April 19, 2015

SEC Pursues Another Fractional Interest Company

By Stephen C. Baker and Bradford P. Barron

SEC v. Pacific West Capital Group, No. 2:15-cv-02563 (C.D. Cal.)

On April 7, 2015, the Securities and Exchange Commission (SEC) filed a complaint in the United States District Court for the Central District of California against Pacific West Capital Group, Inc., its owner, and the purported agents through which it allegedly sold fractional interests in life insurance policies.  In the lawsuit, the SEC seeks to permanently enjoin the defendants from engaging in the sale of securities, to have the defendants disgorge all of their ill-gotten gains and to pay all applicable civil penalties.

The complaint alleges that Pacific West and its president, Andrew B. Calhoun, IV, improperly sold fractional interests in universal life insurance policies.  The SEC alleges that Pacific West and Mr. Calhoun have engaged in this practice since 2004 and have raised approximately $100 million from more than 3,200 investors.  The SEC further alleges that Pacific West has sold fractional interests in approximately 125 life insurance policies.  The SEC further claims that Pacific West has defrauded its investors by using the funds from new investors to pay premiums on policies purchased by prior investors. 

The SEC claims that Pacific West and Calhoun offered these fractional interests through PWCG Trust and that these investments were not registered and were offered and sold in violation of the registration provisions of federal securities laws.  The SEC also claims that the selling agents of Pacific West were unregistered brokers and dealers, which violated the relevant broker-dealer registration provisions of federal securities laws.

The SEC asserts that in marketing the fractional interests, Pacific West represented to buyers that it created three levels of reserves to pay premiums for a six- to nine-year period during which the policies were expected to mature.  Pacific West represented that a cash call from investors for additional funds would only be necessary in the event that Pacific West’s three levels of reserves were exhausted, but that Pacific West had never made a cash call nor had it ever touched the secondary or tertiary premium reserves. 

Allegedly, of the nearly $100 million obtained from investors, 45 percent was paid to Pacific West as its “margin.”  However, this was never disclosed to investors.  The SEC further alleges that, since January 2012 through November 2014, Pacific West had used part of its “margin” to fund the premiums on policies that had not matured as expected, which allowed Pacific West to continue to represent that Pacific West had never made a cash call from existing investors. 

Finally, the SEC claims that Pacific West and Calhoun had no reasonable basis for its representation to investors that the policies procured by Pacific West would likely mature within Pacific West’s expected maturity period.  Rather, the SEC alleges that Pacific West and Calhoun merely estimated, felt or targeted policies that it believed would mature in its expected timeframe, but, in fact, Pacific West undertook no actuarial analysis in making those determinations.

The SEC has brought claims of fraud in connection with the purchase or sale of securities and fraud in the offer for sale of securities against Pacific West and Calhoun.  The SEC has also asserted that the various sales agents of Pacific West and Calhoun operated as unregistered broker-dealers and asserts that all of the defendants were involved in the unregistered offer and sale of securities.  The SEC also seeks joint and several liability against Calhoun, as he was the alleged person who committed, directly or indirectly, the acts and conduct violating various securities laws.

If you have any questions about this alert, please contact the authors listed above or your usual Drinker Biddle contact.

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