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Note: The Commissioner of Commerce and Insurance for the State of Tennessee in her capacity as Liquidator for Doctors Insurance Reciprocal ("DIR"), The Reciprocal Alliance, Risk Retention Group ("TRA"), and other risk retention groups filed an action for an alleged investment fraud, fraudulent transfers, misappropriation, negligent handling of trust funds, and related matters against John Crews, Judith Kelley and Gordon McLean (Defendants). Defendants moved to dismiss the action on the ground that it failed to adequately state a claim against them for racketeering activity under the US "RICO" act, 18 U.S.C. §1961. The US District Court for the Western District of Tennessee, Breen, J., granted the motion.

Among other things in describing the fraud, the Complaint noted that Defendants sought to hide a deficit of US$12 million in the trust account that they were required to maintain by causing one company under their control, DIR, to issue a letter of credit for US$2 million and another company, TRA, to issue another LC for US$10 million. Since this amount was not listed as coming from a "premium," questions were raised by state regulators who were told to disregard them.

Comment:

If the allegations are correct, this use of LCsto hide a fraudulent misuse of funds represents a new approach to non-bank letters of credit.

[JEB/gsp]

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