Guarantee Security Life Insurance Company
Encyclopedia
Guarantee Security Life Insurance Company, or GSLIC, represented one of the most severe cases of insurance fraud
in Florida
history. According to the Florida Insurance Commissioner:
when they decided to form their own company, Transmark USA, Inc. In 1984, Transmark purchased Guarantee Security Life Insurance Company (GSLIC) of Jacksonville, Florida
. The two men moved to the Sunshine State, Blackburn taking charge of daily operations, while Sanford managed the investment portfolio.
GSLIC's primary products were deferred annuities and life insurance
policies. The firm marketed these products through a national sales force of over 16,000 highly commissioned insurance agents. However, customers were attracted to the products by the promised 10% interest rate, which was guaranteed for the first year. According a sales brochure, customers were also protected against loss of their investment: "The principal is fully guaranteed. It is not subject to losses created by market fluctuations."
Customers soon found there were drawbacks to the policies. The interest rates paid after the first year dropped dramatically. However, annuitants were discouraged from withdrawing their money by high cancellation penalties ($1,000 for a $10,000 investment).
Between 1984 and 1991, the company grew from less than $100 million to almost $1 billion in assets and had about 57,000 policyholders in 42 states. In 1991, however, the company went insolvent and stopped writing new policies. Consequently, the State of Florida established a receivership
to take control of the company.
island, Rudder Cut Cay, with company funds and begun minting his own coins bearing his likeness on one side and his bikini-clad wife on the other. His assets also included a million-dollar Ponte Vedra Beach oceanfront home, two $165,000 Lamborghini
Countachs, a Rolls-Royce, a Corvette
, and a Jaguar
.
The sheer magnitude of the fraud – involving the collapse of what was then Florida’s sixth-largest insurer – attracted Congress
's attention. On April 29–30, 1992, the U.S. Senate Permanent Subcommittee on Investigations held hearings on GSLIC, as part of an investigation titled "Efforts to Combat Fraud and Abuse in the Insurance Industry." Chairman Sam Nunn
called several of GSLIC's executives, accountants, brokers, customers, and regulators to the stand to testify. It soon became apparent that the regulatory safeguards against insurance fraud and abuse had failed on a monumental scale.
Company records revealed that GSLIC’s assets had been systematically looted by Transmark management in the form of excessive salary and dividends. Transmark Chairman Mark Sanford took $37 million; Transmark, $23 million; GSLIC President William Blackburn, $17 million; Sanford's brother Rob, $2 million; Blackburn's wife Melanie, $700,000; and Sanford’s wife Margena, $600,000. Together they looted the company of more than $80 million.
In order to finance the lavish executive salaries while still paying the annuities and insurance agent commissions, GSLIC management invested in high-yield, high-risk junk bonds. In 1991, the junk bond market collapsed, causing the company to become insolvent. In testimony before the Senate, GSLIC's Deputy Receiver estimated the fair value of the company’s assets at $230 million. Obligations to its policyholders and annuitants totaled $620 million.
to sell the junk bonds on December 31, 1984 in exchange for a $155 million "account receivable due from brokers" and repurchase the bonds on January 2, 1985 for the same amount, plus a fee.
In 1985, Sanford refined his scheme to eliminate several problems. These issues included the creation of a suspicious, huge account receivable that was never funded, and the questionable legality of a transaction never consummated by a cash transfer. On December 31, 1985, Sanford attempted to sell $246 million in junk bonds to Merrill Lynch in exchange for U.S. Treasury bonds
(which do not require a reserve due to their risk-free status). However, Merrill Lynch’s computer system recorded the transaction as of January 2, 1986 – too late to help GSLIC’s balance sheet. So Sanford's assistant arranged for Merrill Lynch to doctor the records by issuing a written confirmation that the trade actually occurred December 31, 1985.
In 1986, Sanford tried a different scheme. According to the State of Florida's complaint, Southeast Bank – at the insurer’s request – falsified its December 31, 1986 portfolio summary. Abraham J. Briloff, CPA, noted, "The change made it appear that the bank was holding $292 million in Treasury bonds for GSLIC on that date, even though the bonds weren’t in the bank’s possession." Southeast Bank employees manually typed a 15-page confirmation summary.
In 1987, GSLIC did not make any year-end sales, probably because it had just issued $100 million in preferred stock
, bringing sufficient cash to its bottom line.
In 1988, Transmark underwent major changes in management. William Blackburn sold his one-third interest in Transmark to Sanford. According to his testimony, "I was not interested in continuing that relationship since Mr. Sanford and I had different views about the future direction of the company."
In 1988 and 1989, Transmark also acquired retail, printing, and plastics companies, facilitating a convoluted arrangement (designed by law firm Shereff, Friedman, Hoffman and Goodman) in which GSLIC was able to exceed the legal limits on investment in affiliates. Transmark created a holding company called CG Acquisition USA and issued CG’s one share of common stock to a company officer. This officer in turn granted Transmark an option to reacquire the share, executed a shareholder agreement granting Transmark the right to appoint CG directors, and gave Transmark a warrant to acquire 99 shares of CG common stock. This allowed Transmark was able to retain control over the companies while still holding them out as unaffiliated companies and listing the investment as a $19 million asset.
In 1989, Sanford began using these subsidiary companies to count assets twice on GSLIC’s balance sheet. An example is GSLIC's loan of $25 million to the airline group. That same day, the airline paid Transmark $17 million in dividends, and Transmark in turn paid it to GSLIC as gross paid-in and contributed surplus. Thus, GSLIC was able to count the same asset twice – once as a loan receivable to the airline, and again as contributed surplus from Transmark. GSLIC also made a loan of $44 million to the printing group, which resulted in Transmark giving another $19 million of paid-in capital to GSLIC.
In 1990, Sanford pursued another circular arrangement in which he caused the subsidiaries to issue $27.5 million in preferred stock, which was simply given to GSLIC to enhance its balance sheet. The combined result of these schemes was that the retail, airline and printing operations' debts exceeded their assets by $35 million, but they were carried at face value on Transmark's balance sheet at $120 million.
In 1991, the company went broke. William Blackburn testified, "Everything went wrong after I left. The most significant event, I can speculate, is the junk market crash in 1989."
(GAAP). Don Withers refused to recognize the year-end sales under GAAP, noting, "in today’s environment I can not get anyone to agree that a period of time of less than 10-15 days would be sufficient to expose the Company to sufficient investment risk to entitle you to recognize the gain on the transaction." As a result, Mark Sanford became angry and fired the accounting firm.
Later in 1985, GSLIC engaged Coopers to audit GSLIC's 1985 statements based on statutory accounting rules. Coopers found that under statutory accounting, a 10-15 day period is not needed to recognize a sale of bonds: "as long as GSLIC does not have any legal obligation to reacquire the securities and will reacquire the securities at their fair market value, the sales should be recognized for statutory accounting purposes along with any corresponding gain or less." Sanford assured Withers that Florida insurance regulators had approved the year-end transactions. As a result, Coopers issued a clean audit report.
In reference to the auditors, Senator John Glenn
made this statement on March 3, 1993:
Insurance fraud
Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer.Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. Fraudulent claims account for a significant portion of all claims received by insurers, and cost billions...
in Florida
Florida
Florida is a state in the southeastern United States, located on the nation's Atlantic and Gulf coasts. It is bordered to the west by the Gulf of Mexico, to the north by Alabama and Georgia and to the east by the Atlantic Ocean. With a population of 18,801,310 as measured by the 2010 census, it...
history. According to the Florida Insurance Commissioner:
- [GSLIC] was, almost from the beginning, a massive fraud, aided and abetted by blue-ribbon brokers and licensed professionals motivated by their own self-interest. The fraud at Guaranteed Security was a carefully orchestrated bank robbery. But the thieves disguised themselves with the help of accountants and brokers and lawyers rather than wearing silk-stocking masks.
Background
In 1978, Mark Sanford and William Blackburn were working as stockbrokers in Louisville, KentuckyLouisville, Kentucky
Louisville is the largest city in the U.S. state of Kentucky, and the county seat of Jefferson County. Since 2003, the city's borders have been coterminous with those of the county because of a city-county merger. The city's population at the 2010 census was 741,096...
when they decided to form their own company, Transmark USA, Inc. In 1984, Transmark purchased Guarantee Security Life Insurance Company (GSLIC) of Jacksonville, Florida
Jacksonville, Florida
Jacksonville is the largest city in the U.S. state of Florida in terms of both population and land area, and the largest city by area in the contiguous United States. It is the county seat of Duval County, with which the city government consolidated in 1968...
. The two men moved to the Sunshine State, Blackburn taking charge of daily operations, while Sanford managed the investment portfolio.
GSLIC's primary products were deferred annuities and life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
policies. The firm marketed these products through a national sales force of over 16,000 highly commissioned insurance agents. However, customers were attracted to the products by the promised 10% interest rate, which was guaranteed for the first year. According a sales brochure, customers were also protected against loss of their investment: "The principal is fully guaranteed. It is not subject to losses created by market fluctuations."
Customers soon found there were drawbacks to the policies. The interest rates paid after the first year dropped dramatically. However, annuitants were discouraged from withdrawing their money by high cancellation penalties ($1,000 for a $10,000 investment).
Between 1984 and 1991, the company grew from less than $100 million to almost $1 billion in assets and had about 57,000 policyholders in 42 states. In 1991, however, the company went insolvent and stopped writing new policies. Consequently, the State of Florida established a receivership
Receivership
In law, receivership is the situation in which an institution or enterprise is being held by a receiver, a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights." The receivership remedy is an equitable remedy that emerged in...
to take control of the company.
Government Investigation
On December 20, 1991, the State of Florida filed a 17-count suit against GSLIC’s executives, accountants, lawyers, and brokers charging "breach of fiduciary duty, negligence, breach of contract, waste of corporate assets and conspiracy to defraud." The State of Florida sought and obtained a court order freezing Chairman Mark Sanford’s assets, after finding that he had purchased a BahamianThe Bahamas
The Bahamas , officially the Commonwealth of the Bahamas, is a nation consisting of 29 islands, 661 cays, and 2,387 islets . It is located in the Atlantic Ocean north of Cuba and Hispaniola , northwest of the Turks and Caicos Islands, and southeast of the United States...
island, Rudder Cut Cay, with company funds and begun minting his own coins bearing his likeness on one side and his bikini-clad wife on the other. His assets also included a million-dollar Ponte Vedra Beach oceanfront home, two $165,000 Lamborghini
Lamborghini
Automobili Lamborghini S.p.A., commonly referred to as Lamborghini , is an Italian car manufacturer. The company was founded by manufacturing magnate Ferruccio Lamborghini in 1963, with the objective of producing a refined grand touring car to compete with established offerings from marques like...
Countachs, a Rolls-Royce, a Corvette
Corvette
A corvette is a small, maneuverable, lightly armed warship, originally smaller than a frigate and larger than a coastal patrol craft or fast attack craft , although many recent designs resemble frigates in size and role...
, and a Jaguar
Jaguar (car)
Jaguar Cars Ltd, known simply as Jaguar , is a British luxury car manufacturer, headquartered in Whitley, Coventry, England. It is part of the Jaguar Land Rover business, a subsidiary of the Indian company Tata Motors....
.
The sheer magnitude of the fraud – involving the collapse of what was then Florida’s sixth-largest insurer – attracted Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
's attention. On April 29–30, 1992, the U.S. Senate Permanent Subcommittee on Investigations held hearings on GSLIC, as part of an investigation titled "Efforts to Combat Fraud and Abuse in the Insurance Industry." Chairman Sam Nunn
Sam Nunn
Samuel Augustus Nunn, Jr. is an American lawyer and politician. Currently the co-chairman and Chief Executive Officer of the Nuclear Threat Initiative , a charitable organization working to reduce the global threats from nuclear, biological and chemical weapons, Nunn served for 24 years as a...
called several of GSLIC's executives, accountants, brokers, customers, and regulators to the stand to testify. It soon became apparent that the regulatory safeguards against insurance fraud and abuse had failed on a monumental scale.
Company records revealed that GSLIC’s assets had been systematically looted by Transmark management in the form of excessive salary and dividends. Transmark Chairman Mark Sanford took $37 million; Transmark, $23 million; GSLIC President William Blackburn, $17 million; Sanford's brother Rob, $2 million; Blackburn's wife Melanie, $700,000; and Sanford’s wife Margena, $600,000. Together they looted the company of more than $80 million.
In order to finance the lavish executive salaries while still paying the annuities and insurance agent commissions, GSLIC management invested in high-yield, high-risk junk bonds. In 1991, the junk bond market collapsed, causing the company to become insolvent. In testimony before the Senate, GSLIC's Deputy Receiver estimated the fair value of the company’s assets at $230 million. Obligations to its policyholders and annuitants totaled $620 million.
Chronology
In 1984, Mark Sanford ran into trouble when his efforts to raise capital clashed with Florida insurance regulations. To protect policyholders, the statutes required insurers to maintain a reserve totaling 20% of the total amount invested in high-risk investments. The reserve is recorded as a liability, and would have caused GSLIC to become insolvent. To circumvent the regulations, Sanford made an oral arrangement with Merrill LynchMerrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
to sell the junk bonds on December 31, 1984 in exchange for a $155 million "account receivable due from brokers" and repurchase the bonds on January 2, 1985 for the same amount, plus a fee.
In 1985, Sanford refined his scheme to eliminate several problems. These issues included the creation of a suspicious, huge account receivable that was never funded, and the questionable legality of a transaction never consummated by a cash transfer. On December 31, 1985, Sanford attempted to sell $246 million in junk bonds to Merrill Lynch in exchange for U.S. Treasury bonds
Treasury security
A United States Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States federal government, and they are often referred to simply as Treasuries...
(which do not require a reserve due to their risk-free status). However, Merrill Lynch’s computer system recorded the transaction as of January 2, 1986 – too late to help GSLIC’s balance sheet. So Sanford's assistant arranged for Merrill Lynch to doctor the records by issuing a written confirmation that the trade actually occurred December 31, 1985.
In 1986, Sanford tried a different scheme. According to the State of Florida's complaint, Southeast Bank – at the insurer’s request – falsified its December 31, 1986 portfolio summary. Abraham J. Briloff, CPA, noted, "The change made it appear that the bank was holding $292 million in Treasury bonds for GSLIC on that date, even though the bonds weren’t in the bank’s possession." Southeast Bank employees manually typed a 15-page confirmation summary.
In 1987, GSLIC did not make any year-end sales, probably because it had just issued $100 million in preferred stock
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
, bringing sufficient cash to its bottom line.
In 1988, Transmark underwent major changes in management. William Blackburn sold his one-third interest in Transmark to Sanford. According to his testimony, "I was not interested in continuing that relationship since Mr. Sanford and I had different views about the future direction of the company."
In 1988 and 1989, Transmark also acquired retail, printing, and plastics companies, facilitating a convoluted arrangement (designed by law firm Shereff, Friedman, Hoffman and Goodman) in which GSLIC was able to exceed the legal limits on investment in affiliates. Transmark created a holding company called CG Acquisition USA and issued CG’s one share of common stock to a company officer. This officer in turn granted Transmark an option to reacquire the share, executed a shareholder agreement granting Transmark the right to appoint CG directors, and gave Transmark a warrant to acquire 99 shares of CG common stock. This allowed Transmark was able to retain control over the companies while still holding them out as unaffiliated companies and listing the investment as a $19 million asset.
In 1989, Sanford began using these subsidiary companies to count assets twice on GSLIC’s balance sheet. An example is GSLIC's loan of $25 million to the airline group. That same day, the airline paid Transmark $17 million in dividends, and Transmark in turn paid it to GSLIC as gross paid-in and contributed surplus. Thus, GSLIC was able to count the same asset twice – once as a loan receivable to the airline, and again as contributed surplus from Transmark. GSLIC also made a loan of $44 million to the printing group, which resulted in Transmark giving another $19 million of paid-in capital to GSLIC.
In 1990, Sanford pursued another circular arrangement in which he caused the subsidiaries to issue $27.5 million in preferred stock, which was simply given to GSLIC to enhance its balance sheet. The combined result of these schemes was that the retail, airline and printing operations' debts exceeded their assets by $35 million, but they were carried at face value on Transmark's balance sheet at $120 million.
In 1991, the company went broke. William Blackburn testified, "Everything went wrong after I left. The most significant event, I can speculate, is the junk market crash in 1989."
The Auditors' Work
In early 1985, Mark Sanford hired Coopers & Lybrand to audit GSLIC's 1984 financial statements based on Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles
Generally Accepted Accounting Principles refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards...
(GAAP). Don Withers refused to recognize the year-end sales under GAAP, noting, "in today’s environment I can not get anyone to agree that a period of time of less than 10-15 days would be sufficient to expose the Company to sufficient investment risk to entitle you to recognize the gain on the transaction." As a result, Mark Sanford became angry and fired the accounting firm.
Later in 1985, GSLIC engaged Coopers to audit GSLIC's 1985 statements based on statutory accounting rules. Coopers found that under statutory accounting, a 10-15 day period is not needed to recognize a sale of bonds: "as long as GSLIC does not have any legal obligation to reacquire the securities and will reacquire the securities at their fair market value, the sales should be recognized for statutory accounting purposes along with any corresponding gain or less." Sanford assured Withers that Florida insurance regulators had approved the year-end transactions. As a result, Coopers issued a clean audit report.
Subcommittee Findings
The Subcommittee issued several recommendations for tightening up statutory accounting. These include a requirement that auditors contact state regulators regarding misleading financial transactions; the use of GAAP for determining the financial soundness of insurance companies; and review of quarterly financial statements by insurance regulators.In reference to the auditors, Senator John Glenn
John Glenn
John Herschel Glenn, Jr. is a former United States Marine Corps pilot, astronaut, and United States senator who was the first American to orbit the Earth and the third American in space. Glenn was a Marine Corps fighter pilot before joining NASA's Mercury program as a member of NASA's original...
made this statement on March 3, 1993:
- The Subcommittee finds that Coopers and Lybrand accepted and relied upon the representations by GSLIC management that Florida regulators were aware of the year-end transactions and had approved them. The Subcommittee believes that as independent auditors, Coopers & Lybrand had an obligation to verify this information for itself. In doing so, the auditors could have discussed with the Florida Insurance Commissioner the true effect of the year-end transactions, including the fact that proper MSVR was not being calculated and set aside for the protection of policyholders. If they had done so, perhaps they would not be party to the unfortunate situation faced by thousands of policyholders today.