Porch sues China Construction Bank over Vesttoo reinsurance collateral fraud – Artemis.bm
Porch Group has filed a law suit in New York against China Construction Bank Corporation, over the Vesttoo reinsurance collateral fraud, accusing the massive Chinese bank of “enabling its personnel to perpetrate a colossal fraud” on the plaintiffs.
Recall that, Porch Group is the owner of Homeowners of America Insurance Company (HOA), an insurance carrier that found a letter of credit (LOC) that was supposed to provide the collateral to back a reinsurance deal it had entered into with insurtech Vesttoo was forged.
Porchhad significant impacts from the fraud and has already been able to make some financial recoveries after its exposure to the Vesttoo fake reinsurance letter of credit (LOC) collateral fraud and scandal.
Then it has also benefited from a small recovery under the Vesttoo bankruptcy case settlements, which we believe to have been up to $3 million, Artemis now understands.
Finally though, one of the injured parties that has suffered financial impacts of the extensive reinsurance collateral fraud has now taken the step of pursuing damages from a bank who’s staff had been accused of playing a facilitating role in the elaborate Vesttoo fraud scheme.
Of the billions of dollars in letters of credit (LOC) that should have backed up reinsurance deals involving Vesttoo, but were found to be forged or invalid, the vast majority were purported to have come from China Construction Bank.
In total, almost $3.36 billion of standby letters of credit (LOC) have been presumed to be fraudulently created under the Vesttoo scheme.
Of these, the latest figures Artemis had seen towards the end of 2023 suggested that $2.81 billion of these could have been linked to China Construction Bank, with $362.5m purportedly linked to Standard Chartered Bank and $186m to Santander.
With little in the way of financial recoveries able to be made from Vesttoo itself through its lengthy and expensive bankruptcy case, it was always going to be the case that parties would start to look elsewhere for recoveries.
China Construction Bank was an obvious candidate, given the alleged involvement and participation in the fraud by staff, and the first sign this could be on the horizon was when the Committee of Unsecured Creditors in the Chapter 11 bankruptcy case of Vesttoo filed a request to conduct legal discovery on China Construction Bank late in 2023.
Porch is a member of that committee and is the first to take the step of launching legal action against the massive Chinese bank.
China Construction Bank is named as the issuing institution for many of the fraudulent letters of credit (LOC) from the Vesttoo case and during the bankruptcy it came to light that emails show a China Construction Bank (CCB) employee, Chun-Yin Lam, used an official bank email address to communicate with some of the Vesttoo employees accused of perpetrating the fraud, including co-founders Yaniv Bertele and Alon Lifshitz, as well as capital finder Udi Ginati.
CCB employee Lam had also identified the Chinese investor implicated in the fraud, Yu Po Holdings, as a client of the bank. Recall that Yu Po Holdings was the primary investor in reinsurance transactions involving fraudulent LOCs issued by CCB.
How far that discovery actually got is uncertain, as Chinese financial institutions have proven notoriously unresponsive to such proceedings in other international cases.
But Porch has now launched its suit against the bank, saying it is seeking to “recover from China Construction Bank—one of the largest banks in the world—for enabling its personnel to perpetrate a colossal fraud that has upended the reinsurance industry and imposed monumental losses on Plaintiffs.”
Stating that, “CCB affirmatively enabled its employee Chun-Yin Lam, a Relationship Manager in CCB’s Hong Kong S.A.R. office, to issue billions of dollars in false letters of credit purportedly made on behalf of CCB and originating from its New York branch.”
Lam is accused of working with the Vesttoo frausters, using the authority that China Construction Bank (CCB) bestowed on him to issue dozens of letters of credit for reinsurance transactions, which turned out to be fraudulent.
“These letters of credit falsely guaranteed insurance companies, including Plaintiffs, access to critical reinsurance funds to help pay policyholders’ insurance claims in the event of a major catastrophe,” Porch’s law suit states.
“The conspirators’ scheme worked for years. Plaintiffs and other insurance companies paid tens of millions of dollars in premiums for non-existent reinsurance until news broke in July 2023 that certain letters of credit backstopping Vesttoo’s reinsurance transactions were fake,” the law suit adds.
Porch’s HOA was one of the biggest victims, losing tens of millions of dollars when a $300 million letter of credit backing a reinsurance facility turned out to be fraudulent.
Porch has paid out more than $80 million to cover insurance claims that should have been reinsured, the company said.
Porch Group says that it is bringing its legal case against the bank, “to recover from CCB for affirmatively enabling its employees to commit their massive fraud and for negligently allowing their misconduct to continue unabated for years—to Plaintiffs’ extreme detriment.”
Porch states that Gallagher Re was the reinsurance broker that introduced HOA to Vesttoo and that Vesttoo provided its reinsurance via Aon’s White Rock SAC in Bermuda, while Yo Po Finance was supposed to have been the investor backing the collateral, and China Construction Bank issued the LOC to support the reinsurance cover.
Porch states that a collateral letter confirming that CCB would provide a $228 million letter of credit (LOC) was signed by a CCB Senior Vice President named Xu Yingde.
With CCB ranking as one of the largest banks in the world, Porch said it reviewed various information about the bank, its status as an NAIC-approved issuer of letters of credit for reinsurance transactions, and that the collateral letter document itself was stamped by the bank.
Porch also states that the collateral letter was “accepted by Gallagher Re, HOA’s reinsurance broker knowledgeable of the customs and practices of the reinsurance industry, as valid and reliable collateral for the reinsurance transaction.”
A further updated copy of this stamped collateral letter was sent by post from CCB’s Hong Kong office by UPS to HOA, with the name “Yin Lam” named as sender and an employee.
“At all relevant times before and after entering the 2021 Quota Share Reinsurance Contract with White Rock, HOA believed that it was supported by a valid and reliable letter of credit commitment from CCB,” Porch’s law suits states, noting that neither Gallagher Re or White Rock “expressed any skepticism or hesitation about the validity of the letter of credit documentation received from CCB.”
The letter of credit was increased over time to the full $300 million, to support the quota share reinsurance agreement.
Then, when news of the Vesttoo fraud broke in July 2023, Porch delivered a sight draft to CCB’s New York office asking to draw on the letter of credit, and emails were sent to CCB employees Chun-Yin Lam, Philip Ohara, and Allison Lee using official CCB email addresses.
The only response came from CCB’s lawyers, who denying issuing the letter of credit in the first place.
That triggered the chain of events at Porch that drove it to cancel its reinsurance and take actions to shore up the business.
Porch alleges that “CCB employees conspired to defraud HOA,” conspiring with Vesttoo and Yu Po employees and agents to inflict damage on the company.
“CCB, through its employees and agents, was a central participant in the conspiracy to defraud HOA, and other insurance company cedents, through the issuance of falsified letters of credit.”
The named CCB employee Lam used CCB emails, addresses and documents to perpetrate the fraud and cover-up the fraudulent nature of the letters of credit.
Porch also believes others were involved, stating, “On information and belief, Lam’s fraudulent scheme involved other CCB employees at various levels of seniority, who provided support to Lam and oversaw the fraudulent execution of the LOCs.”
They also state that Lam hosted meetings at CCB’s office in Hong Kong with Vesttoo executives and employees.
Porch alleges a network within CCB that arranged and forged the LOC’s, with involvement in Hong Kong, Beijing and New York.
“On information and belief, the execution of LOCs was within these groups’ respective job duties. On information and belief, individuals in these groups, in coordination with Lam, were ultimately responsible for affixing the “Xu Yingde” signatures and coordinating with individuals at CCB that provided final approval for the fraudulent LOCs,” Porch’s law suit explains.
Also stating that, “As one of the largest banks in the world, CCB should have had extensive protocols in place to protect against and detect the type of fraud perpetrated by its employees.”
“Under CCB’s watch, Lam worked with other employees at CCB and co-conspirators at Vesttoo and Yu Po to defraud HOA—to Plaintiffs’ severe detriment.”
It remains to be seen how successful such a law suit can be. In the past, legal action against Chinese banks has not always resulted in recoveries for the injured parties.
It stands to reason that, given the extensive financial damage cause by the Vesttoo reinsurance collateral fraud, additional law suits will come to light over time, as those that faced damages look to recover some of the value lost.
