Guilty Plea In $670 Million Fraud Scheme

logoA certified public accountant (CPA) and purported outside auditor for Provident Capital Indemnity Ltd. (PCI) has pleaded guilty for his role in a $670 million fraud scheme involving victims throughout the United States and abroad.

Jorge Luis Castillo, 56, a resident of New Jersey, pleaded guilty before U.S. District Judge John A. Gibney in the Eastern District of Virginia to conspiring to commit mail and wire fraud, which carries a maximum penalty of 20 years in prison.  Castillo is scheduled to be sentenced on May 22, 2012.

“Mr. Castillo used his position as a CPA to give PCI an air of legitimacy that provided their clients the peace of mind to invest millions,” said U.S. Attorney for the Eastern District of Virginia Neil H. MacBride. “Auditors stand as a gatekeeper to fraud, and we are aggressively pursuing those who abuse their position to facilitate the fraud rather than take steps to put a stop to it.  I want to commend the outstanding work of the Virginia Securities and Financial Fraud Task Force for detecting and disrupting this massive, ongoing international fraud before the scheme victimized even more investors.”

“Mr. Castillo played an integral role in a multi-million dollar fraud scheme that harmed investors throughout the United States and abroad,” said Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division.  “Trading on his qualification as a CPA, he created false documents that concealed the true nature of PCI’s operations.  We are determined to continue holding accountable those who commit financial fraud, and prey upon unsuspecting investors.”

Financial guarantee bonds

According to a statement of facts filed with Castillo’s plea agreement, PCI was an insurance and reinsurance company registered in the Commonwealth of Dominica and doing business in Costa Rica.  PCI sold financial guarantee bonds to companies selling life settlements, or securities backed by life settlements, to investors.

These bonds were marketed to PCI’s clients as a way to alleviate the risk of insured beneficiaries living beyond their life expectancy.  The 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 that he conspired with Minor Vargas Calvo, 60, the president and majority owner of PCI, to prepare audited financial statements, that falsely claimed that PCI had entered into reinsurance contracts with major reinsurance companies. These claims, which were supported by a letter from Castillo stating that 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 admitted that he never performed an audit of PCI’s financial statements and that, in fact, he personally created the statements he claimed to be independently auditing.  He also admitted that he and others at PCI knew that the company never actually entered into reinsurance contracts with any major companies.  Castillo also admitted that he and other conspirators provided the false financial statements and fraudulent independent auditors’ report to Dun & Bradstreet (D&B), which D&B relied on in compiling its commercial reports on PCI and issuing its 5A rating of PCI’s financial strength.

Life settlement

From 2004 through 2010, PCI sold approximately $670 million of bonds to life settlement investment companies located in various countries, including the United States, the Netherlands, Germany and Canada.

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 allegedly 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 that Castillo received approximately $84,000 from his work as the purported outside auditor of PCI from 2004 through 2010.

Vargas, a citizen and resident of Costa Rica, and PCI were charged in a superseding indictment on Oct. 5, 2011, with one count of conspiracy to commit mail and wire fraud, three counts of mail fraud and three counts of wire fraud.  Vargas was also charged with three counts of money laundering.  Vargas was arrested on Jan. 19, 2011, at the John F. Kennedy International Airport in New York, and has been incarcerated pending trial, scheduled to be held on Feb. 13, 2012.  An indictment is a formal accusation of criminal conduct, not evidence.  A defendant is presumed innocent unless and until convicted.

This continuing investigation is being conducted by the U.S. Postal Inspection Service, 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.  This case is being prosecuted by Assistant U.S. Attorneys Michael S. Dry and Jessica Aber Brumberg of the Eastern District of Virginia and Trial Attorney Albert B. Stieglitz Jr. of the Fraud Section in the Justice Department’s Criminal Division.

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.   The department thanks the SEC for its assistance in this matter.

The investigation has been coordinated by the Virginia Financial and Securities Fraud Task Force, an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases in the nation and in Virginia specifically.


About the Author

Truman Lewis
A former reporter and bureau chief, Truman Lewis has covered presidential campaigns, state politics and stories ranging from organized crime to environmental and consumer protection.