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Spitzer Targets Life Settlements

The prosecutor files a suit against Coventry First.

Updated from 12:27 p.m (EDT)

New York Attorney General Eliot Spitzer is gearing up for one last court battle -- this time with a specialized niche of the insurance business called life settlements.

The gun-slinging prosecutor filed a lawsuit Thursday charging

Coventry First

, one of the largest buyers of life settlements, with cheating consumers out of getting the best price for their unused insurance policies.

The civil lawsuit, filed in Manhattan Supreme Court, alleges that the Philadelphia-based firm "rigged'' the bidding process for purchasing life settlements from would-be sellers. Coventry allegedly drove away potential competitors for these policies by making "secret payments'' to brokers supposedly representing the sellers' interests.

"In fact, the bidding is often rigged, with Coventry paying the brokers undisclosed fees, euphemistically called "co-brokering fees,'' "to sit on'' or reduce competitive bids from other buyers,'' the 33-page complaint says.

Alan Buerger, Coventry's president, says, "we're disappointed the AG did this.''Buerger says many of the firm's customers are large trusts and companies, not individuals.

The lawsuit stems from a yearlong investigation into the life-settlements business, which sources say is continuing. However, it's not clear what will happen to the investigation once Spitzer leaves office at year's end. Spitzer is running for New York governor on the Democratic line in the November general election.

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National Financial Partners


, which operates one of the nation's largest life settlements brokerages, has said it's been under investigation by Spitzer's office since early this year.

National Financial is not named as a defendant in the lawsuit, but its life settlements subsidiary, Advanced Settlements, is mentioned in the complaint. The lawsuit alleges that an Advanced broker received a so-called "co-broker fee of $20,000'' on the sale of one policy.

A life settlement is the unused death benefit on a life insurance policy that a consumer or a corporation deems no longer necessary and is interested in selling at a discount to its face value. In recent years, the life settlement business has grown quickly. Last year, it's estimated that companies like Coventry purchased $10 billion in unused life insurance policies.

Firms like Coventry make money by betting that the person selling the unused policy will die before the policy expires. A buyer of a life-settlements policy must continue paying the premium in order to stand any chance of collecting the death benefit.

It's all a bit macabre and a bit risky. But the arbitrage possibilities have attracted lots of sophisticated players to the life-settlements market, including hedge funds and Wall Street firms -- which are financial backers of firm like Coventry.

American International Group

(AIG) - Get American International Group, Inc. Report

, the insurance giant, once was one of Coventry's biggest customers. In fact, people familiar with the investigation say the probe of Coventry and the life settlements grew out of Spitzer's inquiry into accounting irregularities at AIG.