WASHINGTON—The president of a Costa
Rican company that sold reinsurance bonds to life settlement companies was
found guilty by a federal jury in Richmond, Virginia today for carrying out a
half-billion-dollar fraud scheme that affected more than 2,000 victims
throughout the United States and abroad.
U.S. Attorney for the Eastern District
of Virginia Neil H. MacBride and Assistant Attorney General Lanny A. Breuer of
the Criminal Division made the announcement following the jury’s verdict.
“Mr. Vargas lied to investors across the
globe to sell almost half-a-billion dollars worth of ‘guaranteed’ bonds, which
turned out to be worthless,” said U.S. Attorney MacBride. “His fraud affected
thousands of victims around the world, many of whom invested their life savings
with life settlement companies because of the worthless guarantees PCI made.
Mr. Vargas may have thought he was safe operating his scheme from overseas, but
his conviction is yet another example to global fraudsters: You can run, but
you can’t hide. This verdict demonstrates our ability to pursue justice on
behalf of U.S. victims regardless of where the fraudsters may be hiding.”
“Mr. Vargas reaped millions in profit
from a sprawling scheme to defraud investors seeking to hedge their risk in the
life settlements market,” said Assistant Attorney General Breuer. “He used his
ill-gotten gains to fund a soccer team and to provide financial comfort for his
family and for himself. Today, a Virginia jury told Mr. Vargas that he would be
held accountable, hopefully bringing some measure of peace to the investors he
defrauded.”
Minor Vargas Calvo, 60, a citizen and
resident of Costa Rica, is the present and majority owner of Provident Capital
Indemnity (PCI) Ltd., an insurance and reinsurance company registered in the
Commonwealth of Dominica and doing business in Costa Rica. He was convicted of
one count of conspiracy to commit mail and wire fraud, three counts of mail
fraud, three counts of wire fraud, and three counts of money laundering. He
faces a maximum penalty of 20 years in prison on each fraud count and up to 10
years in prison on each money laundering count when he is sentenced on October
23, 2012.
According to court records and evidence
at trial, PCI sold financial guarantee bonds to companies selling life
settlements, or securities backed by life settlements, to investors. These
bonds were marketed to PCI’s clients as a way to alleviate the risk of insured
beneficiaries living beyond their life expectancy. The clients, in turn,
typically explained to their investors that the financial guarantee bonds
ensured that the investors would receive their expected return on investment
irrespective of whether the insured on the underlying life settlement lived
beyond his or her life expectancy.
Evidence at trial showed that Calvo and
PCI’s purported independent auditor for PCI, Jorge Castillo, 56, of New Jersey,
used lies and omissions to mislead PCI’s clients and investors regarding its
ability to pay claims when due on the financial guarantee bonds that PCI
issued. Calvo caused Castillo to prepare audited financial statements that
falsely claimed that PCI had entered into reinsurance contracts with major
reinsurance companies. These false claims, which were supported by a letter
from Castillo stating that he conducted an audit of PCI’s financial records,
were used to assure PCI’s clients that the reinsurance companies were
backstopping the majority of the risk that PCI had insured through its
financial guarantee bonds. The fraudulent financial statements PCI distributed
showed significant assets and relatively small liabilities.
From 2004 through 2010, PCI sold at
least $485 million of bonds to life settlement investment companies located in
various countries, including the United States, the Netherlands, Germany,
Canada, and elsewhere. PCI’s clients, in turn, sold investment offerings backed
by PCI’s bonds to thousands of investors around the world. Purchasers of PCI’s
bonds were required to pay up-front payments of 6 to 11 percent of the
underlying settlement as “premium” payments to PCI before the company would
issue the bonds.
Evidence at trial showed that Vargas
sent more than $23 million of his ill-gotten gains to fund his professional
soccer team in Costa Rica, to his unrelated companies, to his family and to
himself. Due, in part, to these expenditures, when it came time to make good on
PCI’s promises to pay bond holders, Vargas resorted to yet more lies to justify
PCI’s inability to do so.
Castillo, who was a PCI employee prior
to becoming PCI’s “outside auditor,” pleaded guilty on November 21, 2011, to
conspiring to commit mail and wire fraud, which carries a maximum penalty of 20
years in prison. Castillo is scheduled to be sentenced on May 22, 2012. In
addition, the corporation, PCI, pleaded guilty on April 18, 2012, to conspiring
to commit mail and wire fraud, which carries a maximum term of five years’
probation.
This continuing investigation is being
conducted by the U.S. Postal Inspection Service, Internal Revenue Service, and
FBI, with assistance from the Virginia State Corporation Commission, the Texas
State Securities Board, and the New Jersey Bureau of Securities. This case is
being prosecuted by Assistant U.S. Attorneys Michael S. Dry and Jessica Aber
Brumberg of the Eastern District of Virginia and Trial Attorney Albert B.
Stieglitz Jr. of the Criminal Division’s Fraud Section.
The U.S. Securities and Exchange
Commission (SEC) conducted a parallel investigation and in January 2011 filed a
parallel civil enforcement action against PCI, Vargas and Castillo. The
department thanks the SEC for its assistance in this matter.
The investigation has been coordinated
by the Virginia Financial and Securities Fraud Task Force, an unprecedented
partnership between criminal investigators and civil regulators to investigate
and prosecute complex financial fraud cases in the nation and in Virginia
specifically. The task force is an investigative arm of the President’s
Financial Fraud Enforcement Task Force, an interagency national task force.
President Obama established the
Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and
proactive effort to investigate and prosecute financial crimes. The task force
includes representatives from a broad range of federal agencies, regulatory
authorities, inspectors general, and state and local law enforcement who,
working together, bring to bear a powerful array of criminal and civil
enforcement resources. The task force is working to improve efforts across the
federal executive branch, and with state and local partners, to investigate and
prosecute significant financial crimes, ensure just and effective punishment
for those who perpetrate financial crimes, combat discrimination in the lending
and financial markets, and recover proceeds for victims of financial crimes.
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