The ability of insurance regulators to assess the suitability of insurance company buyers has been called into question after it emerged this week that new owners of a property/casualty insurance company were financially backing the insurer with potentially counterfeit assets.
The owners of Oklahoma-based Red Rock Insurance company – which is now being liquidated – were also discovered to have close ties to Alexander Chatfield Burns, whose insurance empire collapsed last year.
According to a Wall Street Journal report, New York executives Andrew Scherr and Scott Hartman bought Red Rock Insurance Company in 2013 for $1. The two had said they would support Red Rock by funneling $30 million into its operations through their company, Foster Jennings Inc.
Red Rock, which had previously specialized in insuring small banking institutions, was refocused to deal in auto and general liability insurance.
Fifteen months after Foster Jennings bought Red Rock, however, Oklahoma regulators seized the company, saying they could not verify the value of the $30 million. Red Rock had provided regulators with a statement showing that its assets included a $40 million stamp collection and bonds issued by Altmark Holdings, an operation based in Turks and Caicos.
Nestor Romero, who took charge of Red Rock after its seizure, told the WSJ that he couldn’t verify Altmark “even had a bank account” and that documentation on the stamp collection “was truly something that had been Xeroxed a few times.”
Attorneys have since suggested the Altmark bonds may have been counterfeit, supplied to Foster Jennings as part of a transaction by a firm run by Cecil Franklin Speight, who pleaded guilty last year to federal fraud charges linked with selling counterfeit Altmark bonds.
An attorney for Hartman said his client was “fooled” by Speight. State insurance-guarantee associations are now paying Red Rock claims.
In the current merger-and-acquisition heavy environment facing the insurance industry, the case raises questions about insurance regulators’ ability to properly screen potential buyers.
Patricia McCoy, a professor of insurance law at Boston College, told the WSJ regulators ought to require new owners to place capital in escrow and then examine it.
“You are venturing into the unknown with new owners,” she said.
