNING U.S. - According to the Economic Report of the President, the U.S. is losing its popularity with foreign investors. In fact, the percentage of foreign investment "has stagnated and even declined in recent years." What is in doubt is whether this is a long trend or a temporary effect. Also, unclear is what exactly is affecting the attractiveness of U.S. investments.

BISHOP, UNABOMBER AND $6.66 – Some believe the next Unabomber is on the scene. He calls himself the Bishop and is demanding that financial services companies manipulate stock prices to $6.66. He has sent threatening letters since 2005, but two explosive devices were sent recently. Officials are warning financial services companies to beware of attacks by the Bishop and possible copycats. Reuters also reports the U.S. Postal Inspection Service is alerting financial firms of potential danger from a would-be letter bomber after companies in Kansas City and Denver were targeted with explosive devices and threatening notes.

GREAT-WEST BUYS PUTNAM – Great-West Lifeco, Inc., a subsidiary of Power Financial Corp. in Montreal, will buy Putnam Investments from Marsh & McLennan for $3.9 billion. Putnam, with about $192 billion in assets under management, is one of the oldest and largest money managers in the nation.

CHOOSING TO LOSE - Following the London Stock Exchange's rejection of the Nasdaq Stock Market's attempt to purchase the exchange, Nasdaq chief executive Robert Greifeld announced that he had "chosen not to win" Nasdaq's bid for the LSE.

DST CONCERNS - Beginning in 2007, daylight savings time will begin three weeks earlier than in past years...on March 11, 2007.  Concern is being raised about the impact of this change on a variety of systems, such as computer systems and synchronized international communications components, that have been pre-set to change the hour on what would have been the traditional date...April 1, 2007. 

PROPRIETARY PRODUCT PROBLEMS – MetLife is being sued for pushing their own products. The plaintiffs accuse MetLife of using incentives to induce their agents to sell proprietary mutual funds and life insurance to consumers who believed they were purchasing financial planning services, as well as not honoring their fiduciary obligation to place the interests of the client above their own and disclose possible conflicts of interest.


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DEFERRED COMP UPDATE - The House Ways and Means Committee has approved a bare-bones version of the Senate minimum wage legislation (S. 2), which does not include provisions that would limit use of non-qualified deferred compensation plans.  If the full House passes this version of the Senate legislation, a conference committee will be needed to resolve differences between the House and Senate versions of the legislation.

RETURN OF THE RED UMBRELLA - In our last issue, we reported that Citigroup is "folding its red umbrella and changing its name to Citi, relegating the old Travelers Group umbrella logo to the scrap heap."  We're happy to report that the red umbrella trademark is back!  Citigroup spun off Travelers in 2002, but retained the red umbrella logo.  A year later, Travelers merged with The St. Paul Cos., creating the St. Paul Travelers Cos., which will now purchase the trademark red umbrella from Citigroup, Inc. and recast itself as simply Travelers.

ADVISORS TRAIL CLIENTS ONLINE - David Macchia, CEO of Wealth2K reports that consumers have become increasingly Net savvy and financial advisors must rethink the way they market to their customers. We agree with that and have a great way for you to catch up with your clients. The Virtual Sales Assistant was the first purely Internet based sales tool in the industry and has now grown to the most comprehensive sales tool in the industry. With the first month free and at no more than $21.95 per month thereafter, it is also the best buy in the industry. Catch up with your clients quickly with the VSA and get a FREE WEB SITE with great content for your clients just for subscribing!

NASD AND LIFE SETTLEMENTS – According to NASD Chairwoman Mary Schapiro, life settlement transactions "can be a valuable source of liquidity for people who no longer want or need their current policies." However, the NASD warns against high costs and points out that insureds might have trouble getting new life insurance coverage after selling existing policies, lump-sum payments may be taxable, and a life settlement payment could interfere with a consumer's ability to receive Medicaid benefits.  The NASD has issued an Investor Alert on life settlements, which you can review here. 

CONSUMERS' EXPECTATIONS HIGH – The University of Michigan's monthly index of consumer sentiment is at its highest level in two years. Drivers appear to be lower gas prices and a strong labor market, boosting consumer confidence to its highest level in two years.

$300 BLN, IRS AND RED FLAGS - President Bush's budget calls for a step-up in efforts to close the $300 billion "tax gap"...the difference between what is owed and what is collected. One plan to close the tax gap calls for brokers, mutual funds and others to report to the IRS the original price that investors paid for securities, making it harder for investors to understate their capital gains.  In addition, expect the IRS to receive more funding for enforcement.  Businesses, particularly employment tax scofflaws, will also be targeted by the IRS, which will be aided by agreements with all 50 states that allow the IRS to see the results of state employment tax audits.

FYI, here are 5 things that are likely to trip audits this year: 1) Earning too much money...good problem to have, but as your income rises so does your chance of audit. 2) Giving too much to charity...if gifts exceed 5-10% of income they are likely to trigger an audit. 3) Not submitting an AMT schedule...the Alternative Minimum Tax usually starts to apply at incomes from about $100,000-$120,000. 4) Taking too many credits...this one applies more to lower income earners over confusion about credits for education, seniors and earned income. 5) Careless errors...sloppy returns can raise the audit flag and don't for get any W-2s and 1099s because the IRS will be comparing their copies to yours.

DEFINED BENEFIT CONTINUED DEMISE - The Employee Benefits Research Institute reports only 16 million private-sector workers were covered by traditional single-employer defined-benefit plans in 2005, down 22% from the total in 1988 and the number of actual plans is down 74% since 1985.

RETIREMENT CONTRIBUTIONS DOWN – According to the Employee Benefit Research Institute, the heads of families who contributed to their work retirement plans dropped to 46.1% in 2004, compared to 48.7% in 2001. This is the case even though 61% of their employers sponsor a retirement plan. This is a recent report but you have to wonder why it takes so long to get this kind of data...it is 2007.

SMALL CAPS FLY HIGH - The Russell 3000 Index has continued to climb and hit an all-time high of 847.18, breaking its record high close of 844.78 set seven years ago.

PERSONAL SAVINGS AT 73-YEAR LOW - The Commerce Department reports that the nation's personal savings rate for all of 2006 was a negative 1%...the lowest level since the Great Depression.  This is not good news, particularly for Boomers, who will not have enough for retirement, and the young folks who will be asked to bear the burden of an aging and broke population.

SOCIAL SECURITY ONLINE - Social Security may be on shaky ground financially, but its website at http://www.ssa.gov is very good. Here are a few things you can do:  See if you qualify for Social Security benefits, apply for benefits, find the office closest to you, calculate potential benefits and check your earnings history. See details in the "What you can do Online" section.

CREDIT CARDS FOR ILLEGAL IMMIGRANTS – Banks across the country have quietly begun offering checking accounts and even mortgages to illegal immigrants and now Bank of America has begun offering credit cards to customers without Social Security numbers...mainly illegal Hispanic immigrants. This illustrates just how big this problem has become and gives insight as to how many big businesses view illegal immigration...more customers!  Bet a U.S. citizen can't get a credit card without a SS number.

ALTERNATIVE INVESTMENTS – According to a study by Rydex Advisor Benchmarking, RIAs plan to recommend more alternative investments during the next five years. Reason cited is growth potential and products include commodities, real estate, private equity/venture capital and hedge funds.

HEALTHCARE, RETIREMENT AND THE AFFLUENT - According to a survey by PNC Wealth Management, affluent Americans are more concerned than ever that high healthcare costs will consume their financial assets and impact retirement plans. The survey showed that more than 43% of respondents with assets of $500,000 to $999,999 said, "healthcare costs will ultimately consume a major portion of my financial assets," a number that rose significantly from a year ago, when 36% expressed the same concern. At the same time, women are far more apprehensive than men about the obstacles that healthcare costs may present in retirement...56% of the female respondents say they worry about maintaining their lifestyle in the face of ever-increasing healthcare expenses, compared to 41% of men who feel the same way.

IMMEDIATE ANNUITIES, COMING OF AGE? – With pension plans going down the tubes, retirees might be looking for a substitute in immediate annuities. These insurance products are expected to grow in popularity as the number of traditional pensions declines and baby boomers scramble for guaranteed sources of income, according to James Lange, author of "Retire Secure!"