Well, now the other shoe has dropped. And it has dropped right on the head of Live Well CEO Michael Hild.
Hild, the founder, CEO, and controlling shareholder of Live Well was arrested this week by federal authorities and charged with orchestrating a $140 million bond fraud scheme that led to the company’s collapse.
According to the U.S. Attorney’s Office for the Southern District of New York, Hild is charged with five counts: One count of conspiracy to commit securities fraud; one count of conspiracy to commit wire and bank fraud; one count of securities fraud; one count of wire fraud; and one count of bank fraud.
In a separate action, the Securities and Exchange Commission also charged Hild and Live Well with “perpetuating a multi-million dollar bond mismarking scheme against Live Well's short-term lenders.”
Court document shows that Hild allegedly participated in a scheme to “fraudulently inflate the value of a portfolio of bonds owned by Live Well in order to induce various securities dealers and at least one financial institution into loaning more money to Live Well.”
According to authorities, the alleged scheme took place from September 2015 through May 2019 and allowed Live Well to grow its bond portfolio “exponentially,” from approximately 20 bonds with a stated value of $50 million in 2014 to approximately 50 bonds with a stated value of $500 million by the end of 2016.
The SEC provides more detailed information on the alleged actions that led to the charges against Hild.
“The SEC alleges that Live Well, under the direction of Hild, fraudulently inflated the value of its portfolio of complex reverse-mortgage bonds. According to the complaint, Hild directed Live Well to submit falsely inflated bond prices to an industry-leading pricing service, who he knew would simply publish the prices Live Well gave it,” the SEC said in a statement.
“As Hild was aware, most of Live Well's lenders relied on those inflated prices in loaning money to Live Well through repurchase securities transactions,” the SEC continued. “Through this alleged scheme – which Hild called a ‘self-generating money machine’ – Live Well was able to borrow tens of millions of dollars more from its lenders through the securities transactions than it could have borrowed had the bonds been priced accurately and was able to fund lavish compensation packages for Hild and others.”
According to the SEC, during the 18 months that the scheme allegedly took place, Live Well’s bond portfolio dramatically increased in value from $71 million to $570 million.
The SEC complaint states that the fraudulent scheme collapsed in 2019 when Live Well’s lenders tried to sell the bonds back to Live Well but Live Well did not sufficient funds to complete the repurchase securities transactions, leaving its counterparties exposed to losses of more than $80 million.
Authorities allege that Hild’s actions, along with the actions of the company’s former chief financial officer and head trader, led to the company’s demise.
But in a signal that Hild could be in some serious trouble, the government states that Eric Rohr, the former chief financial officer at Live Well, and Darren Stumberger, the former head trader at Live Well, have both already pleaded guilty to charges stemming from the scheme and cooperating with the government’s pursuit of their former boss.
“As alleged, Michael Hild orchestrated a scheme to deceive Live Well’s lenders by fraudulently inflating the value of its mortgage-backed bonds by over $140 million,” Manhattan U.S. Attorney Geoffrey Berman said in a statement.
“This allegedly enabled Live Well to borrow money well over the value of the collateral it put up,” Berman continued. “In turn, Hild used these ill-gotten funds to gain control of the company and increase his own compensation by nearly 700%, while exposing lenders cumulatively to $65 million in unsecured loans to the company, which is now in bankruptcy.”
The charges shouldn’t come as a total shock however, as HousingWire reported last month that the SEC, U.S. Attorney’s Office, and Federal Bureau of Investigation were investigating the demise of Live Well.
According to the U.S. Attorney’s Office, the alleged scheme enabled Hild to buy out the preferred stockholders in Live Well, giving Hild exclusive control of the company and allowing him to “substantially” increase his personal compensation.
Court documents show that Hild’s compensation jumped from approximately $1.4 million in 2015, to approximately $5 million in 2016, approximately $9.7 million in 2017, to more than $8 million in 2018.
Eventually, Rohr resigned as CFO at some point towards the end of last year, leading the company to name an interim CFO, who later told Hild that he could would not sign the company’s interim financial statements because he believed that the company’s carrying value for the bond portfolio in question was “significantly overstated.”
Shortly thereafter, Live Well announced that it would cease operations and unwind. After the announcement, Live Well’s interim chief financial officer provided a balance sheet to Live Well’s lenders showing that Live Well had reduced the value of its bond portfolio by approximately $141 million.
According to authorities, as of May 31, 2019, the debt Live Well owed to its lenders on the bond portfolio exceeded the portfolio’s carrying value by approximately $65 million.
“Hild’s ‘self-generating money machine’ was a brazen fraud through which Hild enriched himself at the expense of Live Well’s counterparties,” said Daniel Michael, Chief of the SEC’s Complex Financial Instruments Unit. “This case starkly underscores the risks of improperly valuing assets, and we will remain focused on pursuing those who misrepresent the value of their securities.”
The SEC's complaint charges Live Well, Hild, Rohr, and Stumberger, with violations of the anti-fraud provisions of the federal securities laws. The complaint seeks a permanent injunction, disgorgement of ill-gotten gains along with prejudgment interest, financial penalties, and officer and director bars against Hild and Rohr.
Stumberger and Rohr have consented to the entry of a partial judgment that permanently enjoins them from future violations of the charged provisions of the federal securities laws.
As for the charges from the U.S. Attorney’s Office, Hild is facing a maximum sentence of five years in prison on the count of conspiracy to commit securities fraud. Beyond that, the count of conspiracy to commit wire and bank fraud; count of wire fraud; and count of bank fraud each carry a maximum sentence of 30 years in prison; while the count of securities fraud carries a maximum sentence of 20 years in prison.
The charges also contain a maximum fine of $5 million, or twice the gross gain or loss from the offense.
For much more on the alleged scheme, click below to read an extensive summary from the U.S. Attorney’s Office.
From the U.S. Attorney's Office:
Live Well was a Richmond, Virginia-based company that originated, serviced, and securitized government-guaranteed reverse mortgages known as Home Equity Conversion Mortgages (“HECMs”). In or about 2014, Live Well acquired a portfolio of approximately 20 bonds, each entitling the holder to receive a portion of the interest payments, but not the principal payments, from a particular pool of reverse mortgages (“HECM IO bonds.”). Live Well purchased the HECM IO bond portfolio for approximately $50 million. At the same time that Live Well purchased the HECM IO bond portfolio, HILD established within Live Well a New York City-based trading desk to manage and grow Live Well’s bond portfolio. STUMBERGER supervised the trading desk.
Live Well financed the acquisition and growth of its bond portfolio through a series of loans in which Live Well used its bond portfolio as collateral. The majority of Live Well’s lenders were securities dealers whose lending arrangements with Live Well were structured as bond repurchase agreements, also known as “repo agreements.” A repo agreement is a short-term loan in which both parties agree to the sale and future repurchase of an asset within a specified contract period. The seller sells the asset to the lender with a promise to buy it back at a specific date and at a price that includes an interest payment. Functionally, a repo agreement is a collateralized loan in which title 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 repurchase. Additionally, at least one of Live Well’s lenders was an FDIC-insured bank, and its lending arrangement with Live Well was structured as a secured loan, with certain bonds held as collateral by a third-party custodian.
Live Well’s financing agreements with all but one of the lenders required that any bond that Live Well sought to borrow against be priced by a third-party pricing source in order to determine the market value of the bond as of the measurement date. The lenders then used the value of the bond, minus 10% to 20%, generally, to determine the amount of money to lend Live Well.
The lenders generally relied on a particular widely utilized subscription service (the “Pricing Service”) to price various securities. In or about September 2014, HILD, ROHR, STUMBERGER, and their co-conspirators embarked on a scheme to cause the Pricing Service to publish valuations for the bonds that far exceeded actual market prices. By doing so, the conspirators induced the lenders to extend credit to Live Well far in excess of the prices for which the bonds could be sold in the market. The inflated prices were based on a set of market assumptions that the conspirators called “Scenario 14.”
HILD was aware that if the lenders had known that the Pricing Service was publishing bond prices that did not reflect fair value (meaning the price at which a lender could sell the bond in the market if necessary to recoup its capital), they would have refused to use those prices in determining how much money to loan to Live Well. To prevent the Pricing Service and the lenders from learning that the prices did not reflect market value, HILD directed ROHR, STUMBERGER, and others to take steps to conceal their provision of inflated marks to the Pricing Service. Ultimately, due to the asset overvaluation and the purchase of additional bonds using the capital generated by the scheme, Live Well grew the purported value of its bond portfolio to $500 million by December 2016.
In addition to using the liquidity generated by the scheme to expand Live Well’s bond portfolio, in or about September 2016, HILD used $18 million generated from the repo lenders to buy out the preferred stockholders in Live Well. The elimination of the preferred stockholders gave HILD exclusive control of the company and allowed him to substantially increase his personal compensation. Accordingly, HILD’s compensation jumped from approximately $1.4 million in 2015, to approximately $5 million in 2016, approximately $9.7 million in 2017, and over $8 million in 2018.
In or about late 2018, ROHR resigned as chief financial officer of Live Well. In or about May 2019, the company’s interim chief financial officer informed HILD that he would not sign the company’s interim financial statements because he believed that the company’s carrying value for the HECM IO bond portfolio was significantly overstated. On or about May 4, 2019, Live Well announced that it would cease operations and unwind. After the announcement of Live Well’s closing, Live Well’s interim chief financial officer provided a balance sheet to Live Well’s lenders showing that Live Well had reduced the value of its bond portfolio by approximately $141 million. As of May 31, 2019, the debt Live Well owed to its lenders on the bond portfolio exceeded the portfolio’s carrying value by approximately $65 million.