In April 2010, Dr. Robert Kotler got a call from a fellow investor in a life insurance settlement fund run by Kotler’s friend Robert Zuckerman.
“He said, ‘We got a problem,’” remembered Kotler, a Beverly Hills plastic surgeon. “‘Zuckerman didn’t pay the premiums.’”
Since then, the fund’s business plan has fallen apart, investors lost their money and Kotler and others have sued Zuckerman and his partner, insurance agent Michael Meyer, saying they were scammed. Zuckerman and Meyer have also sued one another – each claiming they were bamboozled by the other.
A life settlement is an investment in another person’s already existing life insurance policy. (It’s illegal in California for strangers to take out policies on each other.)
Investors in these life settlements pay policy holders an amount that’s more than the cash surrender value – exactly what it sounds like – but less than the death benefit. That allows the policy holders to get their hands on cash now. Investors continue paying the premium – failing to do so voids the policy – and either sell the policy to other investors, or wait until the policy holder dies and then collect the death benefit.
Zuckerman pitched Kotler and other investors on the idea of a fund that would invest in life settlements. Making it more enticing, he even had a man on the inside: Meyer, an insurance agent formerly at defunct Beverly Hills firm Gilbert-Krupin, who would select only the best policies for the fund.
Kotler and several others each invested between $50,000 and $100,000 into the fund to purchase the initial policies and pay the premiums. But that didn’t happen, according to the investors.
“The money was stolen,” Kotler said. “There’s no question about it.”
Neither Meyer nor Zuckerman responded to the Business Journal’s request for comment.
Tamar Arminak, a Glendale attorney representing the Kotler group, said Zuckerman tried to sell some of the policies to pay back the money he is accused of embezzling from the fund. But when he realized they were of little or no value – because they were either bad policies to begin with or had lapsed – Zuckerman said he stopped paying the premiums.
Meyer tells it differently, saying the policies were fine until Zuckerman stopped paying premiums, Arminak said.
“You’ve got two con men and they’re both conning each other,” she said.
Zuckerman first approached Kotler to invest in the life settlement fund in early 2009.
“He came over to my office one day and showed me his outline pro forma,” Kotler said. “I read up on it a little bit and then I took everything that he gave me to an insurance broker.”
The broker said that while the estimated return of 17 percent was a little rich, he signed off on the plan, calling it a legitimate business idea.
Based on that stamp of approval, and his personal friendship with Zuckerman, Kotler said he made a $50,000 investment in the fund, called Continental Life Settlement Fund II. Meyer and Zuckerman had already raised a previous life settlement fund, which also failed and is in separate litigation.
While life settlements are indeed legitimate investments, Gilbert-Krupin had a spotty history with them. (Earlier this year, the Business Journal covered another failed Gilbert-Krupin life settlement venture in which QVC star Mark Kress claims the firm’s founder, Dennis Gilbert, sold him policies of people who were much healthier than Gilbert had represented.)
According to the Kotler complaint, Meyer’s plan was to use the fund money to purchase and pay the premiums on legitimate policies taken out by elderly members of his church. And given Meyer’s expertise, he convinced Zuckerman to give him free rein in selecting policies for the fund. In the world of life settlements, it’s preferable to buy policies on people who are likely to meet their demise sooner rather than later.
“Meyer’s job was to cherry-pick only the best policies,” Arminak said. “Those are policies that had previously never lapsed. They were people of the right age group. People of the right infirmity – or not. And the right price.”
In most states including California, life insurance policies become incontestable after two years and can then be borrowed upon or sold. In pitching his investment fund, Zuckerman had implied that he already had control of policies – sourced through Meyer – that were soon to hit the magic two-year mark, Kotler said.
“Frankly, to the investors, the only thing that counts is when you can sell them to another party,” he said. “That was the representation. We didn’t plan on waiting until anybody died.”
According to Kotler, Zuckerman said he planned to make money by acquiring policies, selling them to other investors and using returns to fund more policy purchases. There was even talk of eventually securitizing subsequent funds – talk substantiated by an April 2009 letter from Hunter Wise Securities, a Newport Beach firm that specializes in that line of work. The investors’ money was just to get started.
“We were kind of providing the seed money,” Kotler said. “But the seed money never grew anything for us.”
According to the complaint, the fund was doomed from the start. Zuckerman’s promotional materials said he would need about $1.7 million at inception to purchase the initial policies and pay premiums, management and origination fees. But the investors believe Fund II never raised more than $800,000. Arminak claims that about $700,000 went to Zuckerman for administration fees.
“Zuckerman merely took the invested funds and applied them to his own use,” Patrick Rogan, a Santa Monica trial lawyer and an investor in the fund, said in an email to the Business Journal.
Investors believe Zuckerman figured he could pay the fund back once he was able to sell or cash in on the policies he already bought. But that would be a dangerous game.
“We now know that when Zuckerman tried to sell a couple of these policies after the two-year mark, these policies were duds – they were useless,” Arminak said. “Almost every single one of the policies he selected had lapsed at some point.”
But Meyer was paid whether they were good policies or not. He received commissions upfront from both Gilbert-Krupin and French finance and insurance giant AXA, giving him little incentive to make sure they actually performed, the investors say.
“It was worse than a Ponzi scheme,” Kotler said. “At least in a Ponzi scheme, the early investors get their money.”
In recruiting investors to the ill-fated fund, Zuckerman had help from downtown L.A. attorney Anthony Vienna and real estate investor George Cooper, who were both investors in the fund and essentially commissioned salesmen for it, according to the complaint.
Vienna and Cooper did not respond to requests to comment for this story.
But their alleged involvement might explain why neither of them joined Kotler’s group of aggrieved investors in their suit against Zuckerman and Meyer, which is set to come to trial in the spring. Meanwhile, Zuckerman and Meyer are suing each other with allegations that mirror the deceptive practices alleged by Kotler’s group.
Though both Zuckerman and Meyer are accused of deceptive practices, if Meyer had actually delivered the choice policies he promised, Zuckerman might have come out fine, with investors being none the wiser. But he relied on Meyer, and he got burned, according to Kotler and his fellow plaintiffs.
“He believed the Meyer myth, that these policies were going to pay out,” Arminak said. “He allowed himself to dip into other people’s money thinking eventually he was going to be able to pay it back.”
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