May 18, 2021

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Former CEO Of Live Well Financial Convicted In Connection With $200 Million Bond Fraud Scheme | USAO-SDNY

Audrey Strauss, United States attorney for the South District of New York, announced that MICHAEL HILD, founder and former executive director of Live Well Financial, Inc. (“Live Well”) has been convicted today of securities fraud and cable fraud and charges for bank fraud involving a system to fraudulently increase the value of a portfolio of Live Well bonds to induce various securities dealers and at least one financial institution to borrow more money from Live Well through repurchase (“repo”) agreements and secured loans – as if they otherwise knew the real value of Live Well’s bond portfolio. The program enabled Live Well to expand its bond portfolio exponentially, from approximately 20 bonds with a reported value of approximately $ 50 million in 2014 to approximately 50 bonds with a reported value of over $ 500 million by the end of 2016. In May 2019, in conjunction with an effort to wind up the company, Live Well wrote off the value of its portfolio by over $ 200 million.

Manhattan US attorney Audrey Strauss said, “A unanimous jury found that Michael Hild received millions of dollars in secured loans for Live Well Financial by grossly increasing the value of the bonds used as collateral. Hild fooled a third-party pricing service by providing inflated grades, which resulted in the pricing service posting ratings for the bonds that were well above market value. Lenders have been tricked into lending far more than they otherwise could have done. The house of cards crashed with the breakup of Live Well and the lenders’ revelation that the bond portfolio was overvalued by $ 200 million. Now Michael Hild is waiting to be convicted of his crimes. “

According to the evidence presented during the trial:

Live Wells bond portfolio and repurchase agreements

Live Well was a Richmond, Virginia-based company that established, serviced, and securitized government-guaranteed reverse mortgages called Home Equity Conversion Mortgages (“HECMs”). In or about 2014 Live Well acquired a portfolio of approximately 15 bonds, each of which entitles the holder to receive a portion of the interest payments, but not the principal payments, from a designated pool of reverse mortgages (“HECM IO Bonds”). Live Well bought the HECM IO bond portfolio for approximately $ 50 million. At the same time that Live Well purchased the HECM IO bond portfolio, HILD established a New York City-based trading desk within Live Well to manage and expand Live Well’s bond portfolio.

Live Well financed the acquisition and growth of its bond portfolio through a series of loans where Live Well used its bond portfolio as collateral. The majority of Live Well’s lenders were securities dealers whose loan agreements with Live Well were structured as bond-repurchase agreements, also known as “repo contracts”. A repo contract is a short-term loan in which both parties agree to sell and buy back an asset in the future within a specified contract period. The seller sells the asset to the lender with a promise to buy it back at a certain time and at a price that includes an interest payment. Functionally, a repo is a secured loan where ownership of the collateral is transferred to the lender. When the loan is repaid by the borrower, the collateral is returned to the borrower through a buyback. In addition, at least one of Live Well’s lenders was an FDIC insured bank, and the loan agreement with Live Well was structured as a secured loan with certain bonds held as collateral by a third party custodian.

The program for mislabeling the bond portfolio

Live Well’s funding arrangements with all but one lender required that each bond that Live Well sought to borrow was valued by a third-party pricing source to determine the bond’s market value as of the valuation date. The lenders then used the value of the bond in conjunction with the application of a haircut of generally 10% to 20% to determine the amount of money to be used on the Live Well loan.

Lenders generally relied on a certain widely used underwriting service (the “Pricing Service”) to value various securities. In or around September 2014, HILD and its co-conspirators launched a program to induce the pricing service to publish ratings for bonds that were well above actual market prices. In this way, the conspirators induced the lenders to make loans to Live Well that were well above the prices at which the bonds could be sold in the market. The inflated prices were based on a number of market assumptions that the conspirators referred to as “Scenario 14”.

HILD was aware that if the lenders had known that the pricing service publishes bond prices that do not reflect fair value, that is, the price at which a lender could sell the bond in the market, if for repayment, HILD knew that they would have refused of his capital is required Use these prices to determine how much money to borrow from Live Well. To prevent the pricing service and lenders from learning that the prices did not reflect market value, HILD directed its co-conspirators at Live Well to take steps to hide the provision of inflated brands for the pricing service. Due to the overvaluation of assets and the purchase of additional bonds using the capital generated by the program, Live Well was able to increase the alleged value of its bond portfolio to over $ 500 million by December 2016.

In addition to using the liquidity generated by the program to expand Live Well’s bond portfolio, in or about September 2016, HILD used $ 18 million generated by the repo lenders to buy up Live Well’s preferred stockholders. The elimination of the preferred shareholders gave HILD control of the company and enabled him to increase his personal compensation significantly. Accordingly, HILD’s compensation increased from approximately USD 1.4 million in 2015 to approximately USD 5 million in 2016, approximately USD 9.7 million in 2017 and over USD 8 million in 2018.

In late 2018, Live Well’s chief financial officer resigned after HILD refused to reduce the compensation received by the company. In or about May 2019, the company’s interim CFO announced that it would not sign the company’s interim financial statements, believing the company’s book value for the HECM IO bond portfolio was significantly overvalued. In or around May 2019, Live Well announced that it would cease operations and relax. Following the announcement of the close of Live Well, Live Well’s interim CFO provided Live Well lenders with a balance sheet showing that Live Well had reduced the value of its bond portfolio by over $ 200 million.

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HILD, 46, of Richmond, Virginia, was convicted on five grounds: a case of conspiracy to commit securities fraud; a conspiracy to commit wire and bank fraud; a count of securities fraud; a count of wire fraud; and a count of bank fraud. Count One carries a maximum sentence of five years in prison, Counts two, four and five a maximum sentence of 30 years in prison and Count Three a maximum sentence of 20 years in prison. The indictment also includes a maximum fine of $ 5 million, or double the gross profit or loss from the offense.

The maximum possible sentences are prescribed by Congress and are given here for informational purposes only, as every conviction of the accused is determined by a judge.

HILD is due to be sentenced on August 20, 2021 at 10:00 a.m. by US District Judge Ronnie Abrams, who led the trial.

Ms. Strauss praised the FBI’s investigative work and also thanked the Securities and Exchange Commission.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. US assistant attorneys Jordan Estes and Scott Hartman are responsible for law enforcement.