The Securities and Exchange Commission sued insurance magnate
alleging that he and a lieutenant defrauded insurers out of more than $75 million through a series of undisclosed related-party transactions and advisory fees paid to a Malta entity.
“We allege a massive fraudulent scheme, involving unique financial structures and various complex investments,” said
chief of the SEC Division of Enforcement’s Complex Financial Instruments Unit, in a news release Tuesday accompanying the lawsuit.
The SEC’s civil action is the first government allegation of fraud against Mr. Lindberg, a North Carolina entrepreneur who bought several insurers and proceeded to loan at least $2 billion of their assets to entities he controlled. Four North Carolina insurers have since been placed into rehabilitation, a type of receivership akin to reorganization under federal bankruptcy law, by that state’s regulators while another in Bermuda is in liquidation.
Mr. Lindberg in July was released from federal prison after an appeals court overturned his 2020 conviction on a separate, criminal matter, ruling that the district court judge erred in his jury instructions.
That case, in which Mr. Lindberg was accused of attempting to bribe North Carolina’s insurance commissioner to obtain more favorable regulatory treatment, is tentatively scheduled for retrial in March 2023.
Mr. Lindberg has denied wrongdoing in the criminal case. Referring to the SEC civil action, Susan Estrich, a spokeswoman for Mr. Lindberg, called it “piling on,” saying it was evidence of a “weak case,” in a statement Tuesday.
Ms. Estrich said the Lindberg team showed the SEC millions of pages of documents and bank records and “they zeroed in on a handful of transactions representing less than 1.5% of that period’s transaction volume.” Mr. Lindberg, she added, “intends to fight the false allegations that have been made against him, and to strengthen and support his insurance companies and the policy holders.”
The SEC, in the lawsuit filed Tuesday in federal court in North Carolina, said Mr. Lindberg and a co-defendant,
a former chief investment officer for the North Carolina insurers, had declined to testify during its investigation, citing their Fifth Amendment right against self-incrimination.
Claire Rauscher, a lawyer for Mr. Herwig, said, “we will vigorously defend against the allegations.”
In its complaint, the SEC alleged that the insurers’ funds were supposed to be used to pay policyholder claims. But instead, the agency alleged, Mr. Lindberg “treated the funds as his own assets and used the money for any purpose he decided was in his best interest.”
In one alleged scheme starting in late 2017, according to the SEC, Messrs. Lindberg and Herwig had the insurers sell assets after they were questioned by North Carolina regulators, then repurchased essentially the same ones under a different structure, at an inflated price.
A Lindberg-owned entity pocketed the difference, the SEC alleged, more than $57 million. The boards of the insurers weren’t notified about the mechanics of the transaction nor that Mr. Lindberg pocketed the difference.
The transactions weakened the finances of the insurers, the SEC alleged. In addition, the agency said $3.3 million of the insurers’ assets went to finance the purchase of a personal residence for Mr. Lindberg and more than $4 million of the profits from the round-trip transactions was transferred to a personal cash account for Mr. Lindberg.
The SEC also alleges that a Malta entity indirectly owned by Mr. Lindberg, Standard Advisory Services Ltd., collected more than $21 million in advisory fees from the defrauded insurers. The Malta entity, which for a period was an SEC-registered investment adviser and also is a defendant in the case, loaned $35 million to entities controlled by Mr. Lindberg and paid $12.9 million in dividends to a shell parent company he owned, the SEC alleged.
The defendants also extracted millions of dollars in cash and other liquid assets from the Bermuda insurer for use in Mr. Lindberg’s other businesses, the SEC alleged, by loading the insurer’s books with illiquid, “sham investments.”
The SEC brought the action under its authority to regulate investment advisers, saying the individual defendants and the Malta entity had a fiduciary duty to act in the best interests of the insurers they were advising. The agency seeks disgorgement of allegedly ill-gotten gains and other monetary penalties, among other relief.
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