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WOODBRIDGE MORTGAGE INVESTMENT FUND ORDERED TO CEASE AND DESIST FROM SELLING UNREGISTERED SECURITIES IN MICHIGAN

In December of 2017, Investors in a series of Woodbridge Mortgage Investment Fund LLCs failed to receive their monthly interest payments under the terms of various loan agreements and promissory notes that were sold as first position commercial mortgages (FPCM). On December 13, 2017, WMIF notified its investors that due to a recently “loss of liquidity” it was not able to make the required monthly interest payments. The notification indicated that the company had recently sought a corporate restructuring under chapter 11 of the U.S. Bankruptcy Code in the United States District Court for the District of Delaware and that all future claims for payment and/or return of principal should be submitted as part of the bankruptcy protection plan.

On December 20, 2017, the SEC filed a complaint in the United States District Court in the Southern District of Florida against along with the principal operator(s) and other related Woodbridge entities for their role in the illegal operation of an alleged $1.2 billion Ponzi scheme which began in 2012.The SEC investigation and complaint revealed that over 8,400 unsuspecting investors nationwide were duped into investing in the alleged Ponzi scheme through fraudulent and unregistered securities offerings.

www.sec.gov/litigation/complaints/2017/comp-pr2017-235.pdf

Contrary to what was advertised and represented in the promotional literature disseminated by WMIF all nearly all of the third-party borrowers were in fact individuals and/or entities operating under common control. The SEC complaint alleges that all of the interest payments made to the initial investors were from funds received from subsequent investors. By December 2017 the alleged Ponzi scheme collapsed leaving investors with over $961 million in unrecoverable losses.

The scheme was perpetrated through a vast network of in-house and external sales agents who raised in excess of $1.22 billion by falsely selling Woodbridge investments as “safe” and “secure.” The underlying third-party borrowers were shell entities that apparently had no actual revenue source and thus had no ability to pay the monthly interest payments or return of principal despite being marketed and sold as “low risk” and “simpler” investments.

Because the fund entities were not receiving any interest payments on the promissory notes, Woodbridge used new investor funds to pay the interest and dividends owed to previous investors – thereby creating the illusion that Woodbridge was fulfilling its originally represented investment promises. External sales agents were paid over $64.5 million in commission for soliciting investor funds and selling the fraudulent and unregistered securities offerings. Neither Woodbridge nor its eternal sales agents were registered or authorized to sell the securities offering with any state or federal agency.

On January 29, 2018, The State of Michigan’s Department of Licensing and Regulatory Affairs (LARA) Securities Division issued a Notice and Order directing WMIF to immediately cease and desist from the selling of any Woodbridge investments.

www.michigan.gov/documents/lara/Woodbridge_Mortgage_Investment_Fund_2_LLC_CN_332976_CD_597405_7.pdf

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Proposed Insurance Agents Liability Act

On November 1, 2017, Republican State Senator Rick Jones introduced Proposed Senate Bill No 644, which if enacted would significantly limit a consumer’s ability to pursue a claim or legal action against a licensed insurance agent.

https://mirsnews.com/bills/details/35459

Section 4 of the proposed bill abolishes all claims and/or causes of action against an insurance “licensee” including claims for fraud, misrepresentation, and/or negligence in exchange for a single action under the statute which only applies if there is “special relationship” between the agent/agency and the customer with respect to the specific matter dispute. Absent such a “special relationship” there can be no civil claim or cause of action against an insurance licensee either in law or in equity.

Under the proposed bill, an insurance licensee owes no duty to advise the customer regarding the adequacy of their insurance needs or to explain the coverage terms of an insurance contract. If a “special relationship” is found to exist, the issue as to whether an agent acted improperly can only be maintained if supported by expert testimony (1) establishing the requisite standard of care; (2) violation of the requisite standard of care, (3) and damages that were proximately caused by the licensees breach. Recoverable damages are specifically limited to the insurance benefits that would have otherwise been available plus interest, but for the breach and would in no way allow for any additional measure of damages such as lost profits, consequential or exemplary damages.

Since “licensee” is defined as any individual or agency that is required to maintain a license in order to solicit or sell a contract of insurance in the State of Michigan, it would appear that the act would also apply to the activities of individuals and/or agencies selling life insurance, annuities, health, long term care, and disability policies in addition to traditional property and casualty policies.

Most cases against insurance agents do not involve overt or intentional misrepresentation; rather they fit within a category of failure to inform or failure to properly represent the interest of the insured (i.e. negligence and/or silent fraud). In order to maintain a silent fraud or negligence action against an insurance agent, a plaintiff must show that agent had a duty to disclose pertinent information or to act for the betterment of the insured through some sort of recognizable fiduciary relationship or other legal duty. However, under Michigan law an insurance agent does not stand in a fiduciary relationship with his/her clients and therefore owes no duty to act in the insured’s best interest.

Most other licensed professionals (i.e. accountants, attorneys, brokers, financial advisors) either stand in a fiduciary relationship with their clients or are subject to other regulations that impose a duty to act in the client’s best interest. With regard to an insurance agent selling an investment product such as an annuity or life insurance policy, a licensee is required to have a reasonable basis to believe that the product being sold is suitable for the customer’s given needs given their financial status, investment objectives, given access to full and accurate information under the relevant provisions of the Insurance Code. MCL 500.4155 However, the Insurance Code does not provide for or allow a private cause of action for a violation for any provision contained therein.

This is not the first time that the activities of the insurance industry have been exempted from civil liability under other consumer protection scheme. In 2000 the Michigan Consumer Protection Act (“MCPA”) was revised to specifically exclude the insurance industry from civil claims involving false and/or deceptive practices in the sale of insurance products. MCL 445.904(3) “This act does not apply to or create a cause of action for unfair, unconscionable or deceptive method, act, or practice that is made unlawful by chapter 20 of the insurance code of 1956, 1956 PA 218, MCL 500.2001 to 500.2093.”

Under the proposed bill, insurance agents would be afforded complete immunity from civil liability for recommending or selling an insurance product that may well be inappropriate or unsuitable. The net effect would be to transform the role of an insurance agent and customer to that of a caveat emptor/buyer beware relationship.