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`Death' investors at risk
Inconsistent oversight of viatical companies and uneven enforcement by Illinois regulators leave buyers--who purchase someone else's life insurance benefit for less than what it would someday pay--with scant protection
Desperate for help, a retiree from Orland Park wrote to the Illinois attorney general's office last year. He had invested $25,000 of his retirement savings in 1998 with a suburban company that projected he could earn 28 percent within two years through an unusual transaction.
He had put his money in viaticals--buying someone else's life insurance benefit for a fraction of what it would someday pay. When the policyholder dies, the investor collects all the money.
Six years after making the investment, the 69-year-old former salesman had yet to receive a penny. After the state shuffled the retiree's letter between offices, a terse response came from the Department of Insurance offering some advice: "If you want to pursue the matter further, we can only suggest you contact an attorney."
The letter was a pointed reminder that this corner of the financial world, though growing rapidly, remains largely unregulated. There is little state oversight, no government office to call for help, no regular monitoring of operations. In fact, Illinois law never addresses the rights of those who put their money into viaticals.
Viatical investors can make a nice profit, but too often the transactions are not so simple or lucrative, and the industry has been marred by more than 100 fraud investigations.
Although a few jurisdictions have moved aggressively to corral the industry, Illinois' oversight remains lax, the Tribune found after reviewing thousands of court files and analyzing regulatory actions around the nation.
In New York, for instance, state auditors fan across the country to review balance sheets of viatical companies. But Illinois conducts no regular on-site visits.
Florida has required the annual filing of comprehensive and detailed financial reports spanning dozens of pages. Illinois requires only vague and aggregate data, averaging fewer than four pages.
California requires sales brokers to register with the state in order to keep track of how viaticals are marketed. Illinois has no registry for brokers.
And companies shut down in other states have been welcomed by Illinois regulators. A suburban Chicago company, Robin Hood Group Inc., operates here despite findings in other states that its sales force engaged in improper sales or marketing practices.
Oversight in Illinois is inconsistent and enforcement uneven, in part because the state's Department of Insurance and Department of Securities approach viaticals in different ways.
"Our priority is to ensure that the policyholder is protected," said Deirdre Manna, acting director of the Illinois Department of Insurance. "That's our goal, and I think we've done a good job of making sure that that person is protected."
Illinois law requires that viatical providers obtain a license from the Department of Insurance. The department also approves the language used in viatical contracts with policyholders, and it requires an annual statement summarizing the provider's transactions during the previous year.
There is no licensing or training for brokers, the people who sometimes help policyholders sell their insurance benefits. Nor does Illinois mandate companies pay a minimum percentage of face value, a critical protection adopted by at least a dozen states, a Tribune review of state administrative codes shows.
The law also does not regulate viaticals as securities investments, though some in state government believe that is what they most resemble. In fact, the Department of Securities, which is part of the secretary of state's office, sporadically investigates viatical companies, but the legal precedent is an untested inter-pretation of the state's 1953 securities law.
In the end, that leaves investors with little protection or advice. Although the Department of Insurance's Web site has information for those contemplating selling their insurance benefits, there are no guidelines for those interested in buying such investments.
If a person invests in a stock, he or she can look in the newspaper every morning to track fluctuations in the market. Investing in someone else's life insurance benefits requires a higher level of trust. The viatical company promises to keep track of whether policyholders are alive by contacting them, typically with a phone call or postcard. It then updates investors every month or quarter with an update on the health of those whose benefits they've purchased.
Before buying someone's insurance benefits, the investor also must believe the accuracy of life-expectancy analysis done by doctors the viatical companies hire.
Ultimately, investors accept that they are not given the same level of information that accompanies more traditional deals. There is no prospectus, no quarterly or annual reports, no notice about management shake-ups--all the sorts of reports that companies whose stocks are publicly traded must file with the Securities and Exchange Commission.
"In a normal securities world, you have to disclose information about yourself that would influence an investor," said Tanya Solov, Illinois Securities Department director. But companies dealing in life insurance benefit investments routinely do not make such disclosures.
The state is ill-equipped to track viatical companies, even those it already has dealt with. That's why regulators were surprised to learn this year that an e-mail sales pitch was dispatched to brokers nationwide from Neuma Inc. Neuma, which is based in Lincolnwood, is buying the life insurance policy benefits of people 70 and older who have serious medical conditions. Those likely to die in eight years or less are preferred. All must own at least $250,000 in life insurance. Reflecting the industry trend, anyone with a terminal illness is accepted, but no AIDS or HIV patients. Illinois regulators were caught flat-footed, believing they had a deal four years ago with Neuma owner David- Irwin Binter that he was out of the business of buying life insurance policy benefits. That deal had been reached with AMG Inc., a sister company of Neuma.
Binter said he no longer deals with small investors. He said he still buys policies domestically, then bundles them into funds that will be sold to institutional investors overseas.
Though Binter acknowledges past missteps in dealing with state regulators, he believes the patchwork of laws is confusing and advocates federal standards for the industry.
"In the states' defense, they don't know what to do with us," he said. "We're like the bastard stepchildren. You want to follow the rules, but you can't get any answers."
In 1996, nearly a decade after viaticals were first sold in this country, Illinois passed its first law governing the industry. As originally envisioned, the bill would have been much tougher. According to a 1996 article in the Insurance Regulator, an industry publication, an early draft included a requirement that viatical agents and brokers have a life insurance license. The state also would have required firms to submit all advertising, marketing and contract forms for review. Ultimately, lawmakers were guided by a desire not to impose unneeded regulation on a relatively new industry, said William McAndrew, the Department of Insurance's legislative liaison at the time and now the deputy director.
Holes in the net
The current statute gives authority over the companies to the Department of Insurance. But, unlike in some states, Illinois law never addresses the investment side of the business. Stepping into that void, though with questionable legal precedence, is the Department of Securities.
But the two state offices do not coordinate their efforts to monitor the industry, and that leaves holes in the regulatory net.
Cambridge Management Group Ltd. slipped through one of those openings. The Department of Insurance's Manna expressed disbelief when told by the Tribune that her office in 2003 had granted a viatical license to a company whose officers included a former attorney who was disbarred for fraud and who had been convicted of involvement in a felony confidence game, court records show.
Howard Goldberg was listed as company president on the firm's application to run a viatical business.
However, in the annual corporation report all companies file with the secretary of state's office, Goldberg was listed as secretary. The president was W. Jason Mitan, the attorney who had been disbarred and run afoul of the law.
In an interview, Mitan said the company never purchased or resold any insurance benefits. He denied any involvement in the company and said he resigned from it in 2001. But the corporate report filed each year since, including one dated Jan. 14, lists him as president.
"I didn't apply for the viatical license. I didn't have anything to do with it," Mitan said. "I was a consultant for two weeks." Cambridge Management never filed the annual viatical company report required by the Department of Insurance, nor did it request a license renewal this year.
Mitan's legal problems could have been a barrier to the company being licensed, but the Department of Insurance was unaware of his connection to Cambridge.
Manna, who was named acting director of the Department of Insurance this year, said she is troubled by Cambridge's ability to secure a license without questions being asked.
"We'll look into that one," she said.
The tale of Robin Hood
Robin Hood Group is one of the smallest viatical companies in Illinois. It moved here from Florida after regulators there ordered Robin Hood shuttered last year for operating without a state license.
Company founder Jeannie Cook stands sentinel over her small empire from two personal computers perched on her Lake Zurich dining table. Robin Hood Group manages just 300 policies. Cook said "99.9 percent" of investors are located overseas, primarily in Asia.
Robin Hood's promotional material is peppered with quotations from scripture and other religious overtones.
"Robin Hood Group is owned and operated by active Christian people. We seek to apply the Biblical principles of honesty, integrity, and superior service to everyday business processes with all people," the company's Web site says.
The company or its predecessor, Robin Hood International, has been named in cease-and-desist orders in Florida, Ohio and Washington.
The most egregious case was last fall in Washington, where mostly elderly homeowners were targeted by newspaper and magazine ads offering safe and secure investments.
Cook said Washington investigators asked Robin Hood International for an ex-planation. "We answered their questions, and haven't heard from them in months," she said.
Washington investigators concluded that full and honest disclosure was not made in some cases, except in the fine print of a complex, multipage Robin Hood contract.
Despite brushes with regulators, Cook said all her investors collect their money--eventually.
Meantime, she and her daughters will be scouring the nation for people looking to cash out their life insurance, then brokering those policies overseas to eager investors.
"This is America," she said. "This is free enterprise."
The Illinois Department of Insurance has acted against companies on occasion. In 1998, Chicago-based Viaticus Inc., which was part of CNA Corp., was fined $25,000 after the company mailed sales material on Illinois General Assembly letterhead to state employees' homes.
More recently, Illinois regulators refused license renewals to two companies. In both instances, the moves came after authorities in other states shut down the companies' headquarters.
The license of Future First Financial Group, a Florida company, was revoked there after the insurance department found its owners' conduct "untrustworthy and demonstrated incompetence." The courts took control of its operation.
Officers of Kelco Inc., a Kentucky-based company, were convicted of fraud and money laundering in March 2003. Nine days before their convictions, Kelco applied for a license renewal in Illinois. The state refused, noting that the company's actions had proven it "untrustworthy and fraudulent."
However, in some instances, companies that faced legal problems in other states have been allowed to obtain licenses and conduct business in Illinois.
Like Robin Hood, Resource Funding Group Inc. of Rome, Ga., was ordered to stop doing business in Florida by insurance regulators there because it didn't have a license.
Florida insurance commissioner Kevin McCarty called Robin Hood and Resource Funding potential dangers to the people in his state.
"Since they do not go through any background check, there is no way to know if the public is dealing with people who are trustworthy and competent," he said.
When Binter ran afoul of Illinois regulators, it was because the Securities Department was on his trail.
Department officials acknowledge that they usually act only when there is a complaint, and that they are invoking a securities law that was written a half-century ago, long before the concept of selling insurance benefits was developed. In 1999, the state notified Binter that his company, AMG Inc., might be selling unregistered securities. A hearing was set to determine whether he should be ordered to cease operations.
Binter fought back. The sale of insurance policy benefits involves investment contracts, but that alone does not make them securities, Binter's attorneys argued. The two sides traded legal arguments in Cook County Circuit Court before a compromise was reached.
Binter promised that AMG would alert Illinois if and when he began buying policies again, but only if such transactions might be violating Illinois securities law. Binter argues that his present way of doing business isn't violating that law, so he didn't need to contact the state when he began buying insurance policies again this year
A former trader at the Chicago Board Options Exchange, Binter has had several run-ins with state regulators since entering the viatical business in 1991. Florida denied him a license in 2002, after determining that Binter's Neuma had made "material misrepresentations and omissions" in an earlier application filed with the state. Securities regulators in Kansas and Alabama, as well as Illinois, had questioned the sales of viatical contracts in their states by Binter's companies, but he did not report that to Florida.
Neuma affiliate AMG also advertised on its Web site that contingency insurance through Lloyd's of London provided backup coverage on the investments, when no such agreement existed, Florida regulators said.
Binter acknowledges those mistakes and said he attempted to correct them in a subsequent application for a Florida license that was denied. Now, he does not want a Florida license. Nor, he said, does he need one. The field is going to grow, Binter predicted, because companies have realized they can seek investors internationally without having to contend with a smorgasbord of state rules and regulations.
But while Binter has moved on to a new business model, leaving behind small-time investors in the U.S., some of the people who bought viaticals from him are still waiting for a payoff.
In 1998, Peter Hoogland, a retired Chicago police officer, was looking to invest the $40,000 insurance payout he received after his wife died. He chose to place it into five viatical policies available through Binter.
The medical reports of the people he invested in led Hoogland to believe they would not live for much more than two more years. One was expected to die within nine months, according to the reports Hoogland says he viewed. In the six years since, Hoogland, now 70, has received no return on his money.
In that time Hoogland has come to describe his investment in a lot of ways--"dumb," "a killer," "something not right."
The 14-page contract Hoogland signed carried warnings that people sometimes do not die in the time predicted, and that the money invested in a viatical is "tied up" until the insured dies. That warning was on page 9, in the 18th paragraph.
The items that caught Hoogland's attention were in the first four pages of the contract, which was more marketing that legal warnings. It defined viaticals, explained the process and included a page for the "Returns and Accuracy Record."
That accuracy record boasted an 81 percent rate at correctly projecting life expectancies and promised returns such as 28 percent on policies when the insured died within the expected two year time frame.
Hoogland also had a trusted adviser next to him, a friend for several decades who also was his insurance agent. He assured Hoogland that the investment was a good one.
It is the insurance agent who investors ought to be complaining about, not him, Binter said when asked about Hoogland and other disgruntled investors.
Binter said he was not there when investors sat down with their insurance agent. "I don't know what [he] explained to them," Binter said.
In the years six years since he invested, the only correspondence Hoogland says he has received from Binter's businesses are notices that the people whose policies he bought are still living. As often happens in the viatical industry, the investor eventually has to take over the policy premium if the death does not occur quickly.
Hoogland and other investors learned that the money set aside by Binter to pay premiums has run out.
"All together, they've asked for about $500," Hoogland said. "I've paid $250. They've wanted more, but I sent them a letter telling them I don't think it's right."
CORRECTIONS AND CLARIFICATIONS. In a Page 1 article July 5 on the viatical industry, it was stated that Robin Hood Group, one of the smallest viatical companies in Illinois, or its predecessor, Robin Hood International, "has been named in cease-and-desist orders in Florida, Ohio and Washington." That is true in the cases of Florida and Ohio. In Washington, the state has issued a "notice of intention to enter an order to cease and desist" and has concluded a consent agreement with one of Robin Hood's sales agents requiring him to cease violating the anti-fraud section of the state's securities act. Final action against Robin Hood itself is still pending.
Copyright 2004 Chicago Tribune Company