State Securities Regulators Continue to See Fraud and Abuse in the Life Settlement Market

WASHINGTON, D.C. (April 29, 2009)—State securities regulators continue to see problems of fraud and abuse in the growing life settlement industry and outlined for Congress the need for strong regulation of these financial products by appropriate regulatory authorities.

“Although life settlements may serve a useful purpose by enhancing the value and liquidity of life insurance policies, they also pose significant risks to policyholders and to investors,” North American Securities Administrators Association President and Colorado Securities Commissioner Fred Joseph told the U.S. Senate Special Committee on Aging in a hearing exploring the life settlement industry and its impact on seniors.

“Thousands of investors, many of them senior citizens, have been victimized through fraud and abuse in the sale of viaticals and life settlements,” Joseph testified. “Notwithstanding substantial successes by securities regulators in their enforcement actions, and higher standards among some industry participants, abuses continue and diligent oversight of these products remains necessary.”

Citing deceptive marketing practices and numerous instances of fraud, NASAA first raised awareness of problems in the viaticals industry in 2002. In addition to classic Ponzi schemes, Joseph said, promoters have used fraudulent life expectancy evaluations prepared by captive physicians, inadequate premium reserves and false promises of large profits with minimal risk. “In short, while viatical transactions have helped some people obtain funds needed for medical expenses and other purposes, those benefits have come at a high price for investors, many of them senior citizens,” he said.

To address these problems, state securities regulators and the SEC fought to regulate viatical and life settlement investments under the securities laws, which require sales agents to be screened, tested, and licensed. Promoters must register their offerings with securities regulators and make detailed disclosures to investors. The securities laws also impose strong antifraud standards.

“Using these laws, securities regulators have significantly reduced the incidence of fraud in the viatical market, but our members continue to see evidence of the ‘scam artists’ that once characterized the entire industry,” Joseph said.

For example, in May 2007, the Colorado Division of Securities filed an enforcement action against Life Partners, alleging that from 2004 to 2007, the firm’s unregistered agents sold unregistered viatical settlement investments to at least 110 Colorado investors, netting more than $11 million while marketing the investments using fraudulent misrepresentations and omissions about the risks, costs and returns associated with viaticals. Life Partners subsequently stipulated to a permanent injunction and agreed to make a rescission offer to all Colorado investors. State securities regulators in Texas and Idaho have recently filed similar enforcement actions against other firms.

Viatical settlements emerged in the early 1990s in response to the AIDS crisis to create opportunities for terminally ill patients to receive money by selling their life insurance death benefits for much more than the cash surrender value available from insurance companies. Interests in the settled insurance policies are then sold to investors, with the promise of returns to be paid upon the death of the insured. As the market has expanded, viatical settlement providers turned to new classes of viators, those selling their life insurance policies, including the elderly and the chronically ill.

Joseph told the panel that effective regulation of life settlements requires a joint effort by securities and insurance regulators. “Life settlements are complex financial arrangements, involving both securities and insurance transactions,” he said. “Consequently, regulating them effectively requires a joint effort by securities and insurance regulators, each applying their laws and expertise to different aspects of the product.”

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

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