Interest charge

US authorities accuse Maltese company of ‘elaborate’ scheme that defrauded customers of more than US$75m

The United States Securities and Exchange Commission (SEC) on Tuesday accused two Americans and the Maltese investment advisory firm owned by one of them, Standard Advisory Services Limited, of defrauding clients of more than 75 million dollars “through undisclosed transactions that benefited them and their businesses”.

American insurance tycoon Gregory Lindberg and Christopher Herwig, through the Maltese firm Standard Advisory Services (SASL) owned by Lindberg and the linchpin of the whole operation, are accused of fraudulently tricking their clients into engage in undisclosed transactions with related parties that were, the SEC charged, far from being in the best interests of their clients.

According to the SEC complaint, between July 2017 and 2018, the defendants misappropriated more than US$57 million in client funds, with the Malta-based company collecting more than US$21.4 million in advisory fees from of defrauded customers, money which, according to the SEC, “Lindberg distributed to itself and/or its affiliates”.

In total, the SEC alleges that Lindberg wrongfully obtained more than $75 million from the illicit schemes run by the Malta-based firm.

In an attempt to cover up the fraud, Lindberg allegedly orchestrated the schemes through complex investment structures and a network of affiliates. The funds were allegedly used to pay themselves or to divert the funds to other Lindberg businesses.

The SEC alleges that Lindberg, Herwig and Malta SASL, all acting as trustees, “repeatedly recommended and entered into transactions that were undisclosed and not in the best interests of their clients.”

While the basic premise of the scheme was simple, the SEC argues that “the mechanisms they used to accomplish the fraud were, by design, complex.”

How the diets worked

By 2017, Lindberg had acquired 100% ownership of four North Carolina insurance companies as well as a reinsurance trust, giving it control over hundreds of millions of dollars in premiums from policyholders.

Although the funds were supposed to have been used to pay policyholders’ insurance claims, “Lindberg treated the funds as its own assets and used the money for whatever purpose it deemed to be in its best interest”.

Lindberg asked his insurance companies to enter into investment advisory services agreements with the Malta-based investment adviser he owned.

From July 2017 to 2018, Lindberg, Herwig and SASL, in violation of their fiduciary duties, according to the SEC, “acted in their own interests and plundered the assets of their advisory clients through a series of fraudulent schemes and inappropriate”.

One such scheme saw Lindberg and Herwig advising their clients to enter into “a complex and illogical set of transactions to mask Lindberg’s embezzlement of their funds”.

Specifically, the SEC explains in its complaint that it advised insurance companies to sell their interests in certain Lindberg-affiliated special purpose vehicles and then repurchase what were essentially the same investments through a different investment vehicle. at a higher price.

“Lindberg pocketed the difference, which was more than $57 million,” the SEC alleges. Between November 2017 and June 2018, Lindberg and Herwig led insurance companies to enter into thirteen such transactions.

Lindberg and Herwig used the “fraudulent ‘profits’ to enrich Lindberg and support his other businesses,” according to the SEC, while board members of insurance companies “were left in the dark about the misuse of Lindberg”.

An excerpt from the US SEC complaint

In another scheme, Lindberg and Herwig funneled millions of dollars to Lindberg-owned affiliates by loading the balance sheet of another SASL advisory client, Private Bankers Life & Annuity Co (PLBA), with prohibited investments and/or or fictitious.

Specifically, Lindberg and Herwig allegedly advised the PBLA to buy millions of dollars in securities issued by Lindberg-affiliated companies and hundreds of millions of dollars in illiquid and bogus “buy-out contracts”. [Repos] issued by Lindberg subsidiaries.

These related party transactions violated PBLA’s reinsurance trust agreement, according to the SEC. The Repos, issued by Lindberg-controlled entities “that had neither the ability nor the intention to redeem the allegedly short-term liquid investments, violated applicable insurance law and the PBLA’s investment guidelines and forced the PBLA to assume substantial and unnecessary risks”.

Ultimately, the SEC’s complaint states that PBLA “was left with hundreds of millions of dollars in illiquid and sham repos while Lindberg and his companies held cash.”

The investment portfolios of the four insurance companies were severely compromised and they were placed in receivership as a result. PBLA itself ended up filing for bankruptcy.

According to the SEC, “Lindberg and Herwig used the proceeds of the fraudulent schemes to pay themselves, to acquire new investment opportunities on Lindberg’s behalf, and to transfer large sums of money to Lindberg and its affiliates.

“Lindberg distributed millions of dollars in SASL advisory fees to itself and its affiliated entities that were unrelated to its advisory clients,” the SEC said in its complaint.

They are also accused of spending illicit profits from the schemes for their benefit. Herwig received annual salaries ranging from $947,000 to $1.6 million, while Lindberg is accused of surreptitiously transferring millions of dollars to his personal cash accounts and ordering Malta-based SASL to lend more of $35 million to businesses he owned and controlled.

He also ordered SASL to issue dividends totaling approximately $12.9 million to a shell parent company he owned.

Lindberg and Herwig declined to testify during the SEC investigation, asserting their Fifth Amendment right under the U.S. Constitution against self-incrimination.

“A massive fraudulent scheme orchestrated for their own benefit”

“We allege a massive fraudulent scheme, involving unique financial structures and various complex investments, orchestrated by the defendants for their own benefit rather than for the benefit of their advisory clients,” said Osman Nawaz, head of the instruments unit. financial complexities of the law enforcement division of the SEC. tuesday.

“Today’s filing demonstrates that the SEC will take steps to protect investors from investment advisers who attempt to evade their fundamental fiduciary responsibilities.”

The SEC complaint was filed in the U.S. District Court for the Intermediate District of North Carolina and accuses Lindberg, Herwig and Malta-incorporated Standard Advisory of violating the anti-fraud provisions of the U.S. Advisors Act. 1940 investment, and seeks restitution plus prejudgment interest, penalties and permanent injunctions.

Standard Advisory Services Limited had been granted a category 2 investment services license by the Malta Financial Services Authority. At the end of September 2020, the license was canceled after being returned “quite voluntarily”, according to an MFSA statement at the time.

The Malta-based SASL was registered with the SEC as an investment adviser from November 2016 until it withdrew its registration on October 1, 2019.

Lindberg indirectly owned SASL and Lindberg and Herwig were directors of SASL and members of SASL’s investment committee.

Lindberg had also registered a reinsurance company in Malta, Standard Re, in April 2015. It held Class 1 and Class 2 insurance licenses issued by the MFSA before its license was also returned at the end of 2018.