Corporate fraud and your 401k

corporate fraud

Corporate fraud and your 401k…

In 2008, Principal Life Insurance Company was facing a financial dilemma.  Institutional investors knew Principal had over-leveraged their portfolio of commercial properties, and their loans to developers were primarily bridge and mezzanine loans, both which were high risk and likely to default.  About one-quarter of  Principal’s total assets under management were in commercial real estate, commercial mortgages and securitized commercial mortgages.

Principal knew their share values would plummet within a few months.  They needed to find a way to shore up their stock to prevent this financial disaster;  raising more capital was still needed to purchase stock and build share value.  The company had the least excess capital in the industry, after having made more than $2 billion in share repurchases over the past three years.  Principal picked a separate account within their boutique of investments to sacrifice in order generate more revenues.  The company settled on the Principal U.S. Property Separate Account (PUSPSA).

Back in 2006, perhaps earlier, Principal executives decided they would steal equity from the Principal U.S. Property Separate Account, using those monies to invest in a joint venture involving a large Texas developer.  This effort would require at least $1 billion in 2006, cash ready to be invested.  Principal began to grossly under-report investor’s contributions in their form 5500 reports filed with the Department of Labor, diverting those funds instead into real estate venture capital.  To further perpetrate this fraud, they devised a new category of investing for the PUSPSA account.  The new category was called “forward commitments.”  Between 2007 and 2014, the PUSPSA annual reports included more than a billion dollars in “forward commitments.”  Principal needed to entice as many investors as possible to invest in the PUSPSA… they did so by redefining the allocation as a “fixed income” investment to attract more investors.

Creating loans was the perfect resource for moving dirty money through the financial network.  Principal and their investment partners could borrow funds from a lender, creating a shell company with no assets as the borrower.  No bank would loan funds to a borrower with zero asset value, so the loan guarantor would be the Principal U.S. Property Separate Account, and a Loan Purchase Agreement (LPA) would be included in the loan transaction with the PUSPSA agreeing to purchase the defaulted loan.   Lenders agreeing to this arrangement included Bank of America, Wachovia Bank, and later Wells Fargo Bank.  The LPA would also purchase all expenses attached to the loan agreement, including accrued interest and swap agreements.

Principal had created the perfect “storm” for their clients.  401k investors were contributing large amounts of cash intended for a fixed income separate account investment, and instead the money was being used to pay off defaulted loans owned by Principal and/or their co-investors.

I suspect that in the mind of the fraud perpetrators, they were simply “short selling” the investors.  after all, under the variable annuity contract with plan sponsors, Principal Life owned all plan assets, and the contributions were certainly considered plan assets under ERISA.  As owners of the plan assets, Principal had only to meet a common law standard, which meant they had no fiduciary obligation to their investors to protect the investments from loss.

For these same reasons, the regulator’s hands were tied, except the State of Iowa, who could have enforced the regulations and prevented the wholesale theft of possibly billions of dollars, but failed to do so.

The laws and regulations remain essentially unchanged today, and Principal continues to be in a position to defraud investors of their retirement dollars.  Former President and CEO Larry Zimpleman and many of his co-conspirators are gone, yet others still remain in positions of power within the organization.  When your employer turns your employment earnings over to a company like Principal, you need to be prepared for the worse to become reality.

To perpetrate this money laundering scheme, Principal created a new allocation element into the PUSPSA called “forward commitments.”   In 2008, Principal included a brief narrative in the PUSPSA annual report describing future goals…

corporate fraud

 In 2007, the following properties had been listed as forward commitment acquisitions in the PUSPSA annual report….corporate fraud

The following aggregate dollar values were added as forward commitments in the 2008 annual report…corporate fraud

In 2009 and 2010, the following estimates and properties were added….corporate fraud

corporate fraud

And in 2011 and 2012 the following properties were added….corporate fraud

corporate fraud

Remember the properties acquired under the forward commitment program in 2007?  Their total acquisition cost was $142.8 million… in 2009, the schedule of investments listed those properties Gross Asset Value at $74 million, a loss in value of almost 50% in 2 years.

Hess Tower in Houston and Legacy Circle in Dallas, Texas were reported as forward commitment “dispositions” in 2011, but were never owned by the PUSPSA.  In 2010, both properties were published in the annual report as forward commitments, but were never purchased by the account. Both properties played a major role to deceive investors, and most likely those same investors contributions were used to pay off these two mortgages totaling over $350 million, with no ownership in the properties.

The account paid off hundreds of millions in defaulted mortgages, and assumed ownership of properties valued at a small fraction of the payoffs.  Many of these loans were development loans, where the land was never developed.  Yet, the loan proceeds most likely stayed with the partnership owned by Principal and other developers.  Other properties with defaulted mortgages were purchased during that same time period at grossly inflated costs to value.  Lindenhurst Village Green, for example, a 55 acre parcel of land located in Lindenhurst, Illinois was purchased for 22.7 million in 2009…corporate fraud

Within a year, Lindenhurst’s Gross Asset Value was $6.9 million…corporate fraud

Four years later, Lindenhurst was devalued to $800,000…corporate fraud

In 2008, Henderson Lofts, located in Henderson, Nevada, was purchased in a defaulted mortgage commitment for $13.2 million…corporate fraud

In 2013, the published GAV for Henderson Lofts was $2.65 million…corporate fraud

These forward commitments and mortgage loan purchase agreements involved properties that were all shell companies with financial data that is not available to the public nor regulators. Principal has defrauded investors out of over a billion dollars between 2007 and 2011.  Principal Financial has also openly stole from investors for years with no oversight by regulators.   Under the current administration, the U.S. Department of Justice must step up and force compliance on the part of Principal, and prosecute the wrongdoers.  Restitution must be a part of any agreement reached between the DOJ and Principal.  As long as our federal government allows these indiscretions to take place, investors will continue to lose their life savings.  

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Author: Dennis Myhre

Mr. Myhre can be contacted at..... dmyhre@fiduciaryfactor.com