2014 0425 - DOC 813 - Trial Transcript - Walker v LSW - 224p

  • (p3) - Index 
    • p41 - Jury Instructions  
    • p69 - Closing Argument by Mr. Brosnahan (Plaintiff Attorney - Walker)
    • p126 - Closing Argument by Mr. Martens (Defendant Attorney - LSW)
    • p189 - Rebuttal Argument by Mr. Brosnahan (Plaintiff Attorney - Walker)
    • p214 - Verdict
  • Is that a secret...
  • regulatory safe harbor.
  • Target Premium

p69 - CLOSING ARGUMENT BY MR. BROSNAHAN (Plaintiff Attorney - Walker)

(p84)

  • .... would they know what that really means in terms of the risk to them and how it would interact with......

(p84)

  • Other design elements, I mentioned the way the cost of insurance charge increases as you get older, how that interacts in fact with the net amount at risk which several of the witnesses commented on, and it's a very complex system.
  • But LSW well understands the system.
  • How many policyholders understand the system?

(p88)

  • I also point out that the current basis A has nothing to do with how the policy actually functions.
    • It is purely based on the variable loan rate.
    • It's not based on how the index credits actually accumulate, which is current basis B.
  • So current basis B is obviously the relevant number.
    • It's based on the way the policy actually functions and it's based on historical performance.
    • It's also the one that gets mentioned the most.
    • It's clearly what sells the policies.

(p105)

  • Another issue concerned the testimony that they don't disclose non-guaranteed elements like cost of insurance charges in the policy because they're not allowed to.
  • Again contrary to the statute.
  • The statute that applies actually says not only can you but you must disclose them and describe them if you use them in the illustration, which they do.

(p105)

  • Then she (MacGowan) had to concede that, yes, of course charges and values are two different things.

(p110)

  • Let me move to the reliance element, which is the next element.
    • If a concealed fact is material, you may presume that the plaintiffs would have acted differently if the fact were revealed to them.
    • You can presume that.
    • Clearly the evidence is material here.
    • You can check number five.

(p107) - [Target Premium] / She = MacGowan

  • We also saw how they hid the target premium information.
    • She testified that this was not part of any effort to hide that information from consumers, but the
      e-mail couldn't be more clear.
    • The ICS team pushed to have the target premium on LSW illustrations like we do with NL but receive pushback to include the information on the illustration so with training the agent could find it but the client would have a tough time.

p126 - Closing Argument by Mr. Martens, Defendant Attorney, Life Insurance Company of the Southwest - LSW

  • (p137) - Defendant Attorney - This is what the designer of the policy believed about the policy.
    • He wrote: The reality is that if you fund Provider at target premium, the probability that it will ever lapse is virtually zero.
    • You want to know what the company thought about the policy, what it intended about the policy, whether it had an intent to deceive and to sell people a defective policy?
    • Then look at what the designer of the policy said back at the time.
      • Designer = Michael Tivillini

(p153) - he = Patrick Brockett, Plaintiff Expert Witness

  • And he identified the fact that sometimes when the market performs lower, the policy has less value.
  • Is that a secret, that sometimes when the market performs at a lower rate of return, the policy will have less value?

(p155)

  • That's why Mr. Stemler said he talked to Ms. Walker right at the beginning and said: Listen, when you get a few years out, we're going to need to sit down and look how's the policy doing; are we on track; what types of loans will you be able to take.
  • Because people going into this know it's not a guarantee that in Ms. Walker's case she'll be able to take $93,167 in loans out of the policy for life, not one dollar more or one dollar less.

(p156) - him = Brockett

  • But I asked him specifically: Did you take into account the regulations about what we can, what we're allowed to disclose?
  • His answer was no.

(p158)

  • What Ms. MacGowan explained was: I can't sign off on an illustration that has volatility where even one year of returns, one duration, is above the maximum illustrated rate.

(p158-159)

  • The judge has instructed you that LSW cannot be held liable for failing to disclose things that the law  prohibits us from disclosing.

(p161)

  • But all of this is theoretical, too, because the plaintiffs never read their policies.
    • I mean, they want to claim that they were misled when they didn't read things that were disclosed in the policies.
    • Dr. Brockett testified that all three things that make up the individual claims -- the fees, the way the guaranteed interest worked, and the reduction in the monthly administrative charge -- he testified that it was all disclosed in the policy.
    • ...
    • Some people still don't read the documents, but that doesn't mean that LSW intentionally concealed the relevant facts, and that's the claim here.

(p162) - [Duty to Read]

  • And the judge said it may not be reasonable for plaintiffs to rely on omissions in the illustrations because they're bound by the clear terms of the policy.
    • Plaintiffs had the duty to read their policies insofar as materials in their policies were reasonably accessible to them.
    • They received the policies; they signed for the policies; they had ten days to change their mind.
    • The information Dr. Brockett said was in the policies, they had a duty to read those policies.

(p162)

  • Remember again, this is not a case about confusion or misunderstandings or lack of clarity.
  • This is a case accusing a company of intentional fraud, and there simply was not an intentional fraud here.

(p163) - He (Brosnahan), then (MacGowan, Smith)

  • He has accused them of deceiving the California Department of Insurance.
  • But who didn't you hear from in this trial?
  • Anyone from the California Department of Insurance.

(p164-165)

  • Remember that? Lynn Fish who worked for Ms. MacGowan sent an e-mail saying: Hey, I've been looking over this document. It looks ambiguous to me.
    • Mr. Brosnahan left out when he went through that e-mail with MacGowan what Ms. MacGowan's response was.
    • So on cross-examination I showed you the rest of the e-mail, which was that Ms. MacGowan looked into it. She went and read the language, and she said: I don't understand what you're saying. It seems clear to me.
    • Lynn still had her view. She still thought that the language was ambiguous.
    • And Ms. MacGowan wrote back, hey, whatever, you know. Next issue, essentially. Because you don't fight with anybody in your company over everything.
  • (p165) - You heard Mr. Brosnahan talk about the Donna Morgan video and the fact that there were a bunch of I don't knows or it would depend.
    • I just want to make sure you understood what you saw with the Donna Morgan video deposition.
    • You remember she was the woman who was on one of the videos that we saw in this case.
    • You didn't see the whole video.

(p168)

  • Do you remember that, where they put up that chart that showed the top ten lapsers in terms of premiums paid and cut out certain columns so it made look like, oh, somebody paid $300,000 and their policy lapsed?
    • Well, yeah, somebody who was in their 60s and purchased an $18 million face amount policy, if you don't keep paying for your insurance at that age, it will lapse.

(p169-170)

  • What if somebody pays $100 in premiums into the policy, and let's say that their policy goes up in value $60 over a number of years.
    • That would make their balance $160.
  • Let's say that over those several years where their policy goes up in value $60 that they pay $45 in fees.
    • That person would be up $15. They would have paid in a hundred dollars and their policy would now be worth $115.
  • But under Mr. Brosnahan's little tricky percentage, the percentage in fees they would have paid was 45 percent.
    • That 45 percent is a trick. It's meant to inflame you and make you think that we are gobbling up all of people's principal with our fees when the reality is someone could be up 15 percent and yet Mr. Brosnahan could still stand up here and say, wow, we used 45 percent of your premiums on fees, because his number ignores whether the person gained any money.
  • (p170) - Mr. Brosnahan said: Well, the fees can cause policies to lapse. Is that a secret?
    • I mean, fees cost something. That's the point of fees. If someone puts money into their policy, there will be fees, as they know, coming out of those policies.
    • If you don't put enough premiums into your policy, over time the fees will keep decreasing the value of the policy. That's what fees do.
    • That's not a defect in the policy. That's how policies work. 
  • (p171) - The fact that we charge people fees that we have disclosed and that fees reduce the value of your policy, and if your policy keeps reducing in value, it will lapse, is not a fraud.
    • That's common sense.
    • That's how life insurance works.

(p171)

  • Let me finish talking about the elements because ultimately at the end of the day what the plaintiffs have to show is seven elements, and this is what the judge has instructed you on.
    • You can think of the seven elements of fraudulent concealment like seven bridges.
    • In order for Mr. Brosnahan to get to the land of $53 million, he has to cross seven bridges.
    • If even one bridge wipes out, he cannot make it to the land of $53 million. 

(p171-172) - We = LSW, He = Brosnahan (Plaintiffs)

  • We don't have to prove everything. 
  • He must prove all seven elements.
  • So let's see whether he can do it on the evidence, not based on the misdirection.

(p172)

  • Where is the evidence that we knew about that,
    even if you believe Dr. Brockett?
  • But where the evidence that we intentionally failed to disclose?

(p172)

  • Don't let Mr. Brosnahan take your attention off what the fact is that they say we should have disclosed.
    • Lapse rates and reduced value of these policies, that's what he says we needed to disclose not these hypothetical disclosures that he read to Ms. MacGowan or to Mr. Smith or to any number of other people.
    • What he said we had to disclose was the lapse rates and the reduced value.

 

(p173)

  • Here is the problem.--  It says we intentionally failed to disclose a material fact.
    • Those lapse rates and those reduced values are not facts. -- They are theories.\
    • What we have to disclose, the only thing we can be held accountable for not disclosing, is facts, cold hard facts.
    • And they don't have a fact that we failed to disclose.
  • Mr. Brosnahan can't even come up with a fact that we had to disclose as opposed to a theory.
    • He also says that we should -- the judge said he also has to prove -- Mr. Brosnahan -- that this theory was material.

(p174)

  • Remember, their theory, the theory of this case, is that we should have given them more information because that additional information would have been important.
    • That additional information they say would have been important for them even though they didn't read the information we gave them.

(p174)

  • We know nothing about what might have been important to all the other class members, and that's what they have to prove for a class claim.

(p175)

  • I don't have a duty to tell you things that I don't know about.

(p175)

  • And remember, the claim here is that we failed to disclose lapse rates and reduced values as calculated by Dr. Brockett.
    • Where is the evidence using Dr. Brockett's model or anybody else's model that LSW knew these supposed lapse rates even if you believe they're true? And they're not.

(p175)

  • But even if you believe Dr. Brockett's calculations are true, where is the evidence that we knew that back in 2005 or 2006 or 2007 or 2008 or 2009 or 2010?
    • Where is the evidence that LSW knew the fact that was not disclosed?

(p176)

  • We will see what Mr. Brosnahan comes up with, because if he has no evidence that LSW knew about any of this even if it's true, if he doesn't have any evidence that LSW knew about it, then we had no duty to disclose.
    • He has got nothing.
    • You won't see it, but let's watch.

(p177)

  • This is a case where they claim intentional fraud, and so they have to say that someone intended to deceive.
  • Now, this might seem a little obvious.
    • Companies aren't people.
    • People are people.
    • I say that because companies don't have brains.
      • Companies can't intend.
    • Companies don't think.
      • People think and people intend.
  • So if they want to prove that LSW intended to deceive, what they have to do is point to a person at the company who had that intent.
    • They have to point to a person who was involved with this product who intended to deceive, who had that mental state.
    • Who is it?
    • Who is the person that Mr. Brosnahan claims intended to deceive policyholders?

(p177)

  • Remember, you heard from Elizabeth MacGowan.
    • Is that who he is claiming, back in 2005 and 2006 and 2007 and 2008 when she is working on these products, that she was doing that intending to deceive?
    • Where's the evidence of that?

(p177)

  • If you're going to make an accusation that somebody intended to deceive, the least you can do is have evidence of that.
    • Who is he claiming intended to deceive back in 2007 and 2008 and 2009 and 2010?
    • If he is going to stand up here and accuse Elizabeth MacGowan of fraud, of intending to deceive, then it's time to put up. What have you got?
    • What's the evidence?
    • If you're going to accuse that woman who has been at this company for 25 years of deceiving,
      what's your evidence of it?

(p178)

  • Is he claiming it's Mike Tivilini?
    • You heard from Mike Tivilini in this case on deposition.
    • Mike Tivilini designed this product.
    • Is Mr. Brosnahan claiming he is the one who had this intent to deceive?
  • Is he claiming it's Elizabeth MacGowan?
  • Is it Matt DeSantos?
  • Is it Craig Smith?

(p178)

  • Remember, Craig Smith signed off on these products from 2005 to 2010 as the illustration actuary.
    • He said based on his professional judgment that the illustrations were in compliance with the regulations and that he believed they were, and he said he still believes they are.

(p179)

  • Mr. Brosnahan can't keep talking about LSW abstractly.
    • When you claim an intentional fraud, you have to show a person who had that intent.
    • Who is it and what's the evidence during the entire class period?

(p180)

Listen, you can criticize every company, you can criticize every person, you can criticize me perhaps and things that I could have done better in this trial, but that's not a fraud.

(p180) - Reasonable Reliance

  • The next element is that there must be evidence of reasonable reliance.
    • As I said before, the claim here that there was reliance, how do we know that as to any of the policyholders?

(p182)

I mean, the law is not a secret....

(p183) - you - Dr. Patrick Brockett (Plaintiff Expert Witness)

  • Are you testifying in this trial as to what causes decreased present value in a policy as it actually operates?
    • His answer: Not causality, no.
    • "Q The answer to my question is no?
    • "A No."

(p183)

  • We can go through the same analysis with regard to each of the individual claims, but on the class claim Mr. Brosnahan has not gotten across seven bridges.
    • The only fair and just verdict under the law and the evidence is no; no, we are not liable, not on the volatility defect claim, not on the tax defect claim.

(p183)

  • There's also individual claims with regard to policy fees.
    • Again, we intentionally failed to disclose fees that are on page 4 of our policies. -- That's their theory.
    • The question isn't whether the plaintiffs saw them.
    • The question is did we intentionally fail to disclose them.

(p184)

  • They claim they didn't know them, but Ms. Walker had a meeting with her agent where they were explained.
    • She received an annual statement that included the costs and after receiving it paid another premium.
    • Where is the evidence that we intended to deceive?

(p184)

  • Did they reasonably rely on their illustrations when, as the judge said, they had a duty to read their policies and they didn't do it?

(p184)

  • And I asked him, the second issue, his theory is that the market price was inflated.
    • I said: Did you look to see whether it was inflated? No.
    • Did you research whether this information about the cost was included in the market price? No.
  • He doesn't even have any evidence that the price is inflated for this policy class claim.
    • The same causation problem on that claim.

(p184)

  • With regard to guaranteed interest, again the issues are all the same.
    • Did we intentionally fail to disclose when you can read the policies and read the buyer's guides and see that the method of calculating the guaranteed interest is disclosed?

(p185) - ["a value" vs "the value"] MAC Charge

  • Then the monthly administrative charge.
    • Again it's disclosed that the values are not guaranteed except for those clearly labeled as guaranteed, and the monthly administrative charge is not clearly labeled.
  • Mr. Brosnahan wants to say that's on another page and it doesn't mean the same thing.
    • It's on the immediately prior page.
  • He says it's not a value. He's not an expert. He's not an illustration actuary.
    • I don't know what $793 a month is if it's not a
      value.
  • They didn't read their documents.

(p185) - 

  • Why are we even having a discussion about whether the monthly administrative charge was labeled as guaranteed when no one was deprived of this and the company has always planned through this day to pay it?
    • Was the fact that it didn't have an asterisk on it or it wasn't on the same page, is that really material?
    • I mean, would their decision to purchase this policy have turned on the fact that the number didn't have an asterisk next to it?

(p186)

Did they really think that the insurance became free after year 11?

(p186)

  • Mr. Brosnahan brought up in his closing that question I asked Dr. Brockett about Occam's razor, the principle of decision making that says when you're faced with a complicated explanation or a simple explanation, the simple one is usually right.

(p186)  - [Most of the page - Insert]

(p186)

  • The plaintiffs did not read their policies and are bringing a case for lack of disclosure, for more disclosure, and they're claiming that we should have made projections, predictions about the future.

There is no fraud here, ladies and gentlemen.

  • After three weeks there is no there, there.
    • They have a complicated theory from a high-paid expert who was rounded up by the lawyers and told what the supposed defects were.

p189 - REBUTTAL ARGUMENT BY MR. BROSNAHAN (Plaintiff Attorney - Walker)

(p190) - He = Mr. Martens (Defendant Attorney)

  • He told you that we need to prove that LSW knew Dr. Brockett's lapse rates and Dr. Brockett's reduced value rates, and that that was the level at which we needed to prove the case.
    • But that is not true, and you need look no further than the special verdict form, which defines what we need to prove.
    • And that says: Did plaintiffs prove by a preponderance of the evidence their claim that LSW fraudulently concealed from class members that the interaction between S&P 500 volatility and the design of the LSW policies could lead the policies to lapse or suffer reduced value?  
    • That isn't what we need to prove.
  • This is what we need to prove.
    • The evidence is very clear that they knew this because the nature of volatility is that it creates risk.
    • That is exactly what the case is about.
    • That is what the problem is.

[p194) - [Deterministic / grading - NAIC Proceedings]

  • So you break intent to deceive down into three parts.
  • Did they intend to cause the plaintiffs to purchase the policies? Obviously. That's what they are trying to do. That's what they're trying to accomplish. They're trying to sell policies. They're trying to sell them through their entire -- through the design of the product, through its features, through its marketing of downside protection, tax-free retirement. They're trying to sell it through the illustrations, the way they design the illustrations with constant returns in there that they know are not an accurate reflection of the risk that affects
    these policies. So of course they're trying to induce the plaintiffs to purchase the policies, knowing that a person unaware of the concealed fact, okay -- so if a person doesn't know of the risks, would not have purchased had he known the fact. So all you have to find is that they understood; that if somebody really knew the risks of these policies, that LSW would believe people would not buy the policies at the price that....

(p196)

  • There is only one fair market value, and that's the price that anyone who wants to buy it has to pay.

(p197)

  • You don't even have to go there because you can stop at step one if you find the market value test hard to apply in this case.
    • And it says: If you find the fair market value is difficult to determine, you can award damages based on the difference between the amount that plaintiffs paid and the intrinsic value of the policies that they received.

(p197-198) - [Language: Values vs Policy Performance]

  • You will find that they have twisted the regulations to mean whatever they want them to mean.
    • In particular with respect to Mr. Smith's opinion that they are not allowed to show a lapse risk statistic in an illustration, well, it doesn't say anything like that.
    • It talks about not depicting policy values -- I could pull it up -- that are more favorable to the policyholder -- let's see: When using an illustration in the sale of a life insurance policy, an insurer or its producers or other authorized representatives shall not use an illustration that at any policy duration depicts policy performance more favorable to the policy owner than that produced by the illustrated scale of the insurer whose policy is being illustrated.

(p198) - [Language - Values vs Policy Performance]

  • It talks about depicting policy performance, meaning policy values, that are higher than your scale, your disciplined scale, can support.
    • It's designed to prevent people from overstating the performance of the policy.

(p198) - Good Faith, Regulations

  • And I encourage you to read the regulations, and you will see that time after time they are doing things that are inconsistent with the regulations.
    • And that is not good faith.
    • So the evidence is strongly contrary to the idea
      that they have exercised good faith here.

(p198-199)

Now, if I can try to -- now, going back to the special verdict form, one of the things that you will note that Mr. Martens did not even attempt to do is he made no attempt to deny that LSW knew that the interaction between S&P 500 volatility and the design of the LSW policies could lead the policies to lapse or suffer reduced value.

  • He made no attempt at all to deny what the special verdict form asks you to answer, because that is what needs to be proven.

(p199) - Expert Witnesses.  He - Mr. Martens (Defense Attorney)

  • He talked about Dr. Brockett's assignment in this case.
    • Dr. Brockett described this as a quibble, which is what it is, because if a lawyer hires an expert, obviously the expert knows that the lawyer wants him to investigate a particular thing.
    • You have to identify it.
    • You can't hire somebody and just tell them: Do anything you want.
    • You have to tell them what you want them to look at.

(p200) - Target Premium, He - Mr. Martens, Mr. Tivilini 

  • He mentioned Mr. Tivilini's e-mail, that Mr. Tivilini said that the probability of lapse was virtually zero if you paid fund at the target premium.
    • There was nothing in there about loans.
    • There was nothing in there about volatility.

It was only about if you heavily fund the thing at the target premium, then you have virtually no risk of lapse.

  • I mean, even the fact that he was making a prediction and talking about risk of lapse shows that they understand how important it is that there be risk of lapse.
  • So I don't think that proves what he claims that it proves.

(p200-201) - six-year point

  • Now, he is also saying that, oh, we should look at the magic six-year point, should look at where we are today. That's nonsense. We look at the time of sale, what were the characteristics of the policy at the time of sale. At the time of sale you're looking forward at what the probabilities are that the policy can actually perform in the way that it's been illustrated. We have a six-year period because of a totally arbitrary fact that this is when this case was coming to trial, so we happened to have six years gone by. But that has nothing to do with the issues in this case. These policies are being purchased for a lifetime. They're being purchased for retirement income.
  • So you can't just look at the six-year point and say, oh, well, because they haven't lapsed as of six years, that proves something important. It doesn't prove anything other than the fact that they haven't lapsed after six years.

(p202) - Fees

  • Now, I do have to mention Mr. Martens's response to the 47 percent of the premiums had been consumed by fees.
    • Now, he gave you a little hypothetical demonstration of what the effect of interest credits could be.
    • Of course interest credits would be used to offset fees, but did he give you any evidence of the interest credits?
    • No, he didn't give you evidence of interest credits.

(p202-202) - Fees, breakout, percentages

  • We don't know how much they have given in interest credits.
    • We can't give you that information.
  • But you can be sure that they have that information.
    • They know exactly how much has been given in interest credits.
  • And if that number, 44 point something percent, would have been a respectable number if you added in the interest credits, you can bet they would have showed it to you.
    • But the fact is that it's not a respectable number or at least I think you can infer that from the fact that they have not offered that to you.
  • They have not showed you what percentage of the combined premiums and interest credits have been consumed by fees because they are afraid to let you know what that number is.

(p203) - Flexible Premium

  • Now, with respect to this whole argument about what the plaintiffs could afford, I think their argument is a little -- they backed off a little bit from the opening statement, but I have never really understood this argument because the policy is a flexible premium policy.
    • So just because you originally thought you were going to pay $112,000 in year one, $112,000 in year two, $112,000 in year three, that doesn't mean you have to do it.
    • If you look in the buyer's guides, you will see that they explain that a flexible premium policy means that you can adjust the premiums that you want to pay.
    • So they didn't have to write a check in Ms. Walker's case for $112,000. She could have just said:
      • Okay. I want to reduce my payments.
    • So when people decide to surrender or let it lapse, it's because they don't want to keep paying money into the policy and throwing good money after bad.

(p204) - 

We have put in lots of evidence that they knew about volatility risk, that it was not reflected in these illustrations, that consumers were not being told.

In fact, to the contrary. They are told that it's about downside protection. And as I said, a zero percent floor is a nice thing, but it doesn't protect you from the destruction of your policy value and it doesn't protect you from lapse because of the large fees that are coming out.

p214 - VERDICT

(p215) - 

  • A. Plaintiffs' S&P 500 Volatility Defect Claim
    • "1. Did plaintiffs prove by a preponderance of the evidence their claim that LSW fraudulently concealed from class members that the interaction between S&P 500 volatility and the design of the LSW policies could lead the policies to lapse or suffer reduced value?
    • "No."