(Bloomberg) – Coventry First LLC illegally marked up prices on hundreds of investments that bet on when people would die, an American International Group Inc. unit said at the start of a fraud trial in New York.
Lavastone Capital LLC, the AIG subsidiary, claims Coventry ripped it off of more than $150 million by systematically jacking up prices in a 2006 deal to help it acquire life insurance policies from people seeking to sell them for cash.
“It’s a classic pattern of racketeering over several years,” Lavastone’s lawyer, Randy Mastro, said in his opening statement Thursday in Manhattan federal court. “They lied, they cheated, they stole, they covered up.”
The trial will hinge on details of so-called life settlements, in which an investor buys all or some of a life insurance policy and collects a payout when the insured dies. The arrangement becomes less profitable for the investor the longer the person survives as the investor may have to pay premiums.
Coventry acquired the polices for AIG and then overcharged the insurer before passing them on, Mastro said. The company ratcheted up the scheme in 2008 at the peak of the financial crisis, just as AIG was at its most vulnerable and on the verge of collapse, Mastro argued.
Coventry sought to “bilk their customer out of every last dollar before their gravy train ran out,” said Mastro, of Gibson, Dunn & Crutcher in New York.
Lavastone alleges the scheme involved a total of $1.23 billion in fees and illegal price mark-ups.
Heidi Hubbard, Coventry’s lawyer, said in her opening statement that its pricing practices with AIG were transparent, and that the allegations are nonsense.
“AIG was not defrauded — not in any way,” said Hubbard, of Williams & Connolly LLP in Washington. “AIG had access to all the documents it wanted.”
The only reason the practice increased during the financial crisis, Hubbard said, was because AIG demanded more policies for its own business purposes.
The AIG unit said in its complaint that it provided Fort Washington, Pennsylvania-based Coventry with secret pricing and underwriting data as part of the deal. In return, Coventry was obligated to convey to Lavastone the life policies at cost.
The secondary market for U.S. life policies emerged in the 1980s when the AIDS outbreak led some patients to sell their insurance policies to pay for treatment. Lavastone now owns about 5,700 life settlements that are expected to pay out $18 billion in net benefits, according to the complaint.
The case is Lavastone Capital LLC v. Coventry First LLC, 14-cv-7139, U.S. District Court, Southern District of New York (Manhattan).