Former Chief Financial Officer and Head Trader Have Each Pled Guilty and Are Cooperating With the Government
Geoffrey S. Berman, the United States Attorney for the Southern District of New York, and William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today the arrest of MICHAEL HILD, the founder, former chief executive officer, and controlling shareholder in Live Well Financial, Inc. (“Live Well”). HILD’s arrest was in connection with a scheme, from in or about September 2015 through in or about May 2019, to fraudulently inflate the value of a portfolio of bonds owned by Live Well in order to induce various securities dealers and at least one financial institution into loaning more money to Live Well – through repurchase (“repo”) agreements and collateralized loans – than they otherwise would have had they known the actual value of Live Well’s bond portfolio. The scheme allowed Live Well to grow its bond portfolio exponentially, from approximately 20 bonds with a stated value of $50 million in 2014 to approximately 50 bonds with a stated value of $500 million by the end of 2016. In May 2019, in conjunction with an effort to wind down the company, Live Well wrote down the value of its portfolio by approximately $141 million.
In addition, Mr. Berman announced today the unsealing of charges against ERIC ROHR, the former chief financial officer at Live Well, and DARREN STUMBERGER, the former head trader at Live Well, for their participation in the scheme. Both ROHR and STUMBERGER have pled guilty and are cooperating with the Government.
HILD was arrested in Richmond, Virginia, this morning. HILD will be presented and arraigned later today in the United States District Court for the Eastern District of Virginia. HILD’s case is assigned to United States District Judge Ronnie Abrams. ROHR’s case is assigned to United States District Judge Edgardo Ramos, and STUMBERGER’s case is assigned to United States District Judge J. Paul Oetken.
On August 28, 2019, the Government obtained a post-indictment restraining order restraining assets – including various real properties and business interests in the Richmond area – owned directly or indirectly by HILD and, as alleged, purchased with proceeds of the scheme.
Manhattan U.S. Attorney Geoffrey S. Berman said: “As alleged, Michael Hild orchestrated a scheme to deceive Live Well’s lenders by fraudulently inflating the value of its mortgage-backed bonds by over $140 million. This allegedly enabled Live Well to borrow money well over the value of the collateral it put up. In turn, Hild used these ill-gotten funds to gain control of the company and increase his own compensation by nearly 700 per cent, while exposing lenders cumulatively to $65 million in unsecured loans to the company, which is now in bankruptcy.”
FBI Assistant Director William F. Sweeney Jr. said: “As CEO of Live Well Financial Inc., Hild allegedly inflated the true value of the company’s bond portfolio and used this false information to obtain loans the company otherwise would not have been able to obtain. The dealers and financial institution that lent the money are now in the possession of bonds that don’t hold the value promised as collateral. The FBI is committed to working with our law enforcement partners to ensure this type of behavior ceases to exist.”
In a separate action, the Securities and Exchange Commission (“SEC”) filed civil charges against HILD.
As alleged in the Indictment unsealed today in Manhattan federal court and other public court documents:[1]
Live Well’s Bond Portfolio and Repurchase Agreements
Live Well was a Richmond, Virginia-based company that originated, serviced, and securitized government-guaranteed reverse mortgages known as Home Equity Conversion Mortgages (“HECMs”). In or about 2014, Live Well acquired a portfolio of approximately 20 bonds, each entitling the holder to receive a portion of the interest payments, but not the principal payments, from a particular pool of reverse mortgages (“HECM IO bonds.”). Live Well purchased the HECM IO bond portfolio for approximately $50 million. At the same time that Live Well purchased the HECM IO bond portfolio, HILD established within Live Well a New York City-based trading desk to manage and grow Live Well’s bond portfolio. STUMBERGER supervised the trading desk.
Live Well financed the acquisition and growth of its bond portfolio through a series of loans in which Live Well used its bond portfolio as collateral. The majority of Live Well’s lenders were securities dealers whose lending arrangements with Live Well were structured as bond repurchase agreements, also known as “repo agreements.” A repo agreement is a short-term loan in which both parties agree to the sale and future repurchase of an asset within a specified contract period. The seller sells the asset to the lender with a promise to buy it back at a specific date and at a price that includes an interest payment. Functionally, a repo agreement is a collateralized loan in which title of the collateral is transferred to the lender. When the loan is repaid by the borrower, the collateral is returned to the borrower through a repurchase. Additionally, at least one of Live Well’s lenders was an FDIC-insured bank, and its lending arrangement with Live Well was structured as a secured loan, with certain bonds held as collateral by a third-party custodian.
The Scheme to Mismark the Bond Portfolio
Live Well’s financing agreements with all but one of the lenders required that any bond that Live Well sought to borrow against be priced by a third-party pricing source in order to determine the market value of the bond as of the measurement date. The lenders then used the value of the bond, minus 10% to 20%, generally, to determine the amount of money to lend Live Well.
The lenders generally relied on a particular widely utilized subscription service (the “Pricing Service”) to price various securities. In or about September 2014, HILD, ROHR, STUMBERGER, and their co-conspirators embarked on a scheme to cause the Pricing Service to publish valuations for the bonds that far exceeded actual market prices. By doing so, the conspirators induced the lenders to extend credit to Live Well far in excess of the prices for which the bonds could be sold in the market. The inflated prices were based on a set of market assumptions that the conspirators called “Scenario 14.”
HILD was aware that if the lenders had known that the Pricing Service was publishing bond prices that did not reflect fair value (meaning the price at which a lender could sell the bond in the market if necessary to recoup its capital), they would have refused to use those prices in determining how much money to loan to Live Well. To prevent the Pricing Service and the lenders from learning that the prices did not reflect market value, HILD directed ROHR, STUMBERGER, and others to take steps to conceal their provision of inflated marks to the Pricing Service. Ultimately, due to the asset overvaluation and the purchase of additional bonds using the capital generated by the scheme, Live Well grew the purported value of its bond portfolio to $500 million by December 2016.
In addition to using the liquidity generated by the scheme to expand Live Well’s bond portfolio, in or about September 2016, HILD used $18 million generated from the repo lenders to buy out the preferred stockholders in Live Well. The elimination of the preferred stockholders gave HILD exclusive control of the company and allowed him to substantially increase his personal compensation. Accordingly, HILD’s compensation jumped from approximately $1.4 million in 2015, to approximately $5 million in 2016, approximately $9.7 million in 2017, and over $8 million in 2018.
In or about late 2018, ROHR resigned as chief financial officer of Live Well. In or about May 2019, the company’s interim chief financial officer informed HILD that he would not sign the company’s interim financial statements because he believed that the company’s carrying value for the HECM IO bond portfolio was significantly overstated. On or about May 4, 2019, Live Well announced that it would cease operations and unwind. After the announcement of Live Well’s closing, Live Well’s interim chief financial officer provided a balance sheet to Live Well’s lenders showing that Live Well had reduced the value of its bond portfolio by approximately $141 million. As of May 31, 2019, the debt Live Well owed to its lenders on the bond portfolio exceeded the portfolio’s carrying value by approximately $65 million.
On June 10, 2019, three of Live Well’s lenders filed a Chapter 7 petition for involuntary bankruptcy against Live Well in the United States Bankruptcy Court for the District of Delaware. See In re Live Well Financial, Inc., 19-11317 (LSS). On or about July 1, 2019, the bankruptcy court appointed a trustee for Live Well.
HILD, 44, of Richmond, Virginia, is charged with five counts: one count of conspiracy to commit securities fraud; one count of conspiracy to commit wire and bank fraud; one count of securities fraud; one count of wire fraud; and one count of bank fraud. Count One carries a maximum sentence of five years in prison, Counts Two, Four, and Five each carry a maximum sentence of 30 years in prison, and Count Three carries a maximum sentence of 20 years in prison. The charges also contain a maximum fine of $5 million, or twice the gross gain or loss from the offense.
The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by a judge.
Mr. Berman praised the investigative work of the FBI and also thanked the SEC and the Department of Housing and Urban Development, Office of the Inspector General for their assistance.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Jordan Estes and Scott Hartman are in charge of the prosecution.
The charges contained in the Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.