Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The death of Martha Barotz was the start of her problems. It might now become Apollo’s problem. Per Bloomberg:

Apollo Global Management Inc bet on the longevity of senior citizens by acquiring illegal life insurance policies and funneling the payouts through shell entities, according to a new lawsuit.

The private equity giant allegedly set up a web of sham trusts — using a secretive affiliate called Financial Credit Investment — to hold a portfolio of stranger-originated life insurance policies worth roughly $20 billion. Taking out life insurance on a stranger is “anathema to hundreds of years of public policy” and a violation of the Delaware Constitution, the suit says.

“Apollo has been carrying out a widespread fraudulent human life wagering conspiracy designed to not only hide its involvement, but to create the false appearance that the policies it owns are somehow legitimate,” according to the complaint. “Worse still, when Apollo senses a claim is going to be brought, it attempts to dissolve its shell entities to give itself yet another layer of protection.”

The full complaint is here (PDF). The legal team representing the Estate of Martha Barotz declined to comment. Apollo told us by email:

We believe these claims are baseless. While we generally refrain from commenting on ongoing litigation, we want to be clear that Financial Credit Investment I, a fund previously managed by our affiliates, never participated in the origination of any life insurance policy.

Let’s rewind. Here’s how it started.

In 2006, New York State resident Martha Barotz was paid $150,000 upfront by Life Accumulation Trust III (LATIII), which took out insurance that would pay out a $5mn lump sum on her death.

Barotz, who at the time was in her early 70s, agreed to form an eponymous Delaware statutory trust, after which she signed away control to LATIII. It was LATIII that took out the policy, paid all the premiums, and was its sole benefactor.

In 2011, LATIII sold the Barotz trust to a fund allegedly controlled by Apollo. This fund banked the $5mn lump sum when Barotz died in 2018, aged 83.

Stranger-owned life insurance policies, known as STOLIs, were very popular in the late 2000s in spite of being illegal nearly everywhere. Life insurance policies are freely transferable but if the benefactor has no familial connection to the deceased they can be voided.

In most states, an insurer can sue a benefactor to void a policy. For the insurer this made writing dodgy business a win-win, since it could keep the premiums as well as the lump sum, so some jurisdictions including Delaware allow the victim or their family to sue and claim the death benefit.

The Barotz family has been trying for several years to void the policy taken out on Martha’s life. The latest complaint alleges that the trust Barotz set up was “a sham entity” and that, having collected on her death, the defendants . . . 

… went to great lengths to move those proceeds through a complex maze of purported trusts and other entities in an effort to thwart Delaware law and hinder the Estate’s ability to recover those proceeds. All of these efforts were fraudulent and illegal —and Defendants were well aware they were violating Delaware law.

In January the Superior Court of Delaware ruled in favour of the Barotz estate and ordered a $6.9mn payout (final judgement here). Even though Barotz could be seen to have participated in the scheme, having immediately received 3 per cent of the face value of insurance taken out, it didn’t invalidate Delaware’s public policy against human life wagers, the judge said.

According to the estate’s new suit, the defendants tried to evade the judgment by stripping cash from liable entities and by engineering their insolvencies. Financial Credit Investment 1, the entity Apollo refers to in its above statement, is part of what the complaint calls the FCI suite of funds:

Despite its purported corporate legitimacy, FCI and the various trusts it purportedly owned were, in reality, a conglomerate of shell entities and empty statutory trusts that served as puppets for the ultimate director and financial beneficiary who sits behind the curtain pulling the strings: Apollo.

Wells Fargo and Wilmington Savings Fund Society are named in the suit having allegedly provided administration services to FCI. They have been contacted for comment.

How big a deal might all this be? The complaint quotes previous trial testimony from William Sullivan, “an Apollo employee who served as the managing director of the FCI suite of funds between 2010 and at least 2019” (our emphasis added and case references removed):

“FCI is mainly focused on longevity mortality risk assets,” which are “most sensitive to the risk of people living longer or not . . . by buying life insurance policies that people no longer need anymore and would otherwise surrender back to the carrier.”

The “mortality risk assets” which FCI sources and “isolate[s],” are simply Wall Street jargon for STOLI policies, such as the illegal human life wager taken on Mrs. Barotz life.

Because “FCI has a lot of capital put to work,” the suite of funds does not dabble in the individual policy market but, instead, “only purchase[s] portfolios of policies from existing investors . . . that have already aggregated a portfolio,” otherwise referred to as the “tertiary market.”

FCI’s managing director estimated that, as of 2019, the tertiary life settlement market generated “between 80 and 90 billion policy face.” Within that figure, “FCI’s presence is . . . probably the largest investor in this special asset,” with an estimated $20 billion aggregate investments as of 2019.

There’s an obituary here for Barotz, though it might not fully reflect her legacy.