The U.S. Securities and Exchange Commission scored a victory Friday in its attempts to regulate the viatical settlements industry.
Heavily marketed to Florida retirees, viatical settlement investments offer a way to earn double-digit returns by buying a life insurance policy at a discount from someone dying of AIDS, cancer or another disease. When the insured person dies, the investor collects.
Two brothers who control one of the largest viatical companies, Mutual Benefits Corp. of Fort Lauderdale, agreed Friday to pay $950,000 to settle charges of misrepresentation and sale of unregistered securities. The men neither admitted nor denied the allegations; their company was not charged.
The settlement does not set a precedent affecting the treatment of viaticals being sold today. However, it does indicate the SEC has not given up on its efforts to regulate viaticals in spite of an unfavorable appeals court ruling last year. The industry claims viaticals are insurance contracts rather than securities subject to SEC regulation.
The SEC accused Joel and Leslie Steinger of misrepresenting the $100-million in viaticals they sold to 1,190 investors between October 1994 and April 1996.
"There were numerous misrepresentations, like telling people their money was going to be kept safe in a special trust account, when in fact it was in Mutual Benefits' operating account and being used to pay commissions and expenses," said Christian Bartholomew, a senior SEC trial lawyer in Miami.
The brothers also did not disclose that funds were not being invested immediately, Bartholomew said. In addition, about $3-million of the policies they sold belonged to military veterans who at the time did not have the right to irrevocably assign a policy to someone else.
Mutual Benefits issued a news release saying the violations were "technical in nature and did not jeopardize investor funds." The company said that when it recognized the problem with the veterans' policies, it gave investors back their money.
"I think this case says pretty clearly that under appropriate facts and circumstances we will continue to pursue viatical settlement cases," Bartholomew said.
Viatical companies say SEC regulation would drive up costs.
"Companies may drop out of the business if forced to register, which will limit investors' access to the market and reduce prices obtained by the terminally ill," said Scott Page, president of the National Viatical Association.
_ Information from Bloomberg News was used in this report.