Daryl Henry's reward for 20 years of service in the Navy was a $1,083 monthly pension. But more than half of it went to a private California company -- Retired Military Financial Services -- after Henry was duped into a complex financial agreement, the Maryland resident alleged in a class-action lawsuit.
Struggling with bills, Henry says he answered an ad in the Navy Times and traded 96 months of future pension checks -- totaling $103,000 -- for a lump sum payment of $42,131. He then spent years depositing his government pension checks into a special account so Retired Military Financial Services could take its share of the taxpayer-funded payments and pay private investors with it.
Lump sum pension payments for vets are big business, targeting 1.5 million former service members who receive $40 billion annually. Companies that provide them have attracted negative attention from military advocates for years. Tales of retired or injured vets getting 30 to 40 cents on the dollar are easy to find. In 2004, Congress threatened legislation designed to banish the industry, and several courts have ruled the arrangements run afoul of existing federal laws.
Still, companies offering so-called "annuity utilization contracts" crowd out Google searches around military pensions and loans. The websites that rank highest are often decorated with red, white and blue banners, and they have government-sounding dot-com names. While the lump payouts may sound attractive to retired vets in a financial bind, the terms are oppressive: Participants find themselves with what is essentially a loan at 30 percent interest.
But on Monday, Consumer Financial Protection Bureau Director Richard Cordray said his agency will begin focusing on pension lump sum payments.
"We are ... concerned about military pension buyout schemes," Cordray said in a speech on Elder Abuse Awareness Day. "Military retirees are offered lump-sum cash payments in return for surrendering their rights to their pension payouts. These schemes are usually very bad deals for the retirees. We want to collect information on all of these kinds of financial practices."
Several agencies and investigators have been collecting information on the industry for years. John Wasik, an author of 13 books on personal finance, recently investigated the industry for investment-related fraud in a column on Forbes.com.
"Basically, you sign up they lock you in, and if you want out, you don't have recourse," Wasik said. "There is very clear language saying, ‘This is not a loan,’ but it resembles a loan in all characteristics."
Where do these pension payout companies get their capital from? Investors looking for steady returns. Wasik found that Retired Military Financial Service’s partner, California-based Structured Investments Co., was ordered by an arbitrator in November to repay $5 million to investors who alleged they were defrauded. In December, the firm agreed to stop selling the investments in California.
In August, a California court ruled in favor of Henry and the class of veterans who joined his lawsuit, ordering Retired Military Financial Service to return $2.9 million.
"There is an awful lot of litigation out there," Wasik said. "My biggest concern is the proliferation of these things without regulation. Somebody should be looking at what they are doing."
Attempts to reach Retired Military Financial Services by deadline were unsuccessful. Founder Steven P. Covey defended his company last year in a story published by the Center for Public Integrity’s iWatchNews.org.
"The position is: We’re purchasing at a discounted lump-sum, future cash flow,” he said. “We’re not lenders. When you’re not lenders, you’re not dealing in potential usury areas.”
Covey's attorney, Robert Clarkson, told Wasik that his client had "done nothing wrong,” but said he wouldn't answer questions because of pending litigation.
'It's likely every single one is violating a law'
Plenty of websites offer cash for pension and disability payments, which add to an already crowded field of firms offering lump payments for structured settlement recipients. There’s good money in granting lump payments to down-on-their-luck consumers who have a guaranteed stream of income. Military pensions fall into a protected category, however, says Stuart Rossman of the National Consumer Law Center, who helped argue Henry's case.
"If these sites are dealing with the issue of military pensions, it's likely every single one is violating a law," he said.
All firms that offer such lump payments are between a legal rock and a hard place, he said. Assigning military pensions to a third party isn’t legal; offering loans without abiding by Truth and Lending Requirements is also illegal.
"And they are either one of the other," he said.
One site, MilitaryPensionLoan.org, offers a typical example: "This program is NOT A LOAN," it says on its home page, despite its Web address. "We will buy the next eight years of your pension for a lump sum of cash."
MilitaryPensionLoan.org didn’t immediately respond to requests for comment.
Despite the legal troubles, and occasional bad publicity, the military loan/pension products have survived for more than a decade. Rossman said he filed his first case against such a firm nine years ago. But why?
He thinks many of these companies use veterans' sense of honor against them.
"They believe in doing their duty. They don't want to come forward. They believe 'It's my mistake and I have to own up to it,'" Rossman said. "And a lot of them don't even realize they are paying 30 percent interest."
Rossman hopes military pension payout companies are on the ropes now that investors might be scared away by the California litigation. No investors would mean no money for lump payments.
Henry’s legal triumph was a bit of a hollow victory, however -- he'd already made all 96 payments by the time the judge ruled in his favor. While he is entitled to a portion of the $2.9 million judgment, Rossman said the owners of Retired Military Financial Payments had declared bankruptcy, so there are no assets to pay the judgement.
Still, it was a worthy fight, Rossman said.
"He's proud he's put a stop to this, and once we had the judge's ruling, we were able to tell other members of the class they could stop making payments. We saved them a lot of money, and he's proud of that," Rossman said.