Scams Cash in by Selling Policies of the Dying : Securities: Firms allegedly ask people to speculate on the terminally ill--including AIDS victims--and their insurance coverage. The ‘ghoulish’ schemes are called illegal.

State regulators Wednesday cracked down on two “ghoulish” schemes promising big returns for buying the life insurance policies of terminally ill patients, warning that the AIDS crisis has spawned a new wave of scams.

Unlike legitimate firms that buy AIDS patients’ policies and provide badly needed cash for medical expenses, regulators said the two investment schemes used unsolicited, high-pressure come-ons to lure investors and were not properly registered.

The desperate needs of AIDS patients to pay for the soaring costs of care in their declining days are behind the scam, the North American Securities Administrators Assn. said.

“This is basically an early warning alert about another potential fraud on the investing public,” NASAA President Lewis Brothers said.

North Dakota securities regulators Wednesday stopped two firms--Panama City, Fla.-based National Insurance Marketing Inc. and Waco, Tex.-based Life Partners Inc.--from doing business in the state.

Three other states are investigating similar schemes whose promotional materials promise “big bucks” and a “return that is better than 20% annually” with little or no risk, the NASAA said.

The firms asked people to speculate on the terminally ill--including AIDS victims--and their insurance policies, North Dakota Securities Commissioner Glenn Pomeroy said.

They offered potential investors a “menu” of dying patients, complete with life expectancy data and medical history, he said.

Since the firms were not registered, regulators said, there was no way to verify the information they provided or even that the patients actually exist.

“This form of marketing is ghoulish, insensitive, possibly violative of confidentiality rights and flat-out illegal,” Pomeroy said. “They are selling securities, and they are not registered to do so.”

In addition, Life Partners President Brian Pardo already had a run-in with the Securities and Exchange Commission. Charged with securities fraud in 1989, he was permanently enjoined by the agency in 1991.

In legitimate “living benefit” plans offered by some insurance companies, terminally ill patients get all or part of the value of their benefits while alive. Some patients who do not have “living benefit” options sell their policies to legitimate brokerage firms at discounts of 33% or more and the firms become the beneficiaries.

The firms can profit on the difference between the discounted price they paid for the policy and the full value they receive when the patient dies.

These companies raise money through the stock market or by tapping big institutional investors for capital.

Patients obtain cash that can be used for treatment or other needs.

Despite the potential for fraud, Pomeroy said, it “may make very good sense” to allow terminally ill people to get their death benefits while they are still alive.

“It would be a shame if some quick-buck hustlers destroyed public confidence in this emerging ray of hope for some very sick people,” he said.