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Calling Sam Spade: SEC Charges two N.C. Executives who used a Malta-based entity to steal over $75 million

Malta: geography, history and Malta

The island of Malta is actually three islands that together constitute the Malta archipelago located in the middle (almost the exact middle) of the Mediterranean Sea, halfway between Italy and Libya and almost equidistant between Gibraltar and Lebanon.  In World War II it was the site of three British airfields, the largest of which, RAF Luqa, is now Malta International Airport.  The RAF squadrons of Hurricane and Spitfire fighter aircraft kept the Nazi forces from cutting the supply lines to and from the Suez Canal, despite the German successes of Rommel’s Afrika Corp in North Africa, helping to preserve Allied control of Egypt (and, notionally, also of India).  So this small group of islands (the largest is some 95 square miles) with a current population of just over 409,000, current population reckoned to be of around 540,000 was one of the most important locations in Europe.

Humans have inhabited Malta since at least 5200 BC, when hunter/farmers arrived from Sicily.  By 3500 BC they had begun to build megalithic temples.  The population fluctuated and led to a progression of rulers: Phoenicians, Carthaginians, Romans, Byzantines and Arabs, before it became part of the Kingdom of Sicily in 1091.  In 1798 the French, under Napoleon, took possession of Malta and briefly ruled it until the people rebelled.  Then in 1800 the British took control, ruling the archipelago until Malta gained its independence in 1964.  In addition to nautical trade and tourism, Malta as a center of business evolved into a significant, if remote,  financial center, which is relevant to our story here.

Malta is also known as the home of the Knights Hospitaller, a chivalric order founded in 1099 by the Blessed Gerard of the Kingdom of Jerusalem during the Crusades.  That order later became known as the Knights of Malta, a Catholic lay religious order of military, chivalric, and noble attributes.  Nonetheless, (according to Weapons and Warfare, February 14. 2018), by the 17^th century the Knights of Malta “lived as pirates operating slave galleys. Styling themselves ‘Armies of the Religion on the Sea’ they preyed on Muslim trade and cut Muslim throats …[under the banners] of their Order.”

Today, that Order maintains diplomatic relations with some 112 countries, has been called “the smallest sovereign state in the world”, and has, since 1994, been accorded observer status in the United Nations General Assembly.  The existence of the Order, its interesting history, and its quasi-national status emphasize the somewhat peculiar, but unique status of Malta.  “In any event, why two North Carolina businessmen with significant involvement with insurance companies and a reinsurance trust selected Malta as the situs for a registered investment adviser, Standard Advisory Services Limited (“SASL”).  Or perhaps they were simply caught up in the ethos of mysterious treasure exemplified by the black statuette, the Maltese Falcon.

The two principals and their businesses

The two businessmen involved are Greg E. Lindberg, age 52 and Christopher Herwig, age 43.  Mr. Lindberg, originally from San Mateo, California, graduated from Yale in 1993 with a degree in economics.  Mr. Herwig originally from the Carolinas, obtained both his undergraduate degree and an MBA from the University of North Carolina.  Mr. Lindberg has been quite an entrepreneur, starting a health insurance and reimbursement newsletter for home health agencies while still a Yale undergraduate.  He built on this experience to found an investment banking firm, (operating as a private equity firm), in the mid-1990s in Durham, North Carolina (the home of Duke University), naming the firm, with a tip to his alma mater, Eli Global.  Public statements about its founding focus on the drive, ambition and zeal of the founders, who began with little or no capital. That firm still exists today with several hundred employees and relationships with any number of start-up and early stage companies.

By 2012 Lindberg began investigating the possibility of acquiring insurance companies, intrigued by the large amount of relatively liquid assets retained by insurers to pay insurance claims. In 2014 Eli Global bought its first insurer, an Alabama burial insurance company.  In order to avoid an Alabama law cap on the ability to use the insurer’s funds as capital for investments in affiliated businesses, Mr. Lindberg reincorporated the company in North Carolina, where State insurance regulations were at least “vaguer”, if not simply loose.  Mr. Lindberg reached a “special agreement” with the North Carolina Department of Insurance, where the statutory 10% cap on affiliate investments was waived, and replaced with a 40% ceiling.  In 2015 and 2016 Mr. Lindberg acquired three more insurers, grouping the four together under Global Bankers Insurance Group, LLC., a North Carolina limited liability company (“GBIG”).  By 2017, he had also acquired a Bermuda-based reinsurance trust, Private Bankers Life and Annuity Co. Ltd.(“PBLA”), which was supposed to provide reinsurance protection to Universal Life Insurance Company (“ULICO”).  ULICO was a major life insurer in Puerto Rico.

SASL was founded by Mr. Lindberg in 2016. It was licensed by the Malta Financial Service Authority (according to the Complaint [the “Complaint] filed on 30 August 2022 by the U.S. Securities and Exchange Commission [“SEC”] against Messrs Lindberg and Herwig, and SASL, in the Federal Court for the Middle District of North Carolina) “to provide investment advice to professional clients.”  It was also registered in 2016 with the SEC as an investment adviser, and remained registered until October 1, 2019.  The Complaint notes that SASL “held itself out to the public as an investment adviser and attempted to secure European-based insurance companies as clients [apparently without success].”  Mr. Lindberg, in addition to indirectly owning SASL, was one of its directors and a member of its investment committee.   He was also a board member of each of the insurance companies and a member of its investment committee.  Mr. Herwig was the Chief Investment Officer (“CIO”) of Eli Global and also CIO of each of the insurance companies.  Mr. Herwig was also a director of SASL, a member of its investment committee, and SASL’s portfolio manager.

As the Complaint states, the acquisition of the insurance companies and the reinsurance trust “gave…[Mr. Lindberg] control over hundreds of millions of dollars in premiums from …[the insurance company] policyholders.”  Similarly, PBLA had millions of dollars in assets to fund reinsurance obligations to ULICO.  Like the pirates of Malta, Messers Lindberg and Herwig saw them as “pots of treasure” to plunder; and they did, ultimately misappropriating over $57 million from the SASL advisory clients and collecting over $21.4 million in adviser fees for misadvising those clients. The specific techniques they used are interesting and complex; and well-laid out in the 32 page Complaint.  But more of that later.  First, it is necessary to engage in an excursis into Mr. Lindberg’s adventures in seeking even more lenient regulations by the North Carolina Department of Insurance.

The Bribery Prosecution

Mr. Lindberg and two associates in April 2017 launched a major bribery effort to suborn the North Carolina Insurance Commissioner by making large (i.e., seven figure amounts) political contributions and other expenditures to “persuade” the Commissioner to make decisions favorable to GBIG, including the removal of the Senior Deputy Commissioner who oversaw the regulations and examinations of GBIG. According to a March 5, 2020 Press Release issued by the U.S. Department of Justice, one of the associates pled guilty on 28 August 2018 to giving false statements to the FBI.  All of this led to the Federal criminal prosecution of Mr. Lindberg and a guilty conviction by a jury on 5 March 2020 of conspiracy to commit honest services wire fraud and bribery.  In the course of the trial, it was revealed that the Insurance Commissioner had promptly notified the FBI after the first bribery proposal and as part of cooperating, wore a wire to record the subsequent conversations.  Mr. Lindberg began serving his sentence of seven years and three months (to be followed by three years of probation) on 20 October 2020.  On 29 June 2022 the U.S. Court for the Fourth Circuit overturned the conviction due to faulty jury instructions as to what constitutes an “official act”. Mr. Lindberg was released from prison on 15 July 2022, with a retrial scheduled for March 2023.

How did the two principals get the money? – The Insurers

Now, back to the Complaint and the SEC’s civil action against Mr. Lindberg, Mr. Herwig and SASL.  Messers. Lindberg and Herwig used their positions as two of five board members of each of the four insurance companies, and as members on the investment committee of each of the insurers, “steered” those insurers to enter into investment adviser agreements with SASL.   This gave SASL literally hundreds of millions of dollars received by the insurers as premium payments, to “play with” for the benefit of Messers Lindberg and Herwig.  As the Complaint states “[a]lthough the funds were supposed to be used to pay the policyholders’ insurance claims, Lindberg treated the funds as his own assets and used the money for any purpose in HIS best interest.”  From July 2017 through 2018 the two principals advised their insurance clients to invest in Special Purpose Vehicles (“SPVs”), which were then used to funnel money to specific investment opportunities chosen by and owned by the principals.  When in the Fall of 2017 the North Carolina Department of Insurance criticized these arrangements as exceeding the 40% cap on investments in affiliates, Messers Lindberg and Herwig invented a “work-around”.  They created Finance Companies (“FinCos”), purportedly managed by an independent third party (but not so managed in fact) which issued senior notes (purportedly secured by a pool of Lindberg-affiliate loans, which were in fact the same loans as used in the SPV financings).  The insurers then purchased “senior secured notes” from the FinCos, at a higher price than the insurers had paid for the SPV financings, with the participation of Academy Financial Assets, LLC (“AFA”), another Lindberg entity.  It should not surprise anyone who has read this far that the “spread” between the cost of the original insurance company investments and the amount paid for the FinCos notes, went directly to Mr. Lindberg.  The Complaint lays this all out over eight pages, including diagrams.

How did the two principals get the money? – The Reinsurer

The PBLA reinsurance trust agreement forbade investments in affiliates.  Nonetheless, Messers. Lindberg and Herwig once again were able to convince PBLA to choose SASL as its investment adviser.  In addition, Messers Lindberg and Herwig caused PBLA in July 2017 to transfer $44 million in cash to AFA, Standard Financial Limited and Standard Malta Holdings Limited, each of which was controlled and owned (directly or indirectly) by Mr. Lindberg, to purchase 7% notes issued by the Lindberg entities, where the proceeds of the sale of the notes were used to finance other Lindberg investments.  The transaction documents were signed on behalf of each party by one of Lindberg or Herwig.  The next month they engaged in a similar deal causing PBLA to purchase $18 million from another entity wholly-owned by Lindberg.  Then, beginning in January 2018 they caused PBLA to “invest” over $160 million in 90-day repurchase agreements (“Repos”) issued by Lindberg-affiliated entities.  Although touted as the equivalent of short-term loans, in fact, the Complaint avers that those Lindberg entities “had no intention or ability to repurchase” the Repos.  Instead, every 90 days the Repos were rolled over.  The Complaint notes that as of February 2022 many of those “90 day” deals remained unpaid.  In some cases, the proceeds of the Repos were used to purchase a security to serve as the collateral that supposedly had been the subject of the Repos in the first place.

It all starts to come apart

On June 27, 2019 (after the initiation of the criminal prosecution of Mr. Lindberg) the North Carolina Insurance Commissioner filed a petition for a Court Order to place all four insurance companies in Rehabilitation under the control of a court-appointed rehabilitator.  The boards of the four companies and Mr. Lindberg consented to the entry of the Court Order, which was granted that same day.  Finding that a majority of the insurance company investments were in Lindberg affiliates, and were of minimal value, on June 30, 2019 the four insurance companies “ceased all new business” and as of 30 August 2022 are still in rehabilitation.

On April 15, 2019 the Bermuda Monetary Authority imposed conditions to PBLA’s license as a reinsurer to provide enhanced supervision by the Authority.  By May 2020 the Authority had become concerned that PBLA was not solvent and appointed Deloitte Ltd to examine PBLA’s financial condition.  On September 18, 2020, based on the Deloitte report the Authority filed a petition in the Supreme Court of Bermuda to wind up the affairs of PBLA, and to appoint a liquidator.  Deloitte was appointed the Liquidator on September 25, 2020.  On December 3, 2020 the Liquidator filed a petition in Federal Court under Chapter 15 of the U.S. Bankruptcy Code to recognize the Bermuda liquidation proceedings as “a foreign main proceeding.”

Lindberg who had “funnelled millions of dollars to his personal cash accounts” also directed SASL “to issue dividends (to a shell parent company he owned) totalling approximately $12.9 million.  He also directed a company that he owned which sold $40 million of FinCo notes, to use $3.3 million to finance the purchase of a personal residence for Lindberg in Wake County, North Carolina.  Mr. Herwig received annual salaries of $947,000 to $1.6 million for his difficult work on both sides of the looting transactions.  Indeed, the Complaint notes that during the SEC investigation “Lindberg and Herwig declined to testify …asserting their Fifth Amendment right against self-incrimination.”  Published reports have noted that Lindberg especially has been sued by: i) executives of the four insurance companies; and ii) companies claiming that he and some of his companies had breached existing agreements, including insurance agreements.  He also faces claims in divorce proceedings from his wife and mother of his three children.  In a July 2020 letter written by the Berkeley Research Group, he claimed a personal net worth of “860 million to $1.46 billion” with homes in Idaho, the Florida Keys and the largest home in Raleigh, North Carolina.  He also owns a yacht and a private jet.  He may well need these resources to settle all the claims noted here and, in addition, both the penalties to be exacted by the SEC in the civil procedure triggered by the Complaint and the fines that the Federal Court might impose after the retrial for bribery and honest services fraud.

In the Complaint the SEC charges Mr. Lindberg, Mr. Herwig and SASL with violating Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, as amended (the “40 Act”) by breaching their fiduciary duties as investment advisers to their clients, here the four insurance companies and PBLA, by using schemes to defraud those clients and by engaging courses of business which operated as a fraud on them.  The Complaint also charges Mr. Lindberg and Mr. Herwig with violating those same Sections of the 40 Act by aiding and abetting SASL in its violations of the 40 Act.  The SEC seeks a finding by the Court that the Defendants violated the cited Sections and an Court order: i) permanently enjoining the Defendants and any of their agents and affiliates from future violations of the cited Sections; ii) requiring disgorgement of their ill-gotten gains plus prejudgment interest; and iii) directing payment of a civil money penalty appropriate to the wrongs committed.

Observations

Few people are able to enjoy such business success from relatively modest beginnings, but even fewer have so quickly destroyed everything that they have built – from insurance companies and financial intermediaries, to marriage, parenthood and personal lives.  Sometimes the price of “success” is greater than the reward.  It may be worth remembering that in The Maltese Falcon, the statue (purportedly carved from gold in the 16^th century by the Knights of Malta and painted with black enamel to conceal its value), was at the end, simply an empty promise.

This article has been written by Peter D. Hutcheon of Norris McLaughlin.

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