Board Members of Knights of Columbus Alerted to Potential Massive Fraud by the Knights of Columbus in Letter from UKnight Interactive, a Vendor Charging Knights of Columbus with Business Misconduct in a Commercial Litigation in Federal Court in Colorado
BOULDER, Colo., Aug. 7, 2018 /PRNewswire/ -- UKnight Interactive ("UKnight"), a commercial enterprise which had been involved with the Knights of Columbus ("KC") for numerous years, today reported it sent the following letter to the KC Board of Directors, alerting board members to an ongoing massive insurance fraud UKnight believes KC management is perpetrating on the Order's membership and regulators.
UKnight is a plaintiff in a commercial lawsuit against KC in U.S. District Court in Denver, Colorado, where KC is charged with various counts of business misconduct.
In its letter to KC board members, UKnight lays out the insurance fraud, which includes, among other improper activities, the creation of false membership data by KC to support the fraud. UKnight underscores to KC's board members its belief that the fraud is part of a self-enrichment scheme by certain members of KC senior management. The letter urges directors to exercise their responsibilities to ensure proper governance at the world's largest fraternal order, consistent with their fiduciary duties as members of the board.
The UKnight letter was delivered to KC Supreme Knight (CEO) Carl Anderson and Supreme Advocate (General Counsel) John Marrella for distribution to each director.
Below is the full text of the letter:
August 6, 2018
To: Knights of Columbus Board of Directors c/o Mssrs. Anderson and Marrella Supreme Convention Baltimore, MD 21201
Dear Supreme Director,
My name is Leonard Labriola. I am a founding member of UKnight Interactive. You are a board member of the Knights of Columbus (KC), a non-profit, fraternal insurance company with $105 billion in liabilities. UKnight has brought lawsuit in federal court in Colorado charging KC with numerous counts of business misconduct.
You should be aware that KC appears to be engaging in massive fraud related to its insurance operations, deceiving membership and regulators. This fraud puts at risk the long term financial soundness of the entire Knights of Columbus fraternal order as well as the community programs and donations it makes to many parties, including the Vatican. The fraud involves ongoing inflation of KC's actual membership, and is the basis of a self-enrichment scheme by the Supreme Officers – KC's senior executive management – at the expense of membership and the integrity of the Order.
As a director of KC, you have every right to be concerned about how KC is operating its insurance business, the Order's prime source of revenues.
As a director, you have every right to be concerned about whether KC is representing the size of its membership and field agent sales force accurately.
As a director, you have every right to be concerned about whether the Order's Supreme Officers, its top executives, are engaged in a self-enrichment scheme.
The federal court in Colorado now has ordered the depositions of Supreme Knight Carl Anderson and that of Tom Smith, KC's former chief insurance officer, who, without explanation, recently and suddenly resigned from the position he held for almost 20 years.
The same court also has ordered KC to produce its membership information.
Based on KC's insurance in force, KC owes $105 billion to thousands of Catholic families to cover claims. However, KC has only $23.6 billion in the bank to cover those $105 billion in future claims. Specifically, KC will need to generate $81.4 billion more just to cover that difference. Moreover, 30% of KC's insured members are over 70 years old. The board should be concerned that the clock is ticking.
According to KC tax returns, the Order paid out almost $10 billion more in claims than it has collected since 2004. This means that under the leadership of Carl Anderson, KC has lost almost $10 billion. In fact, KC lost almost $1 billion in 2016 alone.
As a director, you have every right to question KC's Supreme Officers, its top executives, about its management of the KC insurance business and its implications for the Order.
Consider the following chart:
A "Loss Ratio" is used to determine the health of an insurance company. A Loss Ratio is established by dividing a company's claims by its premiums. A healthy loss ratio which is below 100%, indicates that revenues exceed claims. A high loss ratio above 100%, indicates that a company may be in financial distress. The chart above reflects the fact that KC's 10-year loss ratio has averaged 140% according to its form 990s. Even when adding investment returns pulled out as income, KC's loss ratio still only drops to 125%.
But KC executive officers no doubt tell you that KC is profitable, year after year. Indeed, KC 990 tax forms show that KC's revenues less expenses yield positive results, as shown in the following chart.
But in order to create this healthy illusion, KC has been liquidating assets and booking profits generated by current investments rather than allowing those assets to continue building to cover future claims – the $81.4 billion needed to cover future commitments of $105 billion. KC has been, in reality, taking the interest, dividends and capital gains generated by its invested assets and using these sources to basically fund current claims and current bills, including the high salaries of the Supreme Officers.
As a director, you have every right to be concerned that this methodology can't work forever.
The next charts illustrate this reality clearly. The first shows KC's rapidly accelerating death claims.
The chart below shows the diminishing spread between KC's insurance liabilities as reported on its 990 forms– most of which are legally required "minimum reserves", a very small fraction of actual obligations - and the assets required to cover these minimum reserves.
A situation created by combining escalating death claims with slowing sales and negative member growth, KC's assets are being drawn down faster than its insurance sales are replacing them.
If financial markets remain strong, if death claims level off, if young men begin joining KC in the US and Canada, which are the only countries in which KC insurance can be sold, and if KC insurance sales do not slow further, at the current rate KC's assets under management will still drop below KC's legally required reserve by 2033, and that's the best-case scenario. The fact is that an acceleration of negative conditions is far more likely to occur, not a stabilization or reversal. And, with 30% or so of KC's insured members now over 70, as a director you have every right to be concerned that this situation is dire.
As a director, you have every right to question whether KC is providing accurate information to ratings agencies.
Manpower: Financial rating agencies track the size of an insurance company's salesforce as an indicator of the company's strength and growth. Does KC require your GA's to hire additional salesmen at the end of the year for no reason other than to inflate their manpower numbers to receive higher ratings?
Membership: Today, KC reports 1.9 million members. In 2017, UKnight conducted a survey of councils to confirm the existence of, and determine the extent of, this membership inflation. This survey revealed member counts that were 30% - 40% lower than what is reported. This translates into a total membership count of 1.1 million and 1.3 million.
We Urge You as a Director to Ask Your Executive Officers Important Questions About How They Are Conducting KC's Insurance Operations; What is the Exact Size of Its Insurance Sales Force Today Versus the End of 2017; And, What is the True Demographic Makeup and True Size of KC's Membership In the US and Canada Separately, and In the Rest of the World.
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