Southern American Insurance of Salt Lake City was swindled. So too was Commercial Surety & Insurance Corp. of Provo - and it sunk into liquidation by state regulators as a result.
And Senate investigators worried aloud in a hearing Thursday that the type of scam that struck those Utah firms may have spread throughout the insurance industry and may do to it what widespread fraud did to the nation's savings and loans.Staff for the Senate Government Operations Subcommittee on Investigations said the problem is caused by economically troubled insurance companies trying to "rent" securities to help prove to regulators they can cover claims.
Such companies seek to pay small amounts per month to allow them in extreme emergencies to access and cash in large amounts of Government National Mortgage Association (Ginnie Mae) securities owned by others, and which they could not afford to buy themselves because of their economic troubles.
But the two Utah firms apparently ended up renting securities that didn't exist from people who didn't exist and who were vouched for by auditors who didn't exist. But the firms paid - and lost - real money to con men.
What happened to Commercial Surety - which mainly bonded construction companies to ensure their performance - was detailed in testimony by its vice president, Robert V. Murton, and by Utah Deputy Insurance Commissioner Randall Smart.
They said Commercial was financially secure until its principals had a dispute over its ownership and control, and Murton was given 30 days by regulators to obtain additional capital to maintain control.
He and associates tried to "rent" $4.7 million worth of Ginnie Mae certificates by paying just $47,000 a month plus giving shares of their new holding company to the securities' owner.
Committee Chairman Sam Nunn couldn't believe they thought the arrangement was legitimate. "Why would anyone with $4.7 million in securities take only $47,000 a month to risk losing that $4.7 million to a troubled insurance company if it is legitimate?"
Nunn added, "It seems no one with any business experience would believe there was a legitimate owner at the end of that unless they were a complete fool . . . If something (sounds) too good to be true, it usually isn't (true)."
Murton said he believed it because he was dealing with a reputable Beverly Hills attorney, Robert H. Wyshak, to whom he was referred to for the deal by David Lloyd of Dallas.
Lloyd claimed one of his businesses represented a client named Rosa Kant who wished to rent out Ginnie Mae securities. Wyshak said he had checked it out and it was legitimate - because he had valid security numbers, had an affidavit of ownership from Kant and a certified public accountant's audit verifying ownership.
The Senate committee staff later found, however, that the CPA firm apparently does not exist, that the woman posing as Kant was probably a Panamanian national hired to act as her and the numbers for general pools of securities are easily obtainable from any brokerage firm.
But such "proof" also led the Utah Insurance Commission to conclude at first it was a legitimate deal. But later, after stories in the press about fraud on such deals, the commission demanded to see the security certificates as proof of ownership. When they could not be produced, it ordered Commercial Surety into liquidation.
While the arrangement swindled Commercial Surety, Wyshak told the committee that Lloyd had swindled him by providing the false "proof." Lloyd - who is in prison on credit card fraud - told the committee meanwhile that Wyshak was the one doing the swindling with full knowledge the proof was false.
The Senate committee staff said it found 16 other insurance companies nationwide that had similarly rented non-existent securities, including Southern American Insurance of Salt Lake City, from various other con men.
A staff report said Southern American also had experienced financial problems and also was introduced to Wyshak. The report said it paid $350,000 to rent $10 million worth of Ginnie Mae securities for surplus capital enhancement, but that it "never received the securities from Wyshak and Wyshak never returned any money."
It added the company was able to find alternate assets to cover its needs.
Committee counsel Eleni A. Pryles said that until recently, state "insurance departments have considered the Ginnie Mae securities listed on an insurance company's financial statement as an acceptable asset, no questions asked."
"Now they are learning, however, that there are insurance companies out there, 17 that the staff is aware of, which do not actually own the Ginnie Mae securities claimed on their financial statements."
She added, "Regulators are now extremely concerned because they do not have the resources to verify the ownership in each Ginnie Mae security claimed by an insurance company."
Pryles added that so many possible cases of such fraud have been referred to the FBI for investigation that "federal officials commented that `it's a nationwide phenomenon' and `I haven't seen this much white-collar fraud activity since the savings and loan crisis.' "
However, to show that all insurance companies in Utah are not shaky, Smart said that "of the 50 or so insurance companies domiciled in the state, there are only two or three we are monitoring quite closely. The others appear to be doing quite well."
Investigators, regulators and victims said the problems could be reduced if there were a way the government could verify who owns Ginnie Mae securities, which it now cannot. Owners themselves must provide certificates as proof.
Senate investigators said states also should not allow renting of any securities. "We have yet to find any instance of renting that was legitimate," Pryles said.