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Maryland probes buying of settlement payouts by ‘unregistered shell’ firms

12.18.2015

By Terrence McCoy

Washington Post

Companies that purchase settlement payouts belonging to some of the state’s more vulnerable residents are under scrutiny by the Maryland attorney general’s office for using what it calls “unregistered shell companies” in these deals — a violation of state corporate law.

In papers filed in court in the past month, the office has contested six proposed transactions that unregistered corporations filed in state court to buy payments from what are known as structured settlements, spurring the withdrawal of five of the petitions. (In such transactions, the purchasing company pays the beneficiary of the structured settlement a lump sum, and the individual signs ownership of all remaining payments over to the company.) Some of the unregistered entities, investigators found, have no established holdings.

“As public, regulatory and judicial scrutiny of these transactions has increased over the past year, an increasing proportion of the petitions for approval of these transactions filed in Maryland courts have been filed on behalf of unregistered [out-of-state] LLCs [limited liability companies], many of which appear to be related to one another,” the office said in court papers. “This extraordinary proliferation of unregistered LLCs deters regulatory and judicial oversight and may make it more difficult for Marylanders who may have been harmed in these transactions to obtain relief for any such harm.”

Attorney General Brian E. Frosh said his office is determining whether it can move to invalidate deals that companies have filed using unregistered entities. “We’re certainly looking into it,” he said.

The inquiry is the latest push by state authorities to curb what was once a virtually unchecked industry. The inquiry follows a report in The Washington Post in August that showed companies routinely bought payouts belonging to victims of lead-paint poisoning for dimes on the dollar. The state’s highest court has since reformed judicial procedures to better protect people, many of whom are mentally impaired, as they enter into complicated financial deals in which they risk exchanging payouts meant to last a lifetime for pittances.

“It’s an industry that appears to target vulnerable individuals,” Frosh said. “They’re paying an average of 30 percent of the net present value [of someone’s payments]. They’re dealing with a vulnerable population, and they’re not exactly giving them the best deal in town. And they are not even authorized to do business in the state of Maryland.”

Structured settlements are different from traditional settlements, which pay one immediate lump sum. Structured settlements, which attorneys recommend to people who are inexperienced in managing large amounts of money, make payments over decades on a regular schedule to keep the recipients from immediately spending their entire settlements. Considering the vulnerability of many recipients, 49 states and the federal government have laws requiring state courts either to approve or deny deals according to whether they are in best interests of the people being asked to sell their settlements.

These proceedings have meant firms have had to do little beyond scanning court documents to have a shot at poaching a competitor’s customers. Because the pool of structured-settlement recipients is limited, some companies have become creative in the court process, experts say. They file petitions using only customers’ initials, redact information from court documents and file under numerous subsidiaries. One company, Access Funding, filed numerous cases using an entity called En Cor LLC, which business records show is not registered in Maryland.

There is another possible reason for the use of shell companies, said Sean Bentzen, vice president of Bentzen Financial, a purchasing firm in Tennessee. Using shell companies can provide additional cover to a firm that does not want attention, he said. “If you’re looking to do anything that is unethical, the easiest way to do it is to set up a shell company, then fold it, then you say, ‘We didn’t do it,’ and the company is gone. It’s a means to an end, a dirty way to do business, and everyone in the business knows it happens.”

It is difficult to say whether that has happened in Maryland, where the attorney general’s office says it has discovered “dozens” of unregistered corporations filing petitions for the purchase of structured settlements in state courts, in some cases listing only post office boxes or UPS stores as addresses. Also unclear is why companies do not register with the state those entities through which they do business, considering that registering is relatively simple.