The United States Court of Appeals has weighed in on a lawsuit regarding the Vesttoo fraud and the fake letters of credit (LOC) that underpinned reinsurance deals linked to the company, with a finding that could have some ramifications for brokers.
Recall that this particular Vesttoo fraud related lawsuit was dismissed with prejudice by a Texas court a year ago, but at the time Porch said it intended to continue to pursue recourse in the matter.
Porch had originally filed a lawsuit against broking group Arthur J. Gallagher, claiming its reinsurance arm Gallagher Re had mismanaged the administration of a reinsurance arrangement subject to collateral posted by Vesttoo that turned out to be fraudulent.
The claims were denied and the case closed, after which Porch turned to the appeals court and has now found some agreement there, that at least one of its claims deserves further scrutiny.
Porch alleges that Gallagher Re’s administrative and post-binding duties, to the reinsurance arrangement in question, should have included verification of letters of credit (LOCs) and identifying red flags it says arose due to the lack of actual LOCs presented by Vesttoo, rather there was a collateral letter from purported investor Yu Po at the time.
Porch claims that, “Gallagher incorrectly represented the collateral letter as a letter of credit, ignored red flags throughout the transaction process, assured HOA that the collateral was valid, and assured HOA it could “safely” allow Vesttoo’s $25 million withdrawal from the reinsurance account,” the appeal court ruling states (HOA being Homeowners of America, a Porch insurer subsidiary).
The court said it disagrees with Gallagher’s response, explaining, “Porch’s allegations plausibly come within the language of Section 13, which broadly required Gallagher to perform all “servicing duties . . . customarily performed by a reinsurance intermediary-broker,” including “administering all reserve funding.””
Adding, “Contrary to the district court’s ruling, it is at least reasonable to interpret that provision as including Gallagher’s duties with respect to the letter of credit.”
As a result, the motion to dismiss from the District Court is deemed inappropriate on this single issue.
The appeals court concluded that the Texas District Court erred by dismissing Porch’s reinsurance intermediary authorization agreement Section 13 claim against Gallagher Re.
The case now gets remanded for further proceedings in the district court, consistent with the appeals court opinion on this specific Section 13 related argument.
It’s a move that could have some ramifications for reinsurance brokers that worked on Vesttoo related transactions, as the appeals court opinion implies these brokers should have held at least some responsibility for the ongoing management and administration of the arrangements, including measures to ensure credit-worthiness of the collateral.
However, note the appeals court use of language such as “plausibly” and being “reasonable to interpret” that the reinsurance broker held some responsibility for ensuring validity of collateral under the contract.
In this case, the District Court will now hear again from both parties regarding this issue it seems, giving Gallagher Re a further chance to state its opinion, as well as Porch.
The fact there was a lack of official letter of credit and that the reinsurance arrangement was agreed and entered into on the basis of a letter that stated the purported investor Yu Po Finance would provide an LOC at a later date is not all that unexpected.
It is not a particularly unusual practice in the reinsurance market for contract renewals or signings to sometimes occur prior to collateral placement, or verification, with the market often cited as operating on a trust, relationship and reputation basis.
Of course, where trust falls down completely is when one party is fraudulent and, in the case of the Vesttoo reinsurance LOC fraud, this was an incident where numerous parties on all sides of the transactions failed to identify the criminal wrongdoing until it was too late.
So, the Vesttoo saga continues and is likely to run for some time. There are other court cases still ongoing, with little sign of meaningful satisfaction or recovery for anyone involved yet.
Now almost three years since news of the fraud linked to collateral that was supposed to underpin Vesttoo-related reinsurance deals broke, those that suffered financial damages have recovered significantly less than they lost (sometimes next to nothing compared to the damage suffered) and large sums of money remain unaccounted for.
There has been no further progress on holding any individuals to account for the fraud either, with the focus remaining on the LOC’s rather than on those believed to have faked them.
Read all of our coverage of news related to the fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo reinsurance deals.
