Principal Life Insurance Company
Tracking Number: 20241005-0002
Subject: Financial Misrepresentation by Principal Life Insurance Company (2008-2013)
Submitted By: Dennis R. Myhre, AIC
Date: October 5, 2024 (Original Submission)
Affected Parties: 401(k) Plan Investors in Principal U.S. Property Separate Account (PUSPSA)
1. Summary of Allegations
Principal Life Insurance Company engaged in financial misrepresentation following the reclassification of its Principal U.S. Property Separate Account (PUSPSA) as a fixed-income account in 2008. This reclassification led to withdrawal restrictions, causing substantial financial losses for 401(k) investors.
The company’s valuation methods relied on projected unrealized gains and losses rather than market-based assessments. Statements made by then-CFO Terrance J. Lillis indicate discrepancies between reported unrealized losses and actual realized financial outcomes. These inconsistencies suggest fraudulent accounting practices that warrant DOJ and SEC investigation.
2. Detailed Description of Violations:
a. Misrepresentation of Financial Losses
- Principal Life Insurance reported after-tax unrealized losses of $4.2 billion in 2008. However, actual realized losses from 2009-2011 amounted to only $507 million—just 12% of the original unrealized loss position.
- In 2011, Principal reported an unrealized gain of $728 million, yet investors continued to experience declining account values through 2013.
- The company relied on subjective valuation methods rather than market-based assessments, further exacerbating financial misrepresentation.
b. Contradictory Financial Statements
- CFO Lillis stated that Principal’s separate accounts held a “zero risk weight” classification—despite observable financial losses suffered by investors.
- His statements conflict with Principal’s reported valuation metrics and audited financial outcomes, creating doubt about its regulatory compliance.
c. Potential Legal & Regulatory Violations
The following violations appear to be present based on financial reporting inconsistencies:
- Securities Fraud (Misrepresentation under SEC regulations).
- FINRA Disclosure Violations (Failure to provide accurate investment information).
- DOJ Anti-Fraud Statutes (Potential corporate fraud liability).
3. Legal Basis for Whistleblower Disclosure
Principal Life Insurance’s actions appear to violate multiple federal financial regulations, including:
- SEC Rule 10b-5 (Fraudulent misrepresentation in securities transactions).
- FINRA Rule 2020 (False statements in communications with investors).
- DOJ Fraud Enforcement Statutes (Potential corporate fraud liability).
4. Requested Action
Given the financial harm caused to PUSPSA investors, this report formally requests:
- DOJ & SEC Investigation into Principal Life Insurance Company’s financial reporting practices (2008-2013) to determine compliance failures.
- Investor Restitution estimated at $3 billion plus accrued interest since 2008.
a. Unrealized vs. Realized Losses
Principal’s financial statements indicate that unrealized losses played a critical role in PUSPSA’s decline. Exhibit 1 provides a worksheet detailing annual losses, demonstrating the impact of projected, non-realized losses on investors’ portfolio values.
A letter by then CFO & Senior Vice President Terrance J. Lillis (Exhibit 2) addresses Principal’s classification of separate accounts for 401(k) plan participants. In this document, Mr. Lillis describes these accounts as “zero risk weight,” a statement that contradicts the observed financial losses (Lillis, 2008).
b. Contradictory Financial Statements
Further examination of Mr. Lillis’ statements reveals inconsistencies in financial reporting:
- On page 8 of his letter, he states:
- “At year-end 2008, Principal had an after-tax and after-DAC unrealized loss position on AFS debt securities of $4.2 billion. Since then, only a small fraction of that amount has emerged as an actual realized loss. Actual after-tax realized losses on AFS debt securities from 2009 through 2011 have totaled only $507 million, which represents approximately 12% of the original unrealized loss position on these investments.”
- On page 9, Mr. Lillis reports an unrealized gain of $728 million at the end of 2011—yet Principal continued to report declining account values through 2013.
These discrepancies suggest financial misrepresentation, affecting thousands of investors and warranting regulatory scrutiny.
c. Legal & Regulatory Violations
- Securities Fraud under SEC regulations.
- Failure to comply with FINRA disclosure rules.
- Possible violations of anti-fraud statutes under DOJ oversight.
d. Requested Action
Given the financial losses suffered by past PUSPSA investors, this report formally requests:
- A regulatory investigation into Principal Life Insurance Company’s financial reporting practices from 2008-2013 to determine compliance failures and deceptive valuation methods.
- Compensation for affected PUSPSA investors, estimated at $3 billion plus accrued interest since 2008.
e. Supporting Exhibits
At your request, the following Exhibits will be provided:
- Exhibit 1: Unrealized loss worksheet
- Exhibit 2: Terrance Lillis Letter
- Exhibit 3: Audited financial statements (2008-2009)
- Exhibit 4: Audited financial statements (2010-2011)
- Exhibit 5: Audited financial statements (2012-2013)
- Exhibit 6: 2008 Annual Report
- Exhibit 7: 2009 Annual Report
- Exhibit 8: 2011 Annual Report
- Exhibit 9: 2013 Annual Report
- Exhibit 10: Principal U.S. Property Separate Account Profile
- Exhibit 11: Quarterly growth & share performance of Principal.
- Exhibit 12: Principal’s share value decline between 2007-2009.
- Exhibit 13: Principal’s troubled assets skyrocketing in 2010.
- Exhibit 14: SEC meeting records from February 26, 2010.
- Exhibit 15: Loan Purchase Agreement demonstrating fraudulent fund movements.
f. Conclusion
This report presents evidence of financial misrepresentation by Principal Life Insurance Company, highlighting inconsistencies in its reporting of unrealized losses between 2008 and 2013. Based on financial statements, regulatory filings, and internal correspondence, the findings warrant regulatory intervention and financial restitution for affected investors.
Immediate investigation and legal action are necessary to ensure compliance, hold Principal accountable for misrepresentation, and provide financial relief to investors harmed by withdrawal restrictions and valuation practices.
References
- Lillis, T. J. (2008). Letter on Principal Separate Accounts. Principal Life Insurance Company.
- Securities & Exchange Commission. (n.d.). Regulations for group variable annuities. Retrieved from SEC Website.
