CIC Services sues former client over alleged tax scam

The company says its former client set up captive insurance companies solely as a tax shelter

CIC Services sues former client over alleged tax scam

Insurance News

By Ryan Smith

CIC Services has filed a lawsuit against a former client, SRM Group, its owner, Suresh Prabhu, and two related captive insurance companies formerly managed by CIC Services.

The lawsuit, filed in Tennessee, alleges breach of contract and fraud. It comes after a year of arbitration between the parties, in which every claim against CIC Services was dismissed by the arbitrator.

“The arbitrator ruled that the claims against CIC Services and its agents were unfounded based in part upon the fact that Mr. Prabhu and SRM Group misrepresented their intentions in forming and operating the captive insurance companies in question,” said Sean King, general counsel for CIC Services.

The arbitrator found that Prabhu never intended to operate his captive insurance companies as actual insurers despite repeated and explicit warnings from CIC Services.

The arbitrator said that even though CIC Services told Prabhu that there needed to be a business purpose for captive insurance, “he clearly regarded the requirement that the captives operate as real insurers as contrary to his objective and resisted efforts by [CIC Services] to have claims filed. His focus was on the investment, wealth-enhancing aspect of the transactions.”

Since the captives had no real risk-transfer purpose, the arbitrator said, their “wealth-enhancing” aspects were available almost exclusively through tax savings – savings only available to legitimate insurers.

“Mr. Prabhu knew that our firm would not voluntarily assist anyone in forming and operating a pretextual captive insurance company for the purpose of improperly claiming tax benefits,” King said. “All of our material emphasizes as much. However, to induce us to serve him nonetheless, Mr. Prabhu knowingly, repeatedly and explicitly misrepresented his motives to us. For instance, he represented and warranted in multiple contracts that he was motivated primarily by insurance considerations rather than tax or investment motives when, as the arbitrator explicitly concluded, he actually was not.”

CIC Services said that it would “vigorously pursue” anyone who fraudulently induced the company into unknowingly participating in such a scheme.

“If you have no genuine motivation for your captive insurance company, then CIC Services is not the place for you,” King said.

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