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Thursday, January 21, 2010

Paul Bryant Jr. and Alabama Reassurance: A Portrait of Fraud

We have established that a company owned by University of Alabama trustee Paul W. Bryant Jr. was involved in a massive insurance-fraud scheme that led to a 15-year prison sentence for a Pennsylvania lawyer.

But several intriguing questions remain: How did the lawyer, Allen W. Stewart, come to pick Bryant's company as a conspirator? Of all the insurance companies in the country, why did Stewart choose Bryant's company, Alabama Reassurance, to help him carry out a fraudulent scheme?

And here is a fairly recent development: Alabama Re was liquidated in late 2007, with a new company (Alabama Life Reinsurance Company) more or less taking its place. Why was that action taken? We will ponder that question in a moment.

But first, let's think about why Allen W. Stewart might engage the services of Alabama Reassurance. Stewart is in federal prison and not readily available for interviews. But his actions indicate he knew something about Alabama Re that made him think the company would be receptive to a fraud scheme? Is that because Alabama Re had engaged in fraud schemes before? And because the U.S. Department of Justice decided to call off an investigation of Alabama Re in the late 1990s, has the company engaged in fraud schemes since then?

We don't have clear answers to those questions. But we do have a 2006 report from the Alabama Department of Insurance (DOI) that provides considerable insight into how Alabama Re conducted business. And it ain't a pretty picture.

After reading the 77-page document, you are tempted to say, "Gee, what a fly-by-night outfit." But that might give fly-by-night outfits a bad name.

First, let's consider a few peculiarities about Alabama Re. At the end of 2006, the company had "admitted assets" of $238,028,220. Is it housed in a major, multi-story building? Nope, it's in the Bryant Bank headquarters in Tuscaloosa, on McFarland Boulevard.

You might think a company would need quite a few employees to help manage more than $238 million. But you would be wrong. Alabama Re has two full-time employees--President Scott Moore Phelps and Vice President/Actuary William Rodney Windham. They are joined on the board of directors by Paul Bryant Jr., president of Greene Group Inc.; Allen Wayne May, a Tuscaloosa veterinarian; and Sam Moore Phelps, a Tuscaloosa lawyer.

Alabama Re apparently is a decidedly low-tech operation, paying little attention to basic business practices. Reading the DOI report, you picture two guys wearing green eye shades, hunched over their desks in a basement, surrounded by shoe boxes full of money that are covered in cobwebs.

The DOI takes Alabama Re to task for all kinds of shortcomings and violations of the Code of Alabama. In fact, the report devotes 14 pages to noting how the company could better handle its operations. One gets the impression that the good folks at Alabama Re don't much care what the Department of Insurance thinks.

Here are just a few of Alabama Re's "best practices," areas that the DOI said needed major attention:

* Risk of water damage to computer center;

* The backup tape log has a success rate of less than 50 percent;

* No formal records-retention policy;

* No computer-security policy;

* No emergency response procedures;

* No business contingency plan;

* No anti-fraud plan; and

* Daily backups stored at off-premises location.

Some corner lemonade stands probably have better business procedures than Alabama Re. And yet, the company is not a small-time operation. A 1997 report by the U.S. Department of Health and Human Services, Assistant Secretary for Planning and Evaluation (ASPE), ranked Alabama Re among the country's top 50 reinsurers.

It's joined on the list by such stalwarts as Swiss Re Life Company of America (No. 1), Lincoln National Life Insurance Company (No. 2), and Reliastar Life Insurance Company (No. 3)--not to mention such impressive names as Transamerica Occidental Life (No. 7), the Equitable Life Assurance Society (No. 23), John Hancock Mutual Life (No. 27), and Underwriters at Lloyd's of London (No. 32).

I wonder how many of those companies have two employees. If you are going to conduct business in a shady fashion, is it wise to have only a few people who know about it?

Interestingly, Alabama Re is no more, at least not in its original form. As of late 2007, according to the DOI report, the company was merged into Greene Group Inc. and liquidated. A new company, Alabama Life Reinsurance Company, was formed. It has two assumed reinsurance treaties--with Security Life Insurance Company of America and North America Insurance Company of Texas.

The statute of limitations on crimes associated with the Allen W. Stewart case almost certainly has passed. With the liquidation of Alabama Re, any evidence of ongoing irregularities might be gone with the wind, too.

As we've reported in previous posts, Alabama Re had a protector in the Clinton Justice Department of the late 1990s. And that protection almost certainly stayed in place during the pro-business George W. Bush era from 2000 to 2008.

With the economy starting to implode, and public unrest building over multiple major business frauds, did the executives of Alabama Re see a Democratic administration on the horizon? Is that why they thought late 2007 might be a good time to liquidate Alabama Re?

Something tells me it's not a coincidence that Alabama Re was dissolved in late 2007. Something also tells me that federal investigators might want to keep an eye on the activities of Alabama Life Reinsurance Company.

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