Guarantee Security Life Insurance Company
| Company type | Private |
|---|---|
| Industry | Insurance |
| Founded | 1984 (acquired by Transmark USA, Inc.) |
| Founder | Mark Sanford, William Blackburn (via Transmark USA, Inc.) |
| Defunct | 1991 |
| Fate | Insolvency and receivership |
| Headquarters | Jacksonville , United States |
Area served | United States (42 states) |
Key people | Mark Sanford (Chairman), William Blackburn (President) |
| Products | Deferred annuities, life insurance |
Guarantee Security Life Insurance Company (GSLIC) became infamous as one of the most significant insurance fraud scandals in Florida's history. The Florida Insurance Commissioner labeled GSLIC as "an extensive fraud" executed with the cooperation of self-serving brokers, accountants, and attorneys.
Regulatory responses included a $4.5 million settlement with accounting firm Coopers & Lybrand and penalties imposed by the SEC on Merrill Lynch for improper securities transaction reporting, which led to enforced compliance measures and a cease-and-desist directive. Additionally, the Florida Department of Insurance secured a $100 million settlement from entities connected to GSLIC's 1991 failure.
Background
Transmark USA, Inc. was established in 1978 by stockbrokers Mark Sanford and William Blackburn. In 1984, Transmark purchased GSLIC, based in Jacksonville, Florida. Blackburn took charge of day-to-day management while Sanford handled investment activities.
GSLIC primarily offered deferred annuities and life insurance products distributed through a nationwide network of over 16,000 commissioned sales agents. These products guaranteed an 8% interest rate during the first year along with principal protection against market downturns. However, interest rates declined significantly after the initial year, and early termination penalties discouraged policy cancellations.
Between 1984 and 1991, GSLIC's assets grew from under $100 million to nearly $1 billion, serving about 57,000 policyholders across 42 states. In 1986, Transmark raised $50 million through a private placement of 13% senior notes arranged by Drexel Burnham. Institutions associated with Michael Milken were involved in this transaction, prompting Florida to file a $225 million lawsuit against the Milken brothers.
In 1991, GSLIC became insolvent and stopped issuing new policies. The State of Florida placed the company into receivership to oversee its affairs, paying minimum contractual crediting rates—typically around 4%. Policyholders were given the option to transfer their policies to Guaranty Reassurance Corp., or face steep surrender fees and substantial financial losses. About 42,000 out of 55,000 policyholders moved their contracts to Midland National Insurance Company.
The state guaranteed policy values up to $100,000 per insured individual rather than per contract owner. This limitation adversely affected investors such as William Underwood, who owned multiple annuities under his name but incurred losses due to these caps.
Government investigation
On December 20, 1991, Florida initiated a lawsuit with 17 counts against GSLIC’s top executives, accountants, lawyers, and brokers for allegations including breach of fiduciary duty, negligence, breach of contract, corporate asset wastefulness, and conspiracy to defraud. Authorities froze Chairman Mark Sanford’s assets after uncovering his use of company funds to acquire Rudder Cut Cay—a Bahamian island—and produce commemorative coins featuring himself and his spouse.
Sanford’s seized assets encompassed a million-dollar oceanfront residence in Ponte Vedra Beach; two Lamborghini Countachs valued at $165,000 each; a Rolls-Royce; Corvette; Jaguar; a speedboat; and investments in a chain of adult entertainment venues.
The island property—boasting a private airstrip, natural harbor, two miles of beachfront, and a main residence measuring 3,200 square feet—was sold by the state for $6.1 million to a Chicago-based buyer.
Given that GSLIC was Florida’s sixth-largest insurer at the time, the magnitude of the fraud attracted Congressional scrutiny. On April 29–30, 1992, the U.S. Senate Permanent Subcommittee on Investigations convened hearings focused on GSLIC as part of an inquiry titled "Efforts to Combat Fraud and Abuse in the Insurance Industry." Chairman Sam Nunn summoned executives from GSLIC along with accountants, brokers, customers, and regulators. Sanford invoked his Fifth Amendment right against self-incrimination and refused to respond to questions. The subcommittee concluded that existing regulatory mechanisms had failed dramatically in preventing insurance fraud.
Company documents revealed systematic plundering by Transmark leadership through excessive salaries and dividends: Sanford received $37 million; Transmark itself took $23 million; GSLIC President William Blackburn obtained $17 million; Sanford’s brother Rob earned $2 million; Blackburn’s wife Melanie was paid $700,000; and Sanford’s wife Margena received $600,000—totaling more than $80 million.
To sustain extravagant executive compensation while fulfilling annuity obligations and agent commissions, GSLIC heavily invested in high-yield but risky junk bonds. The collapse of the junk bond market in 1991 caused the company’s insolvency. During Senate testimony, GSLIC’s Deputy Receiver estimated total assets at approximately $230 million against liabilities amounting to $620 million owed to policyholders and annuitants.
Chronology
In 1984, Mark Sanford faced regulatory challenges while attempting to raise capital because Florida insurance regulations mandated insurers maintain a 20% reserve against high-risk investments. To prevent insolvency, Sanford arranged a transaction with Merrill Lynch on December 31, 1984, involving the sale of junk bonds in exchange for a $155 million "account receivable due from brokers," with a planned repurchase date of January 2, 1985.
The following year, Sanford adjusted this strategy to resolve issues concerning unfunded receivables and compliance. On December 31, 1985, he sought to exchange $246 million in junk bonds for U.S. Treasury securities, which are exempt from reserve requirements. However, Merrill Lynch’s system recorded the trade as occurring on January 2, 1986—too late to be reflected in GSLIC’s year-end financials. To address this discrepancy, Merrill Lynch issued a written confirmation retroactively dating the transaction to December 31.
In 1986, Sanford adopted a different approach. Florida regulators accused Southeast Bank of fabricating its December 31 portfolio report to indicate it held $292 million in Treasury bonds on behalf of GSLIC when these securities were not actually in the bank’s custody. The bank produced a manually created 15-page confirmation summary to substantiate this claim.
No bond sales took place at year-end in 1987, likely because GSLIC had issued $100 million in preferred stock earlier that year, which strengthened its cash reserves. Merrill Lynch collected fees estimated at $25,000 (1984), $75,000 (1985), $150,000 (1986), and $106,000 (1988) for facilitating these transactions.
In 1988, Transmark’s ownership changed as William Blackburn sold his one-third interest to Sanford due to strategic disagreements. Subsequently, Transmark acquired companies in retail, printing, and plastics sectors through a complex arrangement designed by law firm Shereff, Friedman, Hoffman and Goodman. This structure allowed GSLIC to surpass legal investment limits in affiliated entities by creating CG Acquisition USA—a holding company controlled by Transmark through stock options and warrants—while representing these holdings as unrelated investments valued at $19 million.
By 1989, Sanford utilized these subsidiaries to artificially inflate GSLIC’s balance sheet by double-counting assets. For instance, GSLIC extended a $25 million loan to an airline group; that same day, the airline paid dividends to Transmark, which then returned the funds to GSLIC as contributed surplus. Similarly, a $44 million loan to the printing group was followed by Transmark injecting an additional $19 million in paid-in capital into GSLIC.
In 1990, Sanford arranged for subsidiaries to issue $27.5 million in preferred stock directly to GSLIC to enhance its financial statements. Despite retail, airline, and printing subsidiaries having liabilities exceeding assets by $35 million, they were reported at their full face value of $120 million on Transmark’s records. Florida regulators identified Shereff, Friedman, Hoffman as the architects behind these recapitalization efforts.
The company ultimately failed in 1991. Former partner William Blackburn attributed the collapse primarily to the junk bond market downturn in 1989 and operational errors following his exit.
The auditors' work
In the beginning of 1985, Mark Sanford retained Coopers & Lybrand to perform an audit of GSLIC's 1984 financial statements according to Generally Accepted Accounting Principles (GAAP). Don Withers declined to acknowledge year-end sales under GAAP, arguing that a holding period of 10 to 15 days was essential to validate the recognition of gains. Sanford disagreed with this stance and subsequently terminated the firm's services.
Subsequently, in 1985, GSLIC hired Coopers again to audit the 1985 financials applying statutory accounting standards. Coopers determined that no 10-15 day holding period was necessary provided GSLIC had no legal repurchase obligation and intended to reacquire securities at fair market value. Sanford informed Withers that Florida regulators had approved these year-end transactions, which led Coopers to issue an unqualified audit opinion.
Congressional findings
Hearings on the matter were conducted by Rep. John Dingell's United States House Energy Subcommittee on Oversight and Investigations.
The Senate subcommittee proposed reforms to tighten statutory accounting practices. These included mandating auditors to verify with state regulators regarding potentially deceptive transactions, adopting GAAP for evaluating insurance companies' financial health, and increasing the frequency and rigor of quarterly regulatory examinations.
On March 3, 1993, Senator John Glenn remarked:
The Subcommittee concludes that Coopers and Lybrand accepted GSLIC management’s assertion that Florida regulators had approved the year-end deals. As independent auditors, Coopers & Lybrand should have directly confirmed this with the Florida Insurance Commissioner to evaluate potential effects on policyholder safeguards. Such verification might have prevented their involvement in the substantial losses suffered by thousands of policyholders.
Other sources
- Arens, Alvin A., et al., Auditing and Assurance Services, Prentice Hall, 2003.
- Blackburn, William, GSLIC President, Testimony before the Permanent Subcommittee on Investigations Hearings on Efforts to Combat Fraud and Abuse in the Insurance Industry, Part V, April 30, 1992.
- Complaint, 17 counts, filed December 20, 1991, by the State of Florida Department of Insurance.
- Confirmation Memo of Merrill Lynch Capital Markets to Guaranty (sic) Insurance Co regarding purchase of $5 million in U.S. Government Treasury Notes.
- Heekin, Michael, Deputy Receiver for GSLIC, Testimony before the Permanent Subcommittee on Investigations Hearings on Efforts to Combat Fraud and Abuse in the Insurance Industry, Part V, April 29, 1992.
- Letters from Don Withers of Coopers & Lybrand regarding accounting treatment for end-of-year securities transactions (April & November 1985).
- Marketing brochure by Guarantee Security Life Insurance Company for "The Enhancer" annuity product.
- "Now That We've Got It, We Pause Briefly to Flaunt It," GSLIC recruiting ad, 1987.
- Rogers, Helen P., Certified Financial Planner, "Taking a Stand on Banking," wellingtonpublications.com.
- S. Rpt. 103-29: Third Interim Report on U.S. Government Efforts to Combat Fraud and Abuse in the Insurance Industry – A Case Study of Guarantee Security Life Insurance Company, March 23, 1993.
- Testimonies before the Permanent Subcommittee on Investigations from Lucille Watkins (policyholder) and Don Withers (Coopers & Lybrand), April 1992.