SERVICE TO MEMBERS OR CONFLICT OF INTEREST?
Paul Manfreed was in a quandary; he just did not know what to do next. Paul recently had a conversation with one of First Evangelical Church's senior citizens, Russ. Russ had bought an investment from the associate pastor, John Klaussen, and he told Paul that the investment resulted in a loss rather than the substantial gain he had been led to expect. Asa member of the church's servant leadership team (SLT), Paul agonized about what he should do.
The SLT was not vested with decision-making authority; its role was largely advisory. Members of the SLT were responsible for assisting the head pastor and caring for the congregation's members—even nonmembers who needed help. Their responsibilities did not include supervision of church staff; however, the above-mentioned investments were being sold by a church employee to church seniors—an act that potentially exposed the senior citizens to considerable financial risk. For Paul, this created a dilemma; he was torn between wanting to protect church seniors on the one hand and not meddling in church staffing on the other.
Paul knew that the associate pastor had taken a part-time job as a commission-based agent who was selling unconventional insurance policies to supplement his modest church salary. In fact, a note in the church newsletter announced that Pastor Klaussen was giving up his other part-time job as he had signed a contract with Life Partners, Inc. The notice went on to say, "This is a very Low Risk-High yield investment plan for investors looking for a place to invest money safely. I will be working with them as a consultant."
Should Paul take his concerns to the rest of the SLT or to the church's head pastor? Was he ethically or legally obligated to do so?
Would taking this matter to the SLT or the head pastor be slanderous? Would it open the church to possible litigation? On the other hand, if he didn't take the matter forward, would he be an enabler, inadvertently putting the church at risk? Did the church have a fiduciary responsibility to its seniors for nonspiritual matters?
Was action required, or could the matter just be ignored? Really, was it even a problem? Considering Pastor Klaussen's record of service and reputation, was his part-time job selling investments a superficial problem or one of substance? Unfortunately, the church had no policy statements related to personnel issues to help Paul as he struggled in his deliberations.
A Shepherding Church
First Evangelical Church was a thriving, conservative, main-line church committed to its faith and supporting its members. In addition to the head pastor, Carl Baines, who had been with the church for eight years, the church also had several part-time associate pastors including an executive pastor (business manager), a worship pastor, a youth pastor, and seniors' pastor, John Mangum, who had been with the church for four years.
With good leadership, the church had gown to the point of having multiple services that catered to important church segments. Though all members were welcome at any service, the early service catered to seniors and featured a traditional worship service. The later service catered more to younger families and accordingly had a more contemporary worship service. Both services were heavily attended to the point where the church's physical plant was operating at near capacity levels.
First Evangelical had planned to build a new facility in the suburbs, like many of the city's churches were doing. The church had acquired the land on which to build, and it was mortgage free. The forty acres that the church had acquired would allow not only for the replacement of the current structure but also allow for building additional facilities that would help the church meet other needs. But as the pastors and SLT surveyed the city's church landscape, they realized that the migration of many churches to the suburbs was creating a vacuum within the intercity that provided an opportunity to serve many people who would not, or could not, follow their churches to the suburbs. The church's membership made the decision to remain at its current location. The needs were real and the members decided that the church should remodel rather that relocate and rebuild.
Church membership was strong and was now up to about 1,600 members; about thirty percent were seniors. Recognizing that seniors had some unique needs, First Evangelical had a designated associate pastor just for them. One of the differentiating factors of the seniors' segment of the church was that often they had more financial resources to invest. Some of the seniors had accumulated retirement nest eggs that were being invested in real estate, stocks, bonds, and other investments such as bank certificates of deposit (CDs). Though some of the seniors were financially sophisticated, many were not. Some were widows or widowers with little financial knowledge and few financial skills. If they suffered investment losses at this late point in their lives, recovering from those losses could be difficult or even impossible.
Consequently, low risk investments, such as CDs had been popular among the investing seniors. Unfortunately, interest rates on CDs and other similar securities had dropped dramatically and did not provide the returns that many of them had come to depend upon in their retirement years. That had led some seniors to look for safe, alternative investments.
Win — Win Investments?
The nontraditional, some might say speculative, life insurance investments being sold by their own seniors' pastor, John Kimmel; to supplement his income, seemed ideal. Pastor Klaussen had a strong following among the church's seniors; their confidence in him was high. Through years of service to the church seniors, his position had become one of power, giving him influence with the seniors he pastored. No one doubted Pastor Klaussen's commitment to the faith or his commitment to the seniors he pastored.
On the surface, the investments seemed to be a win-win situation. Church seniors won because they had the peace of mind that comes with investing with someone in whom they had a trust relationship. Pastor Klaussen also won because the commissions he earned from the sale of insurance policy investments helped supplement his modest church salary. Though the church paid a good wage, about $36,000 per year, First Evangelical did not lavishly support their associate pastors. So, to buy things not afforded by his church salary, Pastor Klaussen had taken a part-time job. Prior to becoming an agent with Life Partners Inc. (LPI), Pastor Klaussen had an early morning paper route, but delivering newspapers was behind him now.
Pastor Klaussen had become a commission-based sales agent with LPI. Based on information provided by LPI, the insurance policies that Pastor Klaussen sold had expected earnings rates considerably higher than those being paid by CDs, savings accounts, and other investments in which church seniors had been investing.
Background of LPI
Though publicly held, LPI was about 50 percent owned, and hence controlled, by its founder and CEO, Brian Pardo. It regularly paid dividends, which for CEO Pardo, were sent to his offshore bank account in Gibraltar. LPI was the major player in a narrow slice of the insurance industry. LPI was in the business of buying multi-million dollar life insurance policies at discounted prices from people who no longer wanted, or could no longer afford the premiums on their insurance policies. Rather than getting nothing when they stopped paying the premiums, the policy holders at least got something by selling their life insurance policies to LPI. Through its agents, LPI then resold fractions of the policies to individual investors. LPI sold two products: viatical settlements and life settlements.
In a viatical settlement, LPI bought a life insurance policy from someone with a terminal illness. In a life settlement, LPI bought an insurance policy from someone who was not necessarily terminally ill but who had a life expectancy (LE) of ten years or less. LP1 then resold fractional shares in the acquired policies to investors.
LPI's fractional investments were not registered securities under the Securities Exchange Act; hence, it sold its investments through unlicensed agents, like Pastor Klaussen. This business had been lucrative for LPI and its agents. Though not disclosed to investors, LPI charged about 12 percent for the fractional life insurance policy shares that were sold to investors, and its multi-layered sales force, including sales agents like Klaussen, was paid a commission totaling another 12 percent.
Though not guaranteed, investors were led to believe they could expect double digit returns when the policy matured at the death of the insured. The price charged for a fractional share was meant to pay the life insurance premiums over the policy's expected remaining time to maturity as reflected by the insured's LE. Of course, the expected returns depended heavily on the estimated LE.
If a person lived less than his/her LE, then the investor would have a higher than expected return because the life insurance policy would payout sooner than expected. Conversely, if the insured lived longer than his/her LE, then the price paid for the investment would be insufficient to make all necessary premium payments. In the latter cases, the investor would have to make additional payments to keep the policy in force; hence, the investor's return would be lower than expected.
Many LE estimates were acquired by LPI from one oncologist, Dr. Donald Cassidy. Dr. Cassidy did not have an actuarial background. Although there was no reason to think that Pastor Klaussen was aware of it, the Texas Department of Insurance statistics established that Dr. Cassidy's LEs were underestimated for most of the policies that were sold by LPI. Many of the insured lived two, or even three, times longer than had been projected by Dr. Cassidy.
When the insured person outlived his/her projected LE, the premiums on the insurance policies still had to be paid, and the obligation to pay the life insurance premiums fell upon the investors who had bought the policies for the remaining life of the insured. Postponement of the maturity of the policy significantly reduced the rates of return that investors earned.
Investor Naiveté or a Church Problem?
That is what had happened with the investment made by church senior, Russ. His investment, similar to one made by another investor, had not produced the great returns he had been led to expect based on sales presentations and interviews of key LPI officers. One documented investment related to a life insurance policy on a patient with HIV/AIDS; after the life insurance policy was purchased, the patient received a drug panel that had worked unexpectedly well. That meant both good and bad news. The good news was that the patient's life exceeded the "advertised" LE. The bad news was that in addition to the original investment, the investor had to make many additional premium payments to protect his investment, and the premiums had become burdensome.
The Decision: Questions for you to consider.
Paul wondered, what should be done? Was it ethical for Pastor Klaussen to be selling investments to the church members he pastored; was it legal for him to do so? Was Pastor Klaussen even aware that he might have done wrong—that selling high risk investments to potentially vulnerable church seniors constituted a conflict of interest?
Was there something the church should have done to prevent this type of thing? Did he, Paul, or the church have a fiduciary responsibility to the church seniors? Should Paul take his concerns about the senior's investment loss and Pastor Klaussen's part-time job to other SLT members or the church's head pastor? As part of church leadership, was he ethically or legally obligated to do so? Would doing so be slanderous? Could it open the church to possible litigation? On the other hand, if he did not take the matter forward, would he be putting the church at risk? Did Pastor Klaussen's sale of investments impose a fiduciary responsibility on the church to its seniors for nonspiritual matters?