September 5, 2014 / 4:33 PM / 4 years ago

AIG, philanthropist trade lawsuits over 'life settlements' deal

NEW YORK (Reuters) - An American International Group Inc unit and a philanthropist traded lawsuits on Friday over a partnership gone sour involving billions of dollars in life insurance policies sold by elderly individuals in exchange for cash.

A new sign is displayed over the entrance to the AIG headquarters offices in New York's financial district, January 9, 2013. REUTERS/Brendan McDermid

AIG’s Lavastone Capital said in a lawsuit filed Friday in New York federal court that it had paid Coventry First of Fort Washington, Pennsylvania, more than $1 billion since 2006 to help it acquire the policies, known as “life settlements.”

Coventry, whose chief executive is Philadelphia philanthropist Alan Buerger, is the “leader and creator” of the life settlement industry, according to its website. Investors who acquire a policy cover the premiums until the individual’s death and then collect the payout.

Rather than identifying appropriate policies and selling them to Lavastone at the elderly individuals’ asking price, the lawsuit claimed, Coventry used a network of shell companies to artificially inflate the prices to Lavastone. The fraud cost Lavastone more than $150 million, the lawsuit said.

“Thus, defendants’ behavior is no different than an auction house that knows a bidder’s maximum price ceiling and then uses ‘shill bidders’ associated with the auction house to fraudulently inflate the price to that bidder’s maximum bid,” the lawsuit said. It called Coventry and CEO Buerger “scam artists.”

In a countersuit filed in New York state court a few hours later, Coventry accused Lavastone of breaching its exclusive contract with Coventry by allowing an affiliate to purchase life settlements from other businesses.

The lawsuit also claimed Lavastone “concocted” fraud allegations to escape contractual provisions that limit its ability to resell certain policies, which Coventry estimated could cost AIG $700 million.

“Their lawsuit is simply meant to get leverage to get rid of the contract provisions,” Buerger said in an interview.

Coventry asked a judge to award it more than $100 million and declare that Lavastone is not entitled to its own damages.

An AIG spokeswoman called the Coventry lawsuit “a baseless attempt to distract attention from the fraudulent and illegal scheme that AIG alleged in its complaint.”

Lavastone accused Coventry of engaging in racketeering, fraud, conspiracy, breach of contract and other violations. The lawsuit also noted two previous civil fraud actions against Coventry brought by the New York Attorney General’s office and Florida’s insurance regulator, both of which have been settled.

Besides Coventry, the lawsuit names several other business entities as well as Buerger and several family members.

Lavastone spent about $6.5 billion over a decade to acquire nearly 7,000 life settlements with a face value of $20 billion, its lawsuit said. AIG has since wound down its life settlement business, the lawsuit said.

The Buergers are well-known philanthropists in Philadelphia who donated $50 million to the Children’s Hospital of Philadelphia last year.

The federal case is Lavastone Capital LLC v. Coventry First LLC et al., U.S. District Court for the Southern District of New York, No. 14-7139. The state case is Coventry First LLC v. Lavastone Capital LLC, New York Supreme Court, New York County, No. 652712/2014.

Reporting by Joseph Ax; Editing by Lisa Von Ahn and Richard Chang

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