SEC v. Pacific West Capital Group, Inc., et al

Case Summary:

On February 16, 2018, Thomas C. Hebrank of E3 Advisors was appointed permanent receiver for PWCG Trust (“Defendant”), pursuant to an Order entered by the United States District Court for the Central District of California in an action against Defendant filed by the Securities and Exchange Commission.

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Summary
The Receiver filed a plan with the Court on November 15th to propose a long-term strategy for maximizing the value and addressing the cash flow needs of the PWCG Trust portfolio. A link to the motion can be found below. Highlights include:

 

  • The Receiver’s consultant (Itm/21st) obtained medical records, prepared premium optimization schedules, and prepared Life Expectancy Reports (LE’s) for the insureds and scheduled out monthly premium payments and expected maturity dates.
  • A preliminary analysis indicated that the overall PWCG Trust portfolio had a positive value, but that additional funding sources would be needed to make premium payments, and some of the policies had a negative value.
  • The Receiver used this information to prepare a simple simulation (excluding costs of borrowing and administration) indicating the portfolio could generate as much as $104 million in net cash by the time the last policy matured.
  • Based on the preliminary information, a complete statistical and probability analysis was needed, and another consultant, ClearLife, was engaged by Itm/21st to perform this analysis.  This analysis projected a total recovery from portfolio at the end of 10 years, discounted to net present value, of $41 – $48 million.
  • All of the above analyses identified 34 policies with negative values (premium payments likely to exceed policy maturity value) that should be sold or surrendered in the short term.
  • The Receiver has recommended “pooling” of all assets of PWCG Trust based on the fact that 1) there were insufficient reserves to make most of the policies’ premium payments, meaning the policies would lapse without substantial additional capital; 2) there are 34 policies that have no value and need to be sold or surrendered for their cash value in the short term in order to maximize the total recovery from the portfolio; 3) additional financing (a line of credit) needs to be obtained in order to ensure there is enough cash available to cover premiums for all policies going forward.
  • Pooling of assets means that all of the net assets (policy maturities less premium payments) will be distributed to all investors on a pro-rata basis once sufficient death benefits have been received to begin making distributions. The alternative is that most investors would not recover anything because the cash reserves for their individual policies have been or soon will be fully exhausted, or their negative value policies would be surrendered or sold for a minimum value.
  • A hearing has been set for the Court to review this motion on December 13, 2018.

 

Funding Insurance Premiums
With the Court’s approval, all premium payments continue to be paid by “borrowing” against available PWCG Trust reserve funds. Accordingly, no investor billings are being sent out for premium payments at this time. All policies remain current and active, none have defaulted or lapsed.

 

Policy Maturities
There have been a few policy maturities since the start of the receivership. These funds are being held by the Receiver pending further order of the Court. As noted above, the Receiver has proposed that these funds be pooled with the remaining cash reserves and used to pay premiums for the portfolio moving forward. There have been no new policy maturities since the last monthly update.

 

FREQUENTLY ASKED QUESTIONS:

 

Who is the Receiver? Why was there a Receiver appointed? Thomas C. Hebrank was appointed by the Federal District Court on February 16, 2018. The Receiver was appointed after a complaint was filed by the Securities and Exchange Commission against Pacific West Capital Group, Inc.; Andrew B. Calhoun IV; PWCG Trust, et al. (“PWCG”). Your life insurance investment interest was created by PWCG, and is one of the subjects of the ongoing litigation between the SEC and PWCG.

 

Who can I talk to about my investment? You can periodically visit the Receiver’s website for additional updates as far as the case, Receiver’s Reports and other legal filings (www.ethreeadvisors.com/cases/pwcg). The Receiver and his staff are happy to take your questions, however to keep expenses low we ask that you check the FAQ or website first. Please direct inquiries to the Receiver to pwcg@ethreeadvisors.com.

 

What are the next steps in the receivership? Mills, Potoczak & Company will continue to maintain the accounting and operations relating to these life insurance investments, under the supervision of the Receiver. The funds are now under the direct control of the Receiver. The Receiver is in the process of gathering information regarding these policies, the investor interests, and overall operations. Many, but not all, of these policies have established premium reserves, which are in place to cover or partially cover premium costs on the policies. However, many of these insurance policy investments do not have sufficient funds set aside to make these premiums payments.

 

Do I still need to make premium call, administrative fee or other payments? The Receiver has currently suspended the collection of both investor premium calls and shortfall payments, as well as the $200 or other administrative fees. These would have been billed to you by Mills Potoczak. No prior premium or administrative fees will be refunded. Some investors have their investments in an IRA with Entrust Group. Entrust Group is not part of the receivership and we have no control or authority over any administrative fees billed to investors by them.

 

What are the initial steps being taken regarding premium shortfalls? The Receiver, working with Mills Potoczak, immediately identified insufficient premium reserves for policies with payment due dates starting on March 9, 2018 through May 31. 2018. A reserve shortfall of $435,000 exists for this time period, effecting policies with total death benefits over $117 million. If these premium payments are not made, these policies would lapse, and the investments would be lost. Accordingly, the Receiver filed an ex parte motion on March 1, 2018, asking the District Court for authorization to use the existing reserves on hand at PWCG Trust to fund deficiencies for premium payments that are due during March, April, and May 2018, in order to prevent any policies from lapsing. The Court granted that motion on the following day. A link to the filing as well as the Court’s order can be found below. During this 90 day time period, the Receiver intends to perform additional analysis on the policies and reserves in order to recommend a long term plan for the PWCG Trust portfolio to the Court.

 

During this review period, the Receiver found that proper due diligence was not done in acquiring the policies in the PWCG Trust portfolio, and that a valuation process would need to be completed to properly determine the value and viability of the policies. The majority of the policies had either exhausted, or were about to exhaust their existing reserves. A long-term strategy was needed for maximizing the value of the policy portfolio, and this would require obtaining proper life expectancy reports for the insureds and other valuation information. Accordingly, the Receiver obtained quotes from several life settlement companies, as well as the current trustee Mills Potoczak & Company, to both manage the portfolio and provide valuation services.

 

Based on the quotes received, on May 2, 2018, the Receiver filed a motion with the Court to 1) engage a portfolio and valuation consultant, 2) terminate Mills Potoczak, and 3) use PWCG Trust reserve funds to cover unfunded premium payments through October 2018. This motion is currently before the Court and is scheduled to be heard on May 31, 2018.

 

Will the Receiver be collecting the Final Judgments against defendants Pacific West Capital Group, Inc.; Andrew B. Calhoun IV; and Andrew Calhoun Jr.? Copies of the Final Judgments against Andrew B. Calhoun IV, Andrew Calhoun, Jr. and Pacific West Capital Group, Inc. can be found at the below links under Court Filings. These Final Judgments were entered in favor of the Securities and Exchange Commission on June 15, 2018 and June 26, 2018.

 

The SEC is responsible for collecting each of these Judgments. The Receiver will not engage in direct collection activities with regard to these Judgments.  It should be noted that if the SEC is successful in recovering money from these Defendants, it is possible that the recovered funds will be turned over to the Receiver. In other words, in the normal course of a federal equity receivership, the SEC will turn over funds that are collected on judgments to the Receiver for distribution to the investors who were victims of the underlying wrongdoing. In the meantime, the Receiver will continue his work pursuant to the Appointment Order to maximize the recovery and distribution to investors in connection with the PWCG Trust.

 

Initial Investor Notification Letter

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Court Filings:

 

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Email Thomas C. Hebrank: pwcg@ethreeadvisors.com