CNO stuck in nightmare over alleged hedge fund fraud

CNO Financial Group’s top executives are a conservative lot who have spent much of the past decade stabilizing and reducing the risk profile of the Carmel-based insurer.

So imagine their surprise when they got caught up in what prosecutors have described as perhaps the biggest fraud since Bernie Madoff.

The saga began in late 2013 with a deal CNO struck to offload exposure to long-term-care insurance policies that had the potential to saddle the company with big losses down the road.

CNO brass say they didn’t know it at the time, but the company’s partner in the transaction, Beechwood Re Ltd., turned out to be intertwined with the New York-based hedge fund Platinum Partners—whose leaders, prosecutors say, were masterminds of a $1 billion investment fraud.

Platinum Partners co-founder Mark Nordlicht and three other executives of the now-defunct hedge fund are currently on trial in Manhattan, but the nightmare won’t end for CNO when the jury issues its verdicts. CNO, which took a $75 million pre-tax charge in 2016 stemming from Platinum-related losses, is mired in lawsuits—both as a plaintiff and as a defendant—that likely will take years more to play out.

A CNO spokeswoman declined to make an executive available to discuss the Platinum fallout. But CNO’s account of what transpired is laid out in a lawsuit the company filed in 2016 that remains pending against Beechwood and its principals.

The suit charges that conspirators used Beechwood as a front to funnel cash into the embattled hedge fund Platinum Partners, which was in dire need of capital.

“Beechwood’s massive and risky investments with Platinum … was the goal of the fraudulent scheme hatched by defendants to bamboozle institutional investors like [CNO] out of their money by tricking them into indirectly investing with Platinum,” the lawsuit alleges.

The defendants steered the case into arbitration last year, over CNO’s objection. CNO says in a regulatory filing that it intends to “vigorously pursue” damages in the arbitration and in court.

Painful chapter

No doubt, CNO officials wish they never had engineered the deal with New York-based Beechwood, which was aimed at offloading the risks associated with a $550 million block of long-term-care insurance.

CNO is among a litany of U.S. insurers zinged by an aggressive push into long-term-care insurance, which covers nursing home and prescription costs, after the policies became popular in the 1980s. Industrywide, insurers found payouts far exceeded projections.

As part of its so-called reinsurance agreement, CNO shifted $550 million into a Beechwood-managed trust, with Beechwood poised to pocket the upside if investments outperformed or claims proved smaller than expected. On the other hand, Beechwood would have to pump in capital if reserves fell below required levels.

Beechwood was a startup, and CNO was its first customer. Nonetheless, CNO deemed it on the up and up, given that its purported founders were reputable industry veterans—former Marsh USA CEO Moshe “Mark” Feuer and Scott Taylor, a former Marsh & McLennan executive who also had helped lead Merrill Lynch’s wealth management division.

But in its lawsuit, CNO alleges the pair conspired with Platinum executives on a secret scheme that used Beechwood as a “piggybank” to prop up and fund the teetering Platinum hedge fund.

The suit says that, while Platinum claimed to rack up outsized returns averaging 17 percent a year from 2003 to 2015, those figures were inflated. In reality, by 2014, Platinum was relying almost entirely on new investments and loans to scrape together the cash needed to pay off investors who redeemed their holdings, according to the complaint.

CNO said it began noticing Platinum-related investments in reports it was getting from Beechwood that year. But when it raised concerns that they were unsuitably risky for an insurer, Beechwood reassured the company that they were appropriate and were accurately valued—assertions CNO says proved to be false.

CNO’s worry turned to alarm in the summer of 2016, after prosecutors charged Platinum Partners co-founder Murray Huberfeld with bribing a union official into investing $20 million in Platinum, and federal agents raided the hedge fund’s offices as part of a fraud probe.

CNO contends in its suit that company insiders went to great lengths to conceal the Beechwood-Platinum connection. When CNO asked about the source of the funds used to capitalize Beechwood, Beechwood refused to say, citing “confidentiality agreements.”

In addition, CNO said it now knows that four of five employees identified as Beechwood employees at a November 2013 meeting between the two companies actually were employees of Platinum. “Defendants were aware of this misrepresentation at the time it was made, directed it and intentionally concealed it,” the suit says.

CNO contends it was unaware thatNordlicht and Huberfeld were instrumental in starting Beechwood until a July 2016 Wall Street Journal article exposed the connection.

‘Are you calling me a liar?’

But not everyone buys that CNO was an unsuspecting victim. Last December, Melanie Cyganowski, the defunct hedge fund’s receiver, filed a lawsuit accusing CNO and other defendants of aiding and abetting fraud.

“Contrary to their portrayal as unwitting victims of the scheme,” Cyganowski wrote, CNO and its affiliates “were willing participants, turning a blind eye from multiple red flags of fraud to transact with Beechwood in the hope Beechwood would rescue them from being detrimentally burdened by the long term care insurance portfolios that were albatrosses around their necks.”

CNO calls the claims meritless. In a March filing, the company cited internal correspondence in which Beechwood executives expressed concern that Ed Bonach, CNO’s CEO at the time, would pull the plug on the deal if he found out about the Platinum investments.

In addition, CNO said in a filing that “when a senior manager at CNO questioned … Mark Feuer about Feuer’s repeated denials of any relationship between Platinum and Beechwood, Feuer became extremely heated and responded, ‘are you calling me a liar?’”

This spring, CNO went on the offensive in that case, unleashing crossclaims against Beechwood and its principals similar to its allegations in the earlier lawsuit.

In a response filed May 16, the Beechwood defendants scoffed at what they called CNO’s “smear campaign” and said the company had been forthcoming with CNO.

“CNO’s cross-claims against Beechwood represent an obvious public-relations ploy to foster the false impression that Beechwood was somehow in cahoots with Platinum and surreptitiously invested CNO’s assets in Platinum and Platinum-related investments—notwithstanding contemporaneous documents showing CNO’s knowledge of Beechwood’s relationship to Platinum and knowledge of the nature of its investments.”

Ira Lipsius, an attorney for the Beechwood defendants with Lipsius BenHaim Law LLP in New York City, declined to comment.

Striking new deal

After the Beechwood deal unraveled, CNO took back the long-term-care policies.

That block of business continued to cast a cloud over CNO until last September, when it engineered a reinsurance agreement with Connecticut-based Wilton Reassurance Co. covering all pre-2003 policies.

Shedding the policies wasn’t cheap. CNO took a $660 million charge on the transaction.

Yet Moody’s Investors Service rewarded the company with a credit upgrade, calling the deal a net positive.

And you could almost hear CNO executives breathe a sigh of relief at getting exposure to the business off their books.

“We have materially reduced the risk profile of the company,” CEO Gary Bhojwani said in a statement when the transaction closed. “CNO is squarely focused on the execution of our strategic initiatives to accelerate profitable growth.”•