MetLife Suit Raises Questions of Extent of Corporate Liability

By VICTORIA FINKLE

May 30, 2016

When Christine Ramirez signed over that first check in April 2008, she had no idea that the decision would eventually upend her life.

A broker offered a tempting deal. If she invested in a real estate fund called the Diversified Lending Group, which was managed by someone named Bruce Friedman, she would be eligible for a “guaranteed” return of 12 percent. She could use the proceeds to pay the premium on a new MetLife life insurance policy.

Ms. Ramirez chose not to buy the insurance policy, but she did invest in Mr. Friedman’s fund, a total of $279,769 including her personal savings, a retirement account and proceeds from a line of credit on her home in Simi Valley, Calif.

D.L.G. came crashing down months later, when the Securities and Exchange Commission sued Mr. Friedman, accusing him of misappropriating millions of dollars in investor funds. According to court documents, he operated a Ponzi scheme that defrauded hundreds of investors, including a sitting congressman, of more than $200 million. The money was gone.

“I think I cried every day for a year,” said Ms. Ramirez, 75. “It wasn’t that I didn’t do my homework. I was told it was approved by MetLife and that it was guaranteed.”

Now, Ms. Ramirez and some others who lost their money are suing MetLife, claiming that the insurer ignored or failed to notice signs that agents and brokers were peddling Mr. Friedman’s financing program to retirees and others. Litigation has been winding its way through the courts for years, and MetLife is fighting back.

But last month, a Los Angeles Superior Court judge cleared Ms. Ramirez’s case to move to trial in July. Her lawyers represent 98 people in seven cases, and hers is the first of this group to move forward. She is being given preference because she is battling late-stage breast cancer.

MetLife has settled some cases with its own customers who were duped by the D.L.G. offer, but the current batch of lawsuits involves people who did not buy its insurance. Ms. Ramirez was never a customer of MetLife. Instead, these people only put their money in the D.L.G. investment that was pitched to them by sales people, some who were affiliated with MetLife and some who were independent contractors approved to sell its products. As such, the legal fight raises questions about how far a large company’s liability should extend.

“Big companies, like MetLife, are run by people, and when they fall below the standard of care or engage in improper conduct, our clients, who are also real people, get hurt – and that’s what happened here,” said Richard E. Donahoo, founder of Donahoo & Associates, one of the lawyers representing Ms. Ramirez.

MetLife has argued in court documents that it “had no relationship with D.L.G.” and that it “did not sell, or materially assist in the sale” of the D.L.G. financing program. Neither was it legally obligated to supervise the broker who made the sale to Ms. Ramirez, MetLife said, because he was a contractor and licensed through another, unaffiliated broker-dealer, even though he was authorized to sell MetLife insurance products. The company has added that it did not “take or receive anything from” Ms. Ramirez, and so it is not liable for any damages. A MetLife spokesman, Christopher Stern, said the company does not comment on continuing litigation.

Mr. Friedman was selling promissory notes that claimed to back real estate investments. Promissory notes are similar to bonds and not uncommon products for insurance agents to sell. But regulators have warned about the potential for fraud and abuse. Agents presented the notes as “premium financing” for MetLife insurance products, the lawsuits say; in other words, the investment return would be able to fund the premium payments on a life insurance policy. MetLife does not generally allow premium financing, something these agents admitted in depositions.

Tony Russon, at the time a managing partner at a MetLife insurance subsidiary and a registered principal for a related broker-dealer, introduced Mr. Friedman and his fund to the agents in about 2004, the lawsuit says. The agents were also given D.L.G. “welcome packets” to use in making sales that discussed the “guaranteed” returns promised to Ms. Ramirez and others. Mr. Russon is named in the lawsuit, along with MetLife and the subsidiaries.

It turns out, according to the lawsuit and related filings, that Mr. Friedman owed Mr. Russon about $750,000 from an unrelated side deal and had an agreement to send half of his future income to Mr. Russon until that debt was paid off, all of this unknown to MetLife. Mr. Friedman also bought millions of dollars of life insurance in several policies from MetLife, with the commissions going to Mr. Russon, according to legal documents.

In 2006, a senior fraud investigator at MetLife raised questions with executives about the D.L.G. program. MetLife has said in court documents regarding that 2006 investigation that its underwriting department declined a policy application that disclosed that its premiums would be paid with returns on D.L.G. promissory notes, emphasizing that MetLife did not permit such programs. Mr. Russon was fired in May 2009, soon after Mr. Friedman’s fraud collapsed.

A lawyer for Mr. Russon said Ms. Ramirez had never met Mr. Russon, and that she did not buy any insurance products through him or his agency, nor did she buy into D.L.G. through his office. “We intend on defending Mr. Russon’s interests vigorously at trial,” the lawyer said.

Mr. Friedman used a significant portion of the investor money to support an “extravagant lifestyle,” including expensive vacations, jewelry and a $6.5 million home in Malibu, the government said. He also pledged millions of dollars to charity, including the Dodgers Dream Foundation.

“This case is about aiding and abetting,” Mr. Donahoo said. “Mr. Friedman, who was a felon, likely could never have obtained the millions from the hundreds of people that he cheated without the legitimacy that a company like MetLife provided.”

Few at the time knew that he had been convicted decades earlier of stealing hundreds of thousands of dollars from an employer. He was eventually charged in the D.L.G. matter. But Mr. Friedman fled the country as the investigation progressed, and he died in a French prison in March 2012 while awaiting extradition. His victims received a fraction of every dollar they had invested. MetLife paid $10 million of life insurance from his policies to the receiver who was tasked with recovering money.

The court battle comes as policy makers in Washington decide whether large financial institutions are “too big to manage” – an outgrowth of the fight over “too big to fail,” the idea that a large financial institution can damage the whole economy in times of distress.

MetLife, the largest American life insurer, fought the government’s labeling of it as a systemically important financial institution, which would have subjected it to extra regulation. A Federal District Court judge in Washington ruled in favor of the insurer in March, allowing it to shed that label. But concerns remain about whether the country’s biggest financial institutions have adequate controls to manage the host of assets and employees, including outside contractors.

“‘Too big to manage’ is really the next frontier of regulatory challenges in the financial industry,” said Robert J. Jackson Jr., a professor of law at Columbia University. “Even the best senior managers will tell you that running an organization of this size and scope well, and keeping an eye on all of his employees, is an enormous challenge that we’re not yet prepared for.”

A number of large financial institutions, including MetLife, have already shed significant assets. In January, MetLife announced its intention to spin off its American retail life insurance business, which would include the subsidiaries involved in Ms. Ramirez’s lawsuit. The sale will reduce the company’s total assets by more than 25 percent.

Without a safety net, Ms. Ramirez said, she had to rethink her entire plan for retirement – trips to New York to see family and a vacation to Europe. She now rents out a room in her two-bedroom home to help make ends meet. “I had to give up my privacy, along with losing all of my savings,” Ms. Ramirez said.

Paul Walker, 71, another reported victim of the scheme who is part of the pending litigation and will serve as a witness in her case, said he was ready to go to court to tell his story.

“When you lose all your money, that’s like your blood and sweat and tears,” he said. “I’m mad as hell.”

MetLife Suit Raises Questions of Extent of Corporate Liability