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Juggling Act, Barrons, April 6, 1992, page 14-17. Complaint, 9 counts, filed
December 15, 1989, by CSL Investments and American Capital Fidelity Corporation, against Transmark USA, Inc., Mark C. Sanford, William B. Blackburn and Melanie Blackburn alleging inter alia, fraud, violation of the Florida Securities and Investors Protection Act, negligent misrepresentation and breach of contract, pertaining to Transmark’s preferred stock offering. Complaint, 17 counts, filed December 20, 1991, by the State of Florida Department of Insurance. Confirmation Memo of Merrill Lynch Capital Markets to Guaranty (sic) Insurance Co, regarding purchase of $ 5 million in U.S. Government Treasury Notes. Gallagher, Tom, Commissioner of Insurance, Testimony before the Permanent Subcommittee on Investigations Hearings on Efforts to Combat Fraud and Abuse in the Insurance Industry, Part V, April 29, 1992. Heekins, Michael, Deputy Receiver for GSLIC, Testimony before the Permanent Subcommittee on Investigations Hearings on Efforts to Combat Fraud and Abuse in the Insurance Industry, Part V, April 29, 1992. Letter to Mark Sanford, Guarantee Security Life Insurance Company, from Donald F. Withers, Coopers & Lybrand, dated November 20, 1985, regarding accounting treatment for end-of-year securities transactions. Letter to Rob Sandford (sic), Guarantee Security Life Insurance Company, from Don Withers, Coopers & Lybrand, dated April 5, 1985, regarding accounting treatment for end-of-year securities transactions. “Looting of GSLIC,” chart prepared by the Florida Department of Insurance. Marketing brochure prepared by Guarantee Security Life Insurance Company, regarding “The Enhancer” annuity product. “Now That We’ve Got It, We Pause Briefly to Flaunt It,” GSLIC recruiting ad, 1987. Rogers, Helen. P., Certified Financial Planner, “Taking a Stand on Banking”, wellingtonpublications.com. S. Rpt. 103-29: Third Interim Report on United States Government Efforts to Combat Fraud and Abuse in the Insurance Industry: Enhancing Solvency, Regulation and Disclosure Requirements – A Case Study of Guarantee Security Life Insurance Company, March 23, 1993, Page 5 Watkins, Lucille, Policyholder, Testimony before the Permanent Subcommittee on Investigations Hearings on Efforts to Combat Fraud and Abuse in the Insurance Industry, Part V, April 29, 1992. Withers, Don, Coopers & Lybrand, Testimony before the Permanent Subcommittee on Investigations Hearings on Efforts to Combat Fraud and Abuse in the Insurance Industry, Part V, April 29, 1992.
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called CG Acquisition USA and issued CG’s one share of common stock to a company officer. This officer in turn granted
Transmark an option to reacquire the share, executed a shareholder agreement granting Transmark the right to appoint CG directors, and gave Transmark a warrant to acquire 99 shares of CG common stock. This allowed Transmark to retain control over the companies while still holding them out as unaffiliated companies and listing the investment as a $ 19 million asset.
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motivated by their own self-interest. The fraud at
Guaranteed Security was a carefully orchestrated bank robbery. But the thieves disguised themselves with the help of accountants and brokers and lawyers rather than wearing silk-stocking masks.” This paper describes the company’s history, its investigation by the Senate, its misleading financial maneuvers, its auditors’ work, their mistakes, and recommended changes to insurance accounting.
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246 million in junk bonds to
Merrill Lynch in exchange for U.S. Treasury bonds (which do not require a reserve due to their risk-free status). However, Merrill Lynch’s computer system recorded the transaction as of January 2, 1986 – too late to help GSLIC’s balance sheet. So Sanford’s assistant arranged for Merrill Lynch to doctor the records by issuing a written confirmation that the trade actually occurred December 31, 1985.
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verify this information for itself. In doing so, the auditors could have discussed with the
Florida Insurance Commissioner the true effect of the year-end transactions, including the fact that proper MSVR was not being calculated and set aside for the protection of policyholders. If they had done so, perhaps they would not be party to the unfortunate situation faced by thousands of policyholders today.
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order freezing
Chairman Mark Sanford’s assets, after finding that he had purchased a Bahamian island, Rudder Cut Cay, with company funds and begun minting his own coins bearing his likeness on one side and his bikini-clad wife on the other. His assets also included a million-dollar Ponte Vedra Beach oceanfront home, two $ 165,000 Lamborghini Countachs, a Rolls Royce, a Corvette, and a Jaguar.
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liability, and would have caused GSLIC to become insolvent. To circumvent the regulations, Sanford made an oral arrangement with
Merrill Lynch to sell the junk bonds on December 31, 1984 in exchange for a $ 155 million “account receivable due from brokers” and repurchase the bonds on January 2, 1985 for the same amount, plus a fee.
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WITHERS: Well, you can’t keep doing those type of transactions forever. Sooner or later you have to have economic value coming into the company. Senator NUNN: Because if you don’t what happens? Mr. WITHERS: You will become – your statutory capital and surplus will fall below acceptable levels. You’ll become insolvent.
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will reacquire the securities at their fair market value, the sales should be recognized for statutory accounting purposes along with any corresponding gain or less.” Sanford assured
Withers that Florida insurance regulators had approved the year-end transactions. As a result, Coopers issued a clean audit report.
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would have disclosed some incongruities in the
December 31, 1985 ostensible transactions that Mr. Allerton, then in Boston, had to type up manually, no matter what the appearance of these particular confirmations might be, that someone in that position at Merrill Lynch should lend himself to that kind of process.”
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contributed surplus. Thus, GSLIC was able to count the same asset twice – once as a loan receivable from the airline, and again as contributed surplus from
Transmark. GSLIC also made a loan of $ 44 million to the printing group, which resulted in Transmark giving another $ 19 million of paid-in capital to GSLIC.
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Later in 1985, GSLIC engaged Coopers to audit GSLIC’s 1985 statements based on statutory accounting rules. Coopers found that under statutory accounting, a 10-15 day period is not needed to recognize a sale of bonds: “as long as GSLIC does not have any legal obligation to reacquire the securities and
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In early 1985, Mark Sanford hired Coopers & Lybrand to audit GSLIC’s 1984 financial statements using Generally Accepted Accounting Principles (GAAP). Auditor Don Withers refused to recognize the year-end sales under GAAP, noting, “in today’s environment I can not get anyone to agree that a period
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In 1990, Sanford pursued another circular arrangement in which he caused the subsidiaries to issue $ 27.5 million in preferred stock, which was simply given to GSLIC to enhance its balance sheet. The combined result of these schemes was that the retail, airline and printing operations’ debts exceeded
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In 1986, Sanford tried a different scheme. According to the State of Florida’s complaint, Southeast Bank – at the insurer’s request – falsified its December 31, 1996 portfolio summary. Abraham J. Briloff, CPA, noted, “The change made it appear that the bank was holding $ 292 million in Treasury bonds
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Arens, Alvin A., et al, Auditing and Assurance Services, Prentice Hall, 2003. Blackburn, William, GSLIC President, Testimony before the Permanent Subcommittee on Investigations Hearings on Efforts to Combat Fraud and Abuse in the Insurance Industry, Part V, April 30, 1992. Briloff, Abraham J., Junky
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Coopers & Lybrand also should have discontinued its relationship with GSLIC as soon as the company fired them the first time for upholding GAAP. Withers’ testimony shows that he believed GSLIC’s financial disclosures were adequate. But even a high-quality audit can lead to lawsuits if the client
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Withers made a similar mistake in not contacting Merrill Lynch to obtain an independent confirmation of the transactions. As Abraham Briloff testified, “I can’t help but feel a direct confirmation with Merrill Lynch and also the review of the Merrill Lynch statements that are pumped out periodically
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In order to finance the lavish executive salaries while still paying the annuities and insurance agent commissions, GSLIC management invested in high-yield, high-risk junk bonds. In 1991, the junk bond market collapsed, causing the company to become insolvent. In testimony before the Senate, GSLIC’s
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In 1978, Mark Sanford and William Blackburn were working as stockbrokers in Louisville, Kentucky when they decided to form their own company, Transmark USA, Inc . In 1984, Transmark purchased Guarantee Security Life Insurance Company (GSLIC) of Jacksonville, Florida. Blackburn took charge of GSLIC’s
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Guarantee Security Life Insurance (GSLIC) represents one of the most egregious cases of insurance fraud in Florida history. In the words of the Florida Insurance Commissioner, GSLIC “was, almost from the beginning, a massive fraud, aided and abetted by blue-ribbon brokers and licensed professionals
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Coopers violated principles of engagement risk assessment by continuing its relationship with GSLIC after it was fired for upholding GAAP. Such behavior suggests a high probability that management lacks integrity. According to Auditing and Assurance Services, “Previous conflicts over such things as
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In 1988 and 1989, Transmark also acquired retail, printing, and plastics companies, facilitating a convoluted arrangement (designed by law firm Shereff, Friedman, Hoffman and Goodman) in which GSLIC was able to exceed the legal limits on investment in affiliates. Transmark created a holding company
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In 1988, Transmark underwent major changes in management. William Blackburn sold his one-third interest in Transmark to Sanford. According to his testimony, “I was not interested in continuing that relationship since Mr. Sanford and I had different views about the future direction of the company.”
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In 1985, Sanford refined his scheme to eliminate several problems. These issues included the creation of a suspicious huge account receivable that was never funded, and the questionable legality of a transaction never consummated by a cash transfer. On December 31, 1985, Sanford attempted to sell $
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GSLIC primary products were deferred annuities and life insurance policies. The firm marketed these products through a national sales force of more than 16,000 highly commissioned insurance agents. Customers were attracted to the products by the promised 10% interest rate, which was guaranteed for
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The Subcommittee finds that Coopers and Lybrand accepted and relied upon the representations by GSLIC management that Florida regulators were aware of the year-end transactions and had approved them. The Subcommittee believes that as independent auditors, Coopers & Lybrand had an obligation to
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In addition, Withers relied inappropriately on Mark Sanford’s unverified claims that the Florida insurance regulators had approved the year-end transactions. The textbook notes, “Although considerable evidence is obtained from the client through inquiry, it usually cannot be regarded as conclusive
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Company records revealed that GSLIC’s assets had been systematically looted by Transmark management in the form of excessive salary and dividends. Transmark Chairman Mark Sanford took $ 37 million; Transmark, $ 23 million; GSLIC President William Blackburn, $ 17 million; Sanford’s brother Rob, $ 2
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On December 20, 1991, the State of Florida filed a 17-count suit against GSLIC’s executives, accountants, lawyers, and brokers charging “breach of fiduciary duty, negligence, breach of contract, waste of corporate assets and conspiracy to defraud.” The State of Florida sought and obtained a court
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In 1989, Sanford began using these subsidiary companies to count assets twice on GSLIC’s balance sheet. An example is GSLIC’s loan of $ 25 million to the airline group. That same day, the airline paid Transmark $ 17 million in dividends, and Transmark in turn paid it to GSLIC as gross paid-in and
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In 1987, GSLIC did not make any year-end sales, probably because it had just issued $ 100 million in preferred stock, bringing sufficient cash to its bottom line. This stock became the subject of a 9-count complaint by investors alleging fraud, breach of contract and negligent misrepresentation.
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The sheer magnitude of the fraud – involving the collapse of what was then Florida’s sixth-largest insurer – attracted Congress’s attention. On April 29-30, 1992, the U.S. Senate Permanent Subcommittee on Investigations held hearings on GSLIC, as part of an investigation titled “Efforts to Combat
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Between 1984 and 1991, the company grew from less than $ 100 million to almost $ 1 billion in assets, with about 57,000 policyholders in 42 states. In 1991, however, the company went insolvent and stopped writing new policies. Consequently, the State of Florida established a receivership to take
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Fraud and Abuse in the Insurance Industry.” Chairman Sam Nunn called several of GSLIC’s executives, accountants, brokers, customers, and regulators to the stand to testify. It soon became apparent that the regulatory safeguards against insurance fraud and abuse had failed on a monumental scale.
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Coopers also disregarded GSLIC’s high likelihood of financial failure. The auditors knew GSLIC was investing in speculative bonds and lacked sufficient capital to maintain the 20% reserve required by law. Senate testimony shows that auditor Don Withers was alert to the risk of insolvency: Mr.
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The Subcommittee issued several recommendations for tightening up statutory accounting. These include a requirement that auditors contact state regulators regarding misleading financial transactions; the use of GAAP for determining the financial soundness of insurance companies; and review of
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In 1984, Mark Sanford ran into trouble when his efforts to raise capital clashed with Florida insurance regulations. To protect policyholders, the statutes required insurers to maintain a reserve totaling 20% of the total amount invested in high-risk investments. The reserve is recorded as a
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Customers soon found there were drawbacks to the policies. The interest rates paid after the first year dropped dramatically. However, annuitants were discouraged from withdrawing their money by steep cancellation penalties ($ 1,000 for a $ 10,000 investment).
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Deputy Receiver estimated the fair value of the company’s assets at $ 230 million. Obligations to its policyholders and annuitants totaled $ 620 million. The Senate began piecing together an 8-year chain of events leading to the company’s demise.
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because it is not from an independent source and may be biased in the client’s favor. Therefore, when the auditor obtains evidence through inquiry, it is normally necessary to obtain further corroborating evidence through other procedures.”
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the appropriate scope of the audit, the type of opinion to issue, or fees may cause the auditor to discontinue association. The auditor may also determine that the client lacks integrity and therefore should no longer be a client.”
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of time of less than 10-15 days would be sufficient to expose the Company to sufficient investment risk to entitle you to recognize the gain on the transaction.” As a result, Mark Sanford became angry and fired the accounting firm.
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the first year. According to a sales brochure, customers were also protected against loss of their investment: “the principal is fully guaranteed. It is not subject to losses created by market fluctuations.”
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I have suspicions that it is a fake internet security website designed to provide a false sense of security for websites that require you to input personally identifying information.
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In reference to audit evidence, the main lesson auditors should draw from this case can be summed up in this statement from the report issued on March 3, 1993 by Senator John Glenn:
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In 1991, the company went broke. William Blackburn testified, “Everything went wrong when I left. The most significant event, I can speculate, is the junk market crash in 1989.”
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for GSLIC on that date, even though the bonds weren’t in the bank’s possession.” Southeast Bank employees manually typed a 15-page confirmation summary.
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million; Blackburn’s wife Melanie, $ 700,000; and Sanford’s wife Margena, $ 600,000. Together they looted the company of more than $ 80 million.
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I have recently seen on certain websites images stating proof of internet security as confirmed by the company: Guaranteed Security.
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control of the company. An examination of documents seized from GSLIC’s headquarters turned up evidence of fraud.
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their assets by $ 35 million, but they were carried at face value on Transmark’s balance sheet at $ 120 million.
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All the information that I have found about this company is solely from the website of Guaranteed Security.
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on Knowledge (XXG). If you would like to participate, please visit the project page, where you can join
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daily operations, while Sanford managed Transmark’s investment portfolio.
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quarterly financial statements by insurance regulators.
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