March 8, 2002
A growing number of Americans are being taken in by misleading offers of "guaranteed" returns on viatical settlements -- an unregulated investment product based on the purchase of life insurance policies of terminally ill patients.
An investor may pay a terminally ill person $70,000 for a $100,000 policy. The investor receives the full payout when the original policyholder dies. However, the industry has become one that is prone to widespread fraud, according to witnesses before a House committee.
Developed in the 1980s as a way of providing cash to individuals with AIDS who had life insurance but no heirs, viatical settlements became one of the largest and fastest-growing financial crimes in the country, according to the North American Securities Administrator Association, with investors losing more than $400 million to fraud in the past three years. Viatical settlements are exempted from federal securities laws.
In testimony before the House Financial Services Committee, investors, associations and state regulators reported multiple problems with the industry. Stephen Mercer, a Washington attorney said "I see firsthand 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 living with HIV and AIDS." "At the same time as the market is currently structured, no one should be putting a dime into it," he said.
In January, 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 state securities regulators.
The half-dozen people who testified before the committee said the only way to resolve the industry's woes was to create national legislation that would give the Securities and Exchange Commission and state regulators authority to oversee viaticals just like any other security sold to investors.
House Banking Committee staffers said it was too soon to say whether the committee would propose such legislation.