‘Operation Cleansheet’ Reveals Dirty Laundry

The California Department of Insurance (CDI) announced the sentencing of Lonnie Lee Harwell, a Sacramento man, for his alleged involvement in a nationwide scheme intended to defraud investors and the insurance industry. Harwell was sentenced by U.S. District Court Judge Milton L. Schwartz in Sacramento to 40 months.

The 15-month joint investigation, code-named “Operation Cleansheet,” was conducted by the CDI Fraud Division and Investigations Bureau, the FBI, the U.S. Attorney’s Office and the Sacramento District Attorney’s Office.

Harwell was indicted in May 2000 in connection with a multi-million dollar exploitation of the growing investment market in life insurance policies of terminally ill people, primarily those diagnosed with HIV or AIDS. Harwell and his wife, Penni Alexander-Harwell, face felony charges identifying them as the “ringleaders” of the scam that led companies to issue more than $11.6 million in life insurance policies to people with terminal illnesses.

The CDI alleges that the Harwells, often with the help of recruiters, solicited people with diagnosed terminal illnesses to purchase multiple policies from different companies, a practice known as “stacking.” The insureds would then hide their medical conditions in a practice known as “cleansheeting.”

The policies obtained are referred to as “jet-issued” policies, generally whole-life plans with a comparatively low face value of between $25,000 and $150,000. The low value allows for “jet underwriting,” for which an applicant must be between 15 and 50 years of age and without serious medical problems, but no physical examination or blood work is required.

The investor pays a percentage of the policy’s face value and continues to pay the premiums while the insured has the benefit of the money from the sale of the policy upon his/her death. In return, the investor has the right to collect the full amount upon the death of the insured. Investors in the viatical market typically seek a high return. Nationally, many elderly and fixed-income people have been targeted. They are tempted by high or guaranteed rates of return and Good Samaritan justification.

The Harwells were licensed insurance agents in California and allegedly assisted terminally ill individuals in acquiring multiple fraudulent life insurance policies through misrepresentations. In addition, the Harwells are accused of offering referral fees of $1,000 to people, known as “bird dogs,” who would agree to apply for multiple life insurance policies. These policies would then be sold to investors who were unaware of the misrepresentations in what is known as viatical settlement fraud.

Search warrants were executed on the illegal proceeds of the Harwells’ alleged crimes, which led to a seizure of approximately $1.8 million. In addition to the Harwells, seven other individuals were also sentenced on felony charges.