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August 5, 2010

Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress 

The Securities and Exchange Commission staff report is recommending that the US Congress define life settlements as securities to make sure that investors of these types of transactions receive federal securities law protection. The SEC says there are several benefits to making such an amendment to securities laws:

• This would clarify life settlements’ status under federal securities law, which would allow the federal government and the states to deal with them in a more consistent manner.
• Life settlement market intermediaries would then fall under the regular framework of the Financial Industry Regulatory Authority and the SEC.
• FINRA and the SEC would have clear authority to police the life settlement market, which could help detect securities fraud and discourage financial abuses.

The Life Settlements Task Force prepared the report, which notes “inconsistent regulation of participants” in the life settlements market and that pools of life settlements and individual transactions “would benefit” from “baseline standards of conduct to market participants.” SEC staff is also recommending that the commission:

• Urge Congress and state officials to think about regulating life expectancy underwriters in a more consistent and significant manner.
• Tell staffers to make sure that providers and brokers are meeting legal standards of conduct.
• Have staff members look for the development of a life settlement securitization market.

It was just in early July that US Senator Sen. Herb Kohl released a General Accountability Office report that found that the inconsistent regulation of life settlements create several challenges:

• Some police owners in certain states are not as well-protected.
• Some individual investors may have a hard time getting enough information about their investments and the risks that may be involved.
• Because laws across states are not consistent, this can pose a problem for some providers and brokers.

Related Web Resources:
SEC Releases Report of the Life Settlements Task Force, SEC, July 22, 2010

Sen. Kohl Says GAO Report Supports Tougher Settlement Regs, LexisNexis, August 2, 2010

Read the Life Settlement Task Force Report (PDF)

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May 10, 2010

New Braunfels Firm Accused of Texas Securities Fraud In Sales of Viatical (Insurance) Investments

State District Court Judge Stephen Yelenosky has frozen the assets of Retirement Value LLC and appointed a receiver to take control of the New Braunfels company, which faces allegations of Texas securities fraud related to the sale of investments linked to death benefits from life insurance policies. The Texas State Securities Board, which has been conducting an undercover investigation into the company, requested the court order against the investment firm.

Retirement Value, its President Richard "Dick" Gray, and Chief Operating Officer Bruce Collins are defendants in the court action. According to the securities board, between April 2009 and February 2010 the company allegedly collected $65 million from more than 800 investors. The securities board also claims that investment firm told investors that the expected rate of return would be 16.5% payable upon maturity.

The claim contends that from the $65 million that the Retirement Value received from investors, $9.3 million was paid in commissions to unregistered sales agents. Meantime, Retirement Value, Gray and other principals in the company retained $8.4 million. Only $20.2 million was used to acquire the interests in the life insurance policies, while another third was set aside to acquire additional policies.

In March, the securities board issued an emergency cease-and-desist order telling Retirement Value to stop operations. The court’s ruling to freeze the assets requires that the judge believe it is likely that the Securities Board will succeed in demonstrating its claims. Eduardo Espinosa, of the Dallas office of the law firm K&L Gates has been appointed receiver of the company's assets.

Gray's Houston lawyer, Christopher Bebel, has said that the ruling "constitutes an absurdity" and that the securities board has no regulatory power over the sale of investment products such as those sold by Retirement Value. He also said that "the evidence will show that no wrongdoing has occurred" in the company's operations. "This is incredibly perplexing," Bebel said. "It seems clear the Texas State Securities Board is attempting to usurp the powers of the state legislature, and there is no precedent for this conduct.”

However, Houston Securities Attorney William Shepherd of Shepherd Smith Edwards and Kantas LLP, a Texas securities fraud law firm that represents investors, respectfully disagrees with Mr. Bebel. “The laws of Texas and most states hold that an investment is a security under the ‘family resemblance test,’ which is similar to the analogy of ‘looking like, walking like, and quacking like a duck’, or one that is seeking to make profit based solely on the actions of others. The threshold for coverage by securities laws is quite low and, in cases that our stockbroker fraud law firm is currently handling, it is clear that the securities laws apply to investors with insurance interests. The folks at the Texas Securities Board are quite competent and I am sure that they researched this issue carefully before filing the case. Texas Commissioner Denise Crawford is also President of the North American Securities Administrators Association (NASAA). Even if Mr. Bebel is correct and these are not securities (meaning the claims cannot be maintained by the Texas Securities Board) another party could step in and pursue the claims under a variety of other laws based on the alleged actions.” The receivership would then likely be continued.

When receivers are appointed, their general function is to seek to recover whatever assets can be found so that creditors are reimbursed and investors are compensated for their losses. Unfortunately, after expenses are paid only a fraction of the losses is usually recovered. “Our firm can represent clients to look beyond the reach of a receiver to other companies and individuals who sold or assisted in the sale of the investments to a particular investor,” states Shepherd.

Meantime, it is premature to comment on whether state officials will seek criminal charges in the case. According to securities board spokesman Robert Elder, "The key is full disclosure for investors, The risks and rewards and full details of any investment need to be explained, as well as the background of the individuals selling the investments. And we allege that wasn't done in this case."

Related Web Resources:
New Braunfels firm accused of securities fraud has assets frozen, Statesman.com, May 5, 2010

Judge Appoints Receiver to Take Control of 'Life Settlement' Company Targeted by State Securities Board, Texas State Securities Board

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April 2, 2010

Texas Securities Fraud: SEC Sues Two Individuals For Allegedly Running Multi-Million Dollar Scheme Involving Viaticals

In the U.S. District Court for the Southern District of Texas, the US Securities and Exchange Commission is suing Kelly Gipson and Charles Jordan for allegedly orchestrating a multi-million dollar viaticals scam (in the secondary market for life insurance). On March 22, the agency said the court had granted its request for a temporary order to freeze the defendants’ assets.

Also, a receiver has been appointed to take charge of their business, American Settlements Association LLC, and their assets. The SEC is seeking preliminary and permanent injunctions, civil penalties, disgorgement plus prejudgment interest.

Per the agency’s complaint, Gipson and Jordan made at least $2.3 million from March to December 2007 by selling interests in a life insurance policy to over 50 investors in 10 states. They told them they would spend the funds on future premium payments so that the policy wouldn’t lapse. Instead, Gipson and Jordan mixed investors’ money with their funds and diverted it toward their personal spending, including travel, jewelry, entertainment, and casinos.

The SEC says that not only did the policy expire on March 9, 2010 but also it no longer had any value.

The defendants also allegedly failed to disclose their actions to investors and neglected to tell them about the possible risks involved. They also allegedly told investors that a bonding company was protecting their investments. In fact, Provident Capital Indemnity Ltd., which is based in Costa Rica, doesn’t have the license to provide insurance in the US.

The SEC’s complaint accuses Gipson, Jordan, and ASA of violating Section 10(b) of the Securities Exchange Act of 1934 , Section 17(a) of the Securities Act of 1933, and Rule 10b-5 thereunder.

Our Texas securities fraud law firm handles viatical cases, also known as life settlement cases, throughout the US. Contact our stockbroker fraud lawyers to schedule your free case evaluation.

Related Web Resources:
Commission Obtains Asset Freeze and Appointment of a Receiver in Alleged $3.5 Million Life Settlement Fraud, SEC.gov, March 22, 2010

Securities and Exchange Commission (PDF)

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November 9, 2009

SEC to Continue Fight Against Senior Investment Fraud in 2010

The Securities and Exchange Commission is stepping up its efforts to combat senior investment fraud. In 2010, the SEC plans to focus on issues related to retirement investments, including product development, disclosures, and marketing issues.

The need to better regulate the retirement products arena and actively take action against securities fraud that targets elderly people has increased now that some 55 million senior investors are involved in defined contribution plans. The SEC is currently taking a closer look at life settlements (also called viatical settlements) and target date funds.

Viatical settlements involve transactions made by chronically ill or older people who sell their life insurance policy benefits to investors. In turn, these investors pay the premiums and collect the payout upon the seller’s death. According to the Senate Special Committee on Aging, the life settlement industry has doubled in value in the last 3 years and will likely exceed $150 billion in a few decades.

At this time, the SEC has limited authority over life settlement securities, which fall under its purview when they are solid in capital markets but also are sold in private offerings. On October 22, SEC Chairperson Mary Shapiro spoke at an American Association of Retired Persons forum. She called the life settlement market one of “emerging interest” and said its products could become Wall Street’s “next big securitized products.” The SEC has established a task force to determine whether this area of the market is regulated enough.

Shapiro expressed concern that many seniors may not comprehend the consequences of selling their life insurance policies to investors. She noted that tax benefits and the ability to get life insurance later on can be lost.

Shapiro says the commission is looking at target date funds and a target date’s use in the fund’s name. Target date funds are vehicles for college savings and retirement plans that move toward more conservative holdings as a specific date approaches. The SEC is taking a closer look at marketing and advertising collaterals to figure out if investors are getting accurate information about these products. Shapiro noted that some target-date funds lost up to 40% of their value when the economy collapsed last year.

Related Web Resources:
Schapiro: Settlements Need Watching

AARP

SEC

Continue reading "SEC to Continue Fight Against Senior Investment Fraud in 2010" »

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Posted In: SEC Enforcement , Senior Investors , Viaticals

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September 27, 2009

Securitization of Life Insurance Settlements Might Lead to Next Financial Crisis, Say Lawmakers

House Financial Services capital markets subcommittee chairman Rep. Paul Kanjorski recently warned that unless “additional safeguards” are put in place, the growing securitization of life insurance settlements could lead to the next financial crisis. During a hearing on the issue, Kanjorski said regulators, Congress, and credit ratings agencies should have done a better job moderating the high demand for subprime mortgage backed securities. He says their failure to supervise contributed to the financial debacle.

Life settlements, also known as viaticals, are not securities, but they do fall under the purview of the Securities and Exchange Commission when they are pooled and put up for sale in the capital markets. They are, however, at this time not subject to a registration requirement and have been sold during private offerings. Because of this, the SEC only has limited authority over life settlements.

The agency has set up a task force to assess the issues involving life settlements. The task force will determine whether regulatory changes need to be made and if Congress should expand the SEC’s authority.

According to the SEC Division of Corporation’s associate director Paula Dubberly, life settlements investors need full disclosure so they can understand the risks that arise with the viaticals' securitization. The task force will examine the “tension” between the insured’s privacy rights and providing investors with this type of disclosure.

Credit Suisse's Life Finance Group global head Kurt Gearhart says that as only 35 states regulate life settlements, consumers are lacking protection in 15 states. National Association of Insurance Commissioners vice president Susan E. Voss, however, disagrees with Gearhart’s figures. He says there is some form of life settlement regulation in 45 states. Meantime, Life Partners Holdings Inc. chairman and chief executive officer Brian D. Pardo is calling for stronger federal regulation.

Related Web Resources:
AARP

Panel To Look At Life Settlement Securitization

Continue reading "Securitization of Life Insurance Settlements Might Lead to Next Financial Crisis, Say Lawmakers" »

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September 17, 2008

District Court Finds that Viatical Settlements are Securities In Michigan and Oklahoma

The US District Court for the Western District of Michigan says that under Oklahoma and Michigan laws, viatical settlements are securities. The court, however, did not rule on whether the instruments are securities under Texas law.

Investors in a number of states had sued Trade Partners Inc. and its affiliate partners for viatical settlements that were sold between 1996 and 2003. They wanted the courts to have the instruments declared securities under Texas, Oklahoma, and Michigan laws.

The court noted that earlier in the year, it found that under the Michigan Securities Act, the instruments were settlements under Michigan law. And, based on relevant information and the fact that in 2004, the Oklahoma Securities Act was amended and viaticals became included in the definition of what constituted an “investment contract” securities, the district court found that under the Oklahoma Securities Act, viatical settlements are securities.

The court pointed out, however, that the only Texas court that had considered the issue did not find that the instruments were securities under the Texas Securities Act. It also noted that the Texas Securities Board had told a defendant in a state criminal case that viaticals were securities. Because of these conflicting authorities, the district court opted not to determine whether, under the Texas Securities Act, viatical settlements are securities.

A viatical settlement is also called a life settlement. In this kind of transaction, a chronically ill or terminally ill person can sell his or her life insurance benefits to another party.

Oklahoma Uniform Securities Act of 2004

The Texas Securities Act

Michigan Legislature

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July 26, 2007

Viaticals: Ghoulish Wall Street Even Seeks to Profit on the Dying

What do Bear Stearns, Deutsche Bank, Lehman Brothers, Merrill Lynch, UBS, Wachovia and Wells Fargo and other big securities firms have in common? No conscience. For decades we have thought that Wall Street will do anything for money. Now we are sure.

Two years ago, about 250 people attended an event in New York to discuss yet another exotic product to come out of Wall Street. This spring, as the subprime mortgage market was crumbling, nearly 600 representatives of most largest players in the finance industry met to talk about the product, one they could sell investors which had enough pricing difficulty that large mark-ups could easily be generated. That product is “death bonds.”

In brightly lit rooms with a festive atmosphere, the wizards of Wall Street discussed how they could profit off diseased and dying folks who happen to have life insurance. Death bonds are securitized products which, instead of mortgages, are backed by life insurance policies.

Almost one-third of Americans own life insurance – guarantees to pay a total of trillions of dollars. Yet, many policy owners are unable to pay the premiums, often because they are ill and can’t work and/or have medical costs consuming their resources. While some of those insured simply decide they would rather have the money while alive, others desperately need "life settlements" to pay for medical needs or avoid bankruptcy.

Viaticals, as death bonds are often called, are the result of policies being sold to investors, who then keep up the premiums until the sellers die, then collect the payout. The quicker the death, the higher the profit. Viaticals have been around for years, but were handled mostly by smaller firms with rampant fraud surrounding the industry. Hedge funds then seized on the opportunity to profit. Now, Wall Street sees huge profits in selling bonds backed by such policies, since valuations are problematic, which affords CMO-like sales pitches and higher mark-ups than on generic debt instruments.

Like many mortgage backed securities, there is a guarantee these will pay someday, so long as the insurance company remains solvent, because everyone will die sooner or later. Lets just hope impatient hedge fund managers and other investors do not decide to hasten the process in order to increase their returns.

Shepherd Smith and Edwards represents investors nationwide in claims against those in the securities industry. We handled claims in all types of investments. If you are a victim of worngdoing and suffered losses in any type investment contact us to arrange a free consultation with one of our attorneys.

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Stock Broker Fraud Blog

Published by Houston Securities Fraud Lawyers Shepherd Smith Edwards & Kantas

Life Settlements or Viaticals should be Considered “Securities,” Recommends the SEC to Congress

New Braunfels Firm Accused of Texas Securities Fraud In Sales of Viatical (Insurance) Investments

Texas Securities Fraud: SEC Sues Two Individuals For Allegedly Running Multi-Million Dollar Scheme Involving Viaticals

SEC to Continue Fight Against Senior Investment Fraud in 2010

Securitization of Life Insurance Settlements Might Lead to Next Financial Crisis, Say Lawmakers

District Court Finds that Viatical Settlements are Securities In Michigan and Oklahoma

Viaticals: Ghoulish Wall Street Even Seeks to Profit on the Dying

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