Judge again tosses Penn Mutual whole life lawsuit alleging tax scam

A California federal judge again threw out a lawsuit accusing Penn Mutual Life Insurance Co. and its codefendants of running a whole life insurance tax-avoidance scam.

In her ruling last week, however, Judge Sherilyn Peace Garnett gave the 29 plaintiffs one final opportunity to revive several fraud-related claims through an amended complaint. Plaintiffs have 21 days to file a third amended complaint.

In an order issued in the U.S. District Court for the Central District of California, the judge granted motions to dismiss filed by Penn Mutual and Wintrust Life Finance, finding that the plaintiffs failed to adequately plead several causes of action, including Racketeer Influenced and Corrupt Organizations Act (RICO) claims against Wintrust and claims alleging breach of the implied covenant of good faith and fair dealing against both companies.

The court concluded that further amendment of those claims would be futile. The judge previously tossed out a second amended complaint in December.

The ruling, however, allows plaintiffs to file a third amended complaint seeking to bolster RICO claims against Penn Mutual and Crosslin PLLC, an accounting firm, as well as fraud and negligent misrepresentation claims against Penn Mutual, Wintrust and Crosslin.

Agent pleaded guilty

The defendants include former Penn Mutual agent Randall Scott Boll, who was indicted in 2021 on four counts related to violations of federal money laundering laws and banking regulations.

Boll pleaded guilty to one count of conspiracy to cause a financial institution to fail to file currency transaction reports and to structure financial transactions. He was sentenced to one day behind bars in California, court records say, and two years of supervised release.

The lawsuit alleges that Penn Mutual and Boll – along with several other law, lending, accounting and financial planning firms also named as defendants – constituted a “High-Premium Insurance Enterprise.”

“The HPI Enterprise was an organization consisting of individuals and business entities associated for the common or shared purpose of selling, promoting and/or marketing high-premium life insurance policies and related products to plaintiffs through deceptive and misleading sales tactics and materials, and deriving profits from those activities,” the lawsuit reads.

Penn Mutual whole life policies were aggressively marketed as offering “significant tax advantages,” plaintiffs say. “Boll and other members and associates of the enterprise would reap high commissions (as much as 75-125% of the initial annual premium paid by the policyholder) for each HPI policy sold.”

Plaintiffs accuse Penn Mutual of ignoring its own underwriting guidelines “by repeatedly accepting insurance applications for plaintiffs that … falsely inflated the net worth of plaintiffs.” The policies equated to big profits for the insurer because all of plaintiffs’ policies “were designed to (and in fact did) terminate long before the insureds’ life expectancies,” the lawsuit states.

One type of “sham tax avoidance strategy” incorporated premium financing life insurance loans to finance the policies, the lawsuit alleges.

Tax strategies endorsed

The court stated that the second amended complaint alleges that a Penn Mutual representative endorsed tax strategies promoted by defendant Boll during conversations with several plaintiffs, including statements regarding the tax deductibility of life insurance premiums and policy loan interest.

Because plaintiffs allege those representations were false, the judge found amendment of those claims would not necessarily be futile.

The judge also found that plaintiffs could potentially cure deficiencies in their RICO allegations by more specifically alleging that Penn Mutual shared a common fraudulent purpose with Boll and by identifying allegedly fraudulent statements with greater particularity.

If plaintiffs fail to refile an amended complaint, Penn Mutual and Wintrust will be dismissed from the litigation. At the same time, defendants Boll and Crosslin will be required to answer the existing complaint within 14 days thereafter.

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