Case # 14CF3329
Date: December 11, 2015
INSURANCE AGENT SENTENCED TO 10 YEARS IN PRISON FOR DEFRAUDING OVER $1.4 MILLION IN COMMISSION SCHEME
SANTA ANA, Calif. – An insurance agent was sentenced today to 10 years in state prison for defrauding over $1.4 million through an advance commission scheme. Eric Lee, 65, Brea, pleaded guilty on Oct. 23, 2015, to 10 felony counts of grand theft and 10 felony counts of insurance fraud with sentencing enhancements for damage exceeding $100,000, aggravated white collar crime over $500,000 and property damage over $1.3 million. Lee was also ordered to pay $1.4 million in restitution and a $2.8 million fine.
At the time of the crime, Lee worked as an insurance agent for FMC Financial Group (FMC), a general agency for the insurance company Mass Mutual from October 2009 to November 2010. Between May 2010 and October 2010, Lee sold universal life insurance policies, in excess of one year, to new clients and fraudulently completed their insurance policy applications.
Lee illegally engaged in a practice known in the insurance industry as an advance commission scheme. An advance commission scheme occurs when insurance carriers offer a commission in excess of an annual premium that is paid up front. Agents sell policies with the intent of allowing them to expire after one year while keeping the excess of the annual premium/commission as a profit. This profit to the agent is a loss to the insurance company.
Lee illegally overstated the annual income, net worth, and the source of the applicants’ income on insurance applications in order for life insurance policies to be issued by Mass Mutual. The defendant advised policy holders that they would be receiving free insurance and wrote them a personal check to pay for their first month’s premiums on the policy.
Insurance agents make their money from first year commissions (FYC) on the sale of new policies, renewal commissions, and service fees on policies which have been on the books beyond the first year. If an agent works for an established agency, they will get paid a percentage of the total FYC. The FYC is a calculation based on the first year premium that is due to the insurance company. The total FYC paid to an agent could be anywhere between 50 percent to 130 percent based on the insurance companies the agency represents and what type of policy sold.
Once the policy was placed, Mass Mutual would pay the advance commissions to the FMC General Agent (GA) who had the discretion on how to distribute the commissions. The commission amount Mass Mutual would advance was based on the policy being in force for one calendar year. The GA would annualize the commissions to the agent instead of paying commissions monthly as long as the policy was in force. For each policy placed, the GA and manager each received a percentage.
Lee received the remainder of the percentage from the commission. If a policy lapsed before the first year was complete, the agent was required to pay back the pro-rated portion (charge back) of the commission. Mass Mutual paid a one year commission in advance once the policy holders’ insurance coverage was approved and in place. Lee committed an advance commission scheme by collecting more than $1.4 million on unearned commissions after the insurance policy would lapse after one year due to no future payments being made on the premiums.
Mass Mutual conducted an audit of the policies and discovered a large volume of lapsed policies and contacted the California Department of Insurance, who investigated this case.
Senior Deputy District Attorney Marc Labreche of the Major Fraud Unit prosecuted this case.