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Citizens Schemes to Sell Insurance to Foreigners Securities Class Action

Citizens Old Annual Report Cover

The Summary in the complaint for this securities class action begins somewhat grandly: “This is not a case about investors complaining of poor stock performance. This is a case about [Citzens, Inc.’s] long-standing fraudulent scheme to sell insurance policies to foreigners to prop up its stock price to artificially high levels.”

The class for this action is all persons and entities who acquired the publicly-traded securities of Citizens between March 11, 2015 and April 27, 2017.

Citizens is a US company that sells whole-life insurance policies primarily to foreign customers, mostly in South America and Taiwan. According to the complaint, the policies are attractive because the proceeds and dividends are denominated in US dollars, a stable currency.

However, the complaint claims that the company’s sales people use improper growth projections to get customers to buy into the Citizens Stock investment Plan, which uses dividends to buy the company’s stock. The complaint says that the sales agents are not licensed to sell securities, that they promise impossibly large returns, and that the purchases prop up the company’s stock price.

On top of that, the complaint says that the company has claimed in the past that customers did not have to pay US taxes on the insurance proceeds and dividends, but in 2015 it announced that “a substantial portion” of its policies are subject to US tax laws. Still, the complaint alleges, the company continues to sell the policies as if they are tax-exempt, because otherwise they would be less attractive.

In fact, according to the complaint, the company has done many things to conceal their fraudulent scheme, among them the following:

  • Fired its new CEO three weeks into his tenure because he would not sign off on its financials.
  • Blamed its Vice President and Chief Actuary for its tax issues.
  • Failed to disclose that the company is under investigation by the SEC.
  • Failed to disclose that the company is under investigation by the IRS.
  • Declined to hold a single conference call in the past two years, in order to avoid questions about the tax issues.

The failure to make proper disclosures of the issues, the complaint says, is a violation of the Securities Exchange Act of 1934.

The complaint claims that, by selling to foreigners, the company has managed to evade insurance regulators, who are primarily concerned about what happens in their respective states. However, the federal securities regulators may be catching up with it.

On March 8, 2017, Seeking Alpha published an article on the company’s business practice and revealed that it was under investigation by the SEC and IRS. Several weeks later, in its annual report for 2016, the company admitted to material weakness in financial reporting, sales practices, and actuarial capabilities. After these disclosures, the company’s stock fell sharply.

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