'Death bonds' come under scrutiny in US

Irish units of US hedge fund have gone bankrupt amid allegations that retirees were duped out of their life insurance, writes Seán O'Driscollin New York

At offices on Adelaide Road in south Dublin sit the headquarters of Ritchie Risk-Linked Strategies Trading Ireland, a hedge fund that was set to become the world's biggest trader in life and death.

In a strategy that has taken speculative investment by hedge funds to their limits, Ritchie bought hundreds of millions of dollars of "death bonds" - a scheme in which investment companies purchase insurance policies from old people and continue to pay the premiums on the expectation that the policyholder would die soon and the investment company could cash in on the insurance policy.

In the US, it has become a multibillion-dollar business, with an old person's life expectancy earning as much scrutiny as the future price of coffee or soy beans.

Born with America's Aids crisis, when patients could sell their life insurance policies to pay for medical costs, the death bond business is expanding rapidly as baby boomers reach retirement.

However, despite being at the forefront of an expanding market, Ritchie's four linked Irish companies have crash-landed spectacularly, with accumulated debts of more than $811 million (€588 million) amid massive lawsuits, a criminal investigation of their business partner, and allegations that old people were duped out of their life insurance by unscrupulous brokers.

"Death bonds", as buying up old people's insurance policies are known, is expected to reach sales of more than $6 billion in 2007. It has come under enormous scrutiny in the US in the past year, with several investigations uncovering brokers who bullied entire communities into parting with their life insurance.

The current edition of BusinessWeek features a front-cover picture of Death holding his sickle and looking menacingly over a headline that reads: "Death Bonds: Inside Wall Street's Most Macabre Scheme Ever".

The inside pages feature pictures of Death at his Wall Street desk puffing on a cigar and practising golf, while joyously waiting for old people to fall over their patios in Florida retirement homes.

Ritchie Ireland's parent company, Ritchie Capital Investment, strongly rejects the media portrayal of death bonds, or what is more politely known as "life settlement backed securities".

Those involved in the trade say it allows the elderly to cash in on their life insurance policies and earn a cash sum that is many times larger than that which the elderly customer would get if they sold their policy back to the insurance company.

Ritchie Capital, a $2 billion hedge fund run by former American footballer Thane Ritchie, was so impressed with the death bond market that it pumped in more than $800 million of clients' money into its Dublin subsidiaries, in the expectation that Ritchie would be going into business with Coventry First, a Philadelphia-based company that specialises in buying retirees' insurance policies.

Ritchie Capital was to attract investors for Coventry First in a $300 million offering that was underwritten by Lehman Brothers and included a pool of old people's life insurance policies with a face value of $1.6 billion, by far the largest death bond offering the US had seen. Moody's, the investment risk service, gave a very good risk rating for priority investors, and respectable mutual funds were ready to jump in.

However, according to the New York attorney general's office, Coventry First had been up to some dubious practices while encouraging old people to sell their life insurance policies, including paying insurance brokers to rig offers so it looked like no other company was interested in buying the policy from the old person.

For confused retirees who needed money, Coventry First appeared to be the only deal around when, in reality, other companies were allegedly offering much better sums.

The attorney general's office offers some sample cases, such as a 79-year-old widower living in Hawaii who wanted to sell his $400,000 life insurance policy.

A broker representing the widower allegedly took a cash payment from Coventry so that he would not tell the widower that there was a better offer from another investment company.

A year later, a New York trust representing an 80-year-old woman wanted to sell her $4.9 million life insurance policy. Coventry offered $705,000, allegedly paying a broker representing the woman $49,000 to stay quiet about other offers.

An 85-year-old retiree in Florida also allegedly suffered the same fate, with Coventry allegedly paying a broker $5,000 to hide any other offers from rival companies. In all, the attorney general's office claims it has uncovered more than 200 such cases across the US.

When the case went public, Moody's withdrew its risk rating, the mutual funds ran for cover and Ritchie's Dublin subsidiary was left with a financial disaster.

Ritchie claims, in a lawsuit launched against Coventry First, that it had no knowledge of sharp practices carried out by its partner and would not have invested in the scheme had it known Coventry was under investigation.

In June, Ritchie's Dublin subsidiaries filed for bankruptcy with losses of more than $811 million and are suing Coventry First for $2 billion. Ritchie's largest investors have also begun legal action in an attempt to win their money back.

Last Tuesday morning, the company's lawyer, Thomas Puccio, was discussing the case with Ritchie's Irish directors, who live in Terenure, Clontarf, Harold's Cross and Leixlip.

"Whatever is going on with a company, you have to keep directors informed and that includes litigation," he said.

Asked why Ritchie had located such a large fund in Ireland, Puccio replied simply: "I'm sure you are aware of the tax advantages."