Article

Note: The South Carolina Health Cooperative (SCHC) constituted a multiple employer welfare arrangement (MEWA) under South Carolina law because SCHC “pool[ed] contributions to provide dental, health, and short-term disability benefits to their employees.” As MEWAs are not fully insured, the South Carolina Department of Insurance (SCDOI) required SCHC to “maintain a loss reserve” under SCHC’s licensing order, initially USD 5,000,000. SCHC opted to provide SCDOI with a standby letter of credit to secure any losses in the event of its insolvency.

After being introduced by a named defendant, SCHC engaged Cooperative Solutions of America (Alleged Fraudster) to obtain a standby letter of credit with the assistance of Interlink Global Messaging, LLC (Second Alleged Fraudster). Thus, Second Alleged Fraudster and SCHC “negotiated the sale of the first [standby]” to SCHC purportedly issued by Bank of America. Pursuant to the agreement between Second Alleged Fraudster and SCHC, SCHC wired USD 600,000 to Second Alleged Fraudster’s closing agent, Busch Law (Fraudster Agent). The USD 600,000 fee was subsequently disbursed to several named defendants. When the first standby was to expire, defendants requested that SCHC pay a USD 525,000 renewal fee which SCHC again wired to Fraudster Agent. After SCDOI informed SCHC that its loss reserve amount would increase by USD 3,000,000 to a total of USD 8,000,000, SCHC was informed by defendants that it could obtain a second standby for a USD 350,000 fee. Accordingly, SCHC wired USD 350,000 to Fraudster Agent.

Later, SCHC wired USD 525,000 to Velocity Partners, LLC (Second Fraudster Agent) in order to renew the first standby for another year. Before the second standby expired, however, SCHC was informed by the Alabama Securities Commissioner (ASC) that ASC was pursuing a fraud investigation against several of the parties with whom SCHC had been dealing. SCDOI then “informally confirmed” that the standbys were fraudulent and later “formalized that confirmation” by way of a letter from Bank of America. SCHC was subsequently “placed into rehabilitation” and on the last day of coverage carried an unpaid liability of USD 11,379,000.

As appointed special deputy receiver for SCHC, Michael J. Fitzgibbons (Special Receiver) sued the defendants for racketeering in violation of the RICO Act; civil conspiracy; conversion; unjust enrichment; and unfair and deceptive trade practices under state law. Special Receiver later moved for default judgments against many of the named defendants who failed to respond to their respective complaints. The United States District Court for the District of South Carolina, Austin, MJ., recommended that the motion be denied without prejudice.

The Magistrate Judge noted that granting the motion “would be premature at this stage”. Because two pro se defendants “may have defenses that would apply as well to the Defaulted Defendants, the Court recommends denying [Special Receiver]’s motion for default judgment against the Defaulted Defendants without prejudice to the right to renew it at a later time.”

[MJK]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.