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CPA sentenced to prison in massive fraud scheme
A certified public accountant was sentenced Friday in Virginia to 54 months in prison in a half-billion-dollar fraud scheme affecting more than 3,500 victims throughout the United States and abroad, the Justice Department said.
U.S. Attorney Neil MacBride in Virginia said Jorge Luis Castillo, 57, of New Jersey, was sentenced by U.S. District Judge John A. Gibney, who also ordered three years of supervised release and the payment of $43.5 million in forfeiture fees.
Castillo pleaded guilty in November 2011 to one count of conspiring to commit mail and wire fraud. He had served as an "outside auditor" for Provident Capital Indemnity Ltd. (PCI), where he formerly was employed.
"As a licensed accountant, Mr. Castillo used his expertise to create fraudulent financial statements out of whole cloth," said Mr. MacBride. "Many elderly investors relied on Mr. Castillo's credibility as an outside auditor before entrusting their life savings in this fraud scheme.
"Accountants and auditors are the gatekeepers of our financial system and are entrusted with the critical role of protecting the public from fraud," he said. "Today's sentence will hopefully send a strong message to those in the accounting profession that they will be held responsible when they break that trust by facilitating or participating in fraud."
According to court records, PCI was an insurance and reinsurance company registered in Dominica and doing business in Costa Rica. The firm sold financial guarantee bonds to companies selling life settlements, or securities backed by life settlements, to investors. PCI marketed the bonds to clients as a way to alleviate the risk of insured beneficiaries living beyond their life expectancy.
PCI's clients, in turn, typically explained to their investors that the financial guarantee bonds ensured that the investors would receive their expected return on investment irrespective of whether the insured on the underlying life settlement lived beyond his or her life expectancy.
Castillo admitted conspiring with Minor Vargas Calvo, 61, president and majority owner of PCI, to prepare audited financial statements that falsely claimed PCI had entered into reinsurance contracts with major reinsurance companies. The claims, supported by a letter from Castillo stating he conducted an audit of PCI's financial records, were used to assure PCI's clients that the reinsurance companies were backstopping the majority of the risk that PCI had insured through its financial guarantee bonds.
Castillo further admitted he never performed an audit of PCI's financial statements and, in fact, personally created the statements he claimed to be independently auditing. He also admitted he and others at PCI knew the company never entered into reinsurance contracts with any major companies. He also admitted he and other conspirators provided the false financial statements and fraudulent independent auditors' report to Dun & Bradstreet, which were relied on in compiling commercial reports on PCI and issuing a 5A rating of PCI's financial strength.
From 2004 through 2010, the records show, PCI sold at least $485 million of bonds to life settlement investment companies located in various countries, including the United States, the Netherlands, Germany, Canada and elsewhere. PCI's clients, in turn, sold investment offerings backed by PCI's bonds to thousands of investors around the world. Purchasers of PCI's bonds were required to make up-front payments of six to 11 percent of the underlying settlement as "premium" payments to PCI before the company would issue the bonds.
Court records state Castillo received approximately $84,000 from his work as the outside auditor of PCI from 2004 through 2010.
Vargas, a citizen and resident of Costa Rica, was convicted in April of one count of conspiracy to commit mail and wire fraud, three counts of mail fraud, three counts of wire fraud and three counts of money laundering. In October, he was sentenced to 60 years in prison. PCI pleaded guilty in April to conspiring to commit mail and wire fraud, and was sentenced in September to one year of probation.
The investigation was conducted by the U.S. Postal Inspection Service, the Internal Revenue Service and FBI, with assistance from the Virginia State Corporation Commission, the Texas State Securities Board and the New Jersey Bureau of Securities. Prosecutors are Assistant U.S. Attorneys Michael S. Dry and Jessica Aber Brumberg in Virginia and Assistant Chief Albert B. Stieglitz Jr. of the Justice Department Criminal Division's Fraud Section.
The U.S. Securities and Exchange Commission (SEC) conducted a parallel investigation and in January 2011 filed a parallel civil enforcement action against PCI, Vargas and Castillo.
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