Lawmakers Probe Viatical Fraud

A growing number of Americans are being taken in by misleading offers of “guaranteed” returns on viatical settlements--a risky investment product that needs to be more tightly regulated, lawmakers were told Tuesday.

Viatical investments are life insurance policies sold to investors for a fraction of the death benefit. For example, a $100,000 policy may be sold for $70,000 to an investor, who can cash in the policy for its full value, less expenses, when the policyholder dies.

Viatical settlements were conceived in the ‘80s to provide cash to AIDS patients who had life insurance but no heirs. But the industry is now rife with fraud, said Rep. Sue W. Kelly, (R-N.Y.) chairwoman of the oversight and investigations subcommittee of the House Financial Services Committee.

Investors have lost more than $400 million to viatical frauds in the last three years, making it one of the largest and fastest growing financial crimes in the country, the North American Securities Administrators Assn. said.

Viatical settlements have been exempted from federal securities laws since 1996, when the Securities and Exchange Commission lost a suit against a Texas-based viatical company, which claimed viaticals weren’t securities.

Partly as a result, con artists have gravitated to the industry, Thomas E. Geyer, assistant director of the Ohio Department of Insurance, told the committee.

Last month, Ohio authorities charged 17 people with trying to defraud investors of $105 million in a scheme involving Liberte Capital Group, a Toledo viatical company that allegedly arranged for terminally ill people to conceal conditions such as AIDS when applying for insurance.

Ohio recently passed legislation to put viatical settlements under the purview of state securities regulators, who can require that the investments be sold by licensed individuals, be registered with state securities officials and that the risks of the investment be disclosed to investors, Geyer said.

Several other states also regulate viaticals under insurance or state securities rules. However, the rules vary greatly among states, and some states do not regulate viaticals at all, Kelly said.

That creates problems for both investors and policyholders who want to sell their life insurance policies into the secondary market, Stephen B. Mercer, a Washington attorney who volunteers at a legal clinic serving AIDS patients, told the committee.

“I see first-hand how persons living with the stress of a terminal or chronic health condition benefit from cashing out their policies, and I desperately want viatical settlements to continue to be a practical option for persons with HIV and AIDS,” Mercer testified. “At the same time ... as the market is currently structured, no one should be putting a dime into it.”

Not only is the industry prone to fraud, its structure encourages middlemen to charge large commissions and fees, he said. That discourages investors from buying viaticals, which hurts the policyholders, who get less from the sale of their life insurance.

The half-dozen people who testified Tuesday said the only way to resolve the industry’s woes was to create national legislation that would give the SEC and state regulators authority to oversee viaticals just like any other security sold to investors.

“The alleged fraud resulting in the Liberte Capital Group case and others like it around the country were not caused by anything inherently wrong in a viatical or life settlement transaction, but were caused by persons taking advantage of a perceived regulatory vacuum,” said David M. Lewis, president of the Life Settlement Institute, a trade group that represents life settlement companies.

House Banking Committee staffers said it was too soon to say whether the committee would propose such legislation.