Broker/Dealer and Investment Advisor Fraud and Misrepresentation FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.

April, 2012:

Securities and Exchange Commission v. Provident Capital Indemnity, Ltd., Minor Vargas Calvo, Jorge L. Castillo, and Relief Defendant Desarrollos Comerciales Ronim, S.A., Civil Action No. 3:11-cv-045 (E.D. Va. Jan. 19, 2011)


The United States Securities and Exchange Commission (Commission) recently announced that the Honorable Judge John A. Gibney, Jr., of the United States District Court of the Eastern District of Virginia, Richmond Division, entered a final judgment against Jorge L. Castillo (Castillo).

Among other things, the judgment permanently restrains and enjoins Castillo, a certified public accountant licensed to practice in Costa Rica and, for a time, in New Jersey, from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Section 17(a) of the Securities Act of 1933. The judgment orders Castillo to pay disgorgement in the amount of $84,000, representing Castillo’s ill-gotten gain from his participation in the scheme alleged in the complaint, plus prejudgment interest thereon in the amount of $18,288; provided that Castillo’s payment obligation would be credited dollar-for-dollar by any criminal forfeiture or restitution amounts ordered by the court against Castillo in the criminal action titled United States v. Provident Capital Indemnity, Ltd., Minor Vargas Calvo and Jorge Luis Castillo, 3:11-CR-14 (E.D.V.A.). Castillo pled guilty in the related criminal case and is scheduled for sentencing in September of 2012.

The Commission also issued an Order on April 12, 2012, pursuant to Commission Rule 102(e), suspending Castillo from appearing or practicing before the Commission as an accountant. Castillo consented to the entry of the judgment without admitting or denying any of the allegations in the civil injunctive action. Castillo also consented to the issuance of the Order without admitting or denying any of the findings except he admitted the entry of the injunction.

The Commission’s complaint in this case alleges, in part, that from at least 2003 through 2009, Castillo held himself out as the independent, outside auditor for Provident Capital Indemnity Ltd. (PCI), a purported insurance and reinsurance company based in Costa Rica, which provided financial guarantee bonds on life settlements. PCI’s bonds purported to protect investors’ interests in life settlements by promising to pay the death benefit of the underlying life insurance policies if the insured person on those policies lived beyond his or her estimated life expectancy. According to the complaint, in his purported role as PCI’s auditor, Castillo, along with PCI’s president, misrepresented PCI’s ability to satisfy its obligations under those bonds by making material misrepresentations about: (1) whether PCI’s financial statements had been audited, (2) the assets that backed PCI’s bonds; (3) PCI’s credit rating; and (4) the availability of reinsurance to cover claims on PCI’s bonds.

In particular, the complaint alleges that Castillo issued clean audit reports on PCI’s financial statements, when, in fact, he never conducted an audit of PCI’s financial statements, and he knew or was reckless in not knowing that certain assets listed on PCI’s financial statements did not exist. Castillo thereby supported the illusion that PCI had materially larger assets – including a fictitious “Long-Term Asset” that comprised some 70% to 80% of PCI’s total reported assets for the period in question – and thus a greater ability to meet its obligations on the financial guarantee bonds. PCI provided Castillo’s false audit reports to life settlement issuers, which, in turn, conveyed the information to investors. The Complaint also alleges that Castillo knew PCI was providing his false audit reports to a rating agency that, in partial reliance on those reports, gave PCI a high credit rating, and that, on occasion, Castillo assisted PCI’s president in formulating misleading responses to the rating agency’s questions about PCI’s financial statements. Additionally, according to the complaint, Castillo issued certificates to life settlement issuers that falsely stated PCI had made payments to purchase reinsurance from reputable reinsurers, thereby supporting the illusion that PCI’s obligations on financial guarantee bonds were backed by reinsurance. The complaint alleges that after learning of a regulatory inquiry into his conduct in 2010, Castillo asked the president of PCI to manufacture backup material to support Castillo’s purported audit procedures and told the PCI president that he had destroyed or was in the process of destroying all of his e-mails. Castillo also urged PCI’s president to destroy documents.

Russell L. Forkey, P.A.

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