Guarantee Security Life Insurance Company, or GSLIC, represented one of the most severe cases of insurance fraud in Florida history. According to the Florida Insurance Commissioner:
<blockquote>[GSLIC] was, almost from the beginning, a massive fraud, aided and abetted by blue-ribbon brokers and licensed professionals motivated by their own self-interest. The fraud at Guaranteed Security was a carefully orchestrated bank robbery. But the thieves disguised themselves with the help of accountants and brokers and lawyers rather than wearing silk-stocking masks.</blockquote>
The allegations by Florida insurance regulators against accounting firm Coopers & Lybrand ultimately led to a $4.5 million settlement. The U.S. Securities and Exchange Commission found that Merrill Lynch "failed to properly record the terms and conditions of certain transactions which involved the sale and repurchase of certain securities" and ordered that Merrill adopt procedures and controls to ensure compliance with the SEC's book's and record provisions and "cease and desist" from committing future violations. A $100 million settlement was reached between the Florida Department of Insurance and firms associated with the 1991 collapse of GSLIC.
Background
In 1978, Mark Sanford and William Blackburn were working as stockbrokers in Louisville, Kentucky when they decided to form their own company, Transmark USA, Inc. In 1984, Transmark purchased Guarantee Security Life Insurance Company (GSLIC) of Jacksonville, Florida. The two men moved to the Sunshine State, Blackburn taking charge of daily operations, while Sanford managed the investment portfolio.
GSLIC's primary products were deferred annuities and life insurance policies. The firm marketed these products through a national sales force of over 16,000 highly commissioned insurance agents. However, customers were attracted to the products by the promised 8% interest rate (at a time when the going rate was 8%), which was guaranteed for the first year. According to a sales brochure, customers were also protected against loss of their investment: "The principal is fully guaranteed. It is not subject to losses created by market fluctuations."
Customers soon found there were drawbacks to the policies. The interest rates paid after the first year dropped dramatically. However, annuitants were discouraged from withdrawing their money by high cancellation penalties ($1,000 for a $10,000 investment).
Between 1984 and 1991, the company grew from less than $100 million to almost $1 billion in assets and had about 57,000 policyholders in 42 states. In December 1986, Transmark raised $50 million through a private placement of 13% senior notes arranged by Drexel Burnham. Abraham J. Briloff notes, "The purchasers included institutions with close ties to now imprisoned junkmeister Michael Milken -- notably Columbia Savings & Loan, CenTrust and Imperial Savings & Loan." The Milken brothers' involvement in the GSLIC transactions eventually led to their being sued by the state of Florida for $225 million.
In 1991, the company went insolvent and stopped writing new policies. Consequently, the State of Florida established a receivership to take control of the company. The receiver paid the contractual minimum crediting rate, which for most policyholders was 4%. Policyholders were given the option to transfer to Guaranty Reassurance Corp., the industry-run restoration company, or face stiff surrender charges, lose the possibility of sharing in potential court awards, and receive only 32 cents on the dollar. About 42,000 of the original 55,000 policyholders ultimately transferred to Midland National Insurance Company.
The state determined that it would only guarantee policy values up to a total of $100,000, based not on who the buyer was, but on the insured. This impacted policyholders such as William Underwood, who had paid $50,000 for a single-premium annuity in 1987, and convinced his mother and mother-in-law to invest $40,000 each in their own annuity, naming him as the insured. Underwood stated, "I'd like to wring the agent's neck and damn those guys who did the hanky-panky."
Government investigation
On December 20, 1991, the State of Florida filed a 17-count suit against GSLIC's executives, accountants, lawyers, and brokers charging "breach of fiduciary duty, negligence, breach of contract, waste of corporate assets and conspiracy to defraud." The State of Florida sought and obtained a court order freezing Chairman Mark Sanford's assets, after finding that he had purchased a Bahamian island, Rudder Cut Cay, with company funds and begun minting his own coins bearing his likeness on one side and that of his bikini-clad wife on the other.
His assets also included a million-dollar Ponte Vedra Beach oceanfront home, two $165,000 Lamborghini Countachs, a Rolls-Royce, a Corvette, a Jaguar, and a speedboat. Sanford also invested in a chain of nude dance bars.
Sanford's island, which had a private airstrip, a natural harbor, two miles of beaches and a 3,200-square-foot main house, was sold by the state to a Chicago businessman for $6.1 million.
The sheer magnitude of the fraud – involving the collapse of what was then Florida's sixth-largest insurer – attracted Congress's attention. On April 29–30, 1992, the U.S. Senate Permanent Subcommittee on Investigations held hearings on GSLIC, as part of an investigation titled "Efforts to Combat Fraud and Abuse in the Insurance Industry." Chairman Sam Nunn called several of GSLIC's executives, accountants, brokers, customers, and regulators to the stand to testify. Sanford declined to answer any questions, invoking his right against self-incrimination. Based on other evidence, however, the subcommittee concluded that the regulatory safeguards against insurance fraud and abuse had failed on a monumental scale.
Company records revealed that GSLIC's assets had been systematically looted by Transmark management in the form of excessive salary and dividends. Transmark Chairman Mark Sanford took $37 million; Transmark, $23 million; GSLIC President William Blackburn, $17 million; Sanford's brother Rob, $2 million; Blackburn's wife Melanie, $700,000; and Sanford's wife Margena, $600,000. Together they looted the company of more than $80 million.
In order to finance the lavish executive salaries while still paying the annuities and insurance agent commissions, GSLIC management invested in high-yield, high-risk junk bonds. In 1991, the junk bond market collapsed, causing the company to become insolvent. In testimony before the Senate, GSLIC's Deputy Receiver estimated the fair value of the company's assets at $230 million. Obligations to its policyholders and annuitants totaled $620 million.
Chronology
In 1984, Mark Sanford ran into trouble when his efforts to raise capital clashed with Florida insurance regulations. To protect policyholders, the statutes required insurers to maintain a reserve totaling 20% of the total amount invested in high-risk investments. The reserve is recorded as a liability, and would have caused GSLIC to become insolvent. To circumvent the regulations, Sanford made an oral arrangement with Merrill Lynch to sell the junk bonds on December 31, 1984 in exchange for a $155 million "account receivable due from brokers" and repurchase the bonds on January 2, 1985 for the same amount, plus a fee.
In 1985, Sanford refined his scheme to eliminate several problems. These issues included the creation of a suspicious, huge account receivable that was never funded, and the questionable legality of a transaction never consummated by a cash transfer. On December 31, 1985, Sanford attempted to sell $246 million in junk bonds to Merrill Lynch in exchange for U.S. Treasury bonds (which do not require a reserve due to their risk-free status). However, Merrill Lynch's computer system recorded the transaction as of January 2, 1986 – too late to help GSLIC's balance sheet. So Sanford's assistant arranged for Merrill Lynch to doctor the records by issuing a written confirmation that the trade actually occurred December 31, 1985.
In 1986, Sanford tried a different scheme. According to the State of Florida's complaint, Southeast Bank – at the insurer's request – falsified its December 31, 1986 portfolio summary. Abraham J. Briloff, CPA, noted, "The change made it appear that the bank was holding $292 million in Treasury bonds for GSLIC on that date, even though the bonds weren't in the bank's possession." Southeast Bank employees manually typed a 15-page confirmation summary.
In 1987, GSLIC did not make any year-end sales, probably because it had just issued $100 million in preferred stock, bringing sufficient cash to its bottom line. Altogether, Merrill Lynch received fees of about $25,000 at yearend 1984, $75,000 at yearend 1985, $150,000 at yearend 1986, and $106,000 at yearend 1988 for its part in the yearend bond transactions.