SEC v. Mutual Benefits Corp

408 F.3d 737 (11th Cir. 2005)

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Nature of the Case

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Facts

D is a viatical settlement provider. D purchases policies from individual insureds and typically sell fractionalized interests in these policies to investors. Between 1994 and 2004, over 29,000 investors nationwide invested over $1 billion in viatical settlements offered by D. D identifies terminally ill insureds, negotiates purchase prices, bids on policies, and obtained life expectancy evaluations. D also uses doctors to evaluate the health of an insured and produce a life-expectancy evaluation. D solicits funds from investors directly and through agents. Following the deposit of investor funds into escrow, D would pay premiums, monitor the health of the insured, collect the benefits upon death, and distribute the proceeds to investors. The promised rate of return was dependent upon the term of the investment, which in turn was determined by the life expectancy evaluation. The actual rate of return depended upon the date of the insured's death. If the insured lived beyond his life expectancy, the term of the investment was extended and the premiums had to be paid either from new investor funds assigned to other policies or by additional funds from the original investors. D told investors that the policy of a person with a life expectancy of 12 months would yield a 12% return, assuming the person died when expected. A person with a life expectancy of 72 months would yield a 72% return. D touted its expertise in evaluating life expectancy, and thus its ability to make the venture successful. Potential investors were told that D correctly estimated life expectancy 80% of the time. D made its profit by purchasing the interest in the life insurance policies and then marking them up to the investors. D was supposed to perform the life expectancy evaluation prior to closing on a settlement with an insured but commonly sent the information to the doctors after the closing. After closing D assumed certain responsibilities for paying premiums due. D held the policies in its 's name for the benefit of thousands of investors who purchased fractionalized interests. D also set up a multi-level system for payment of premiums. D would escrow sufficient funds to pay future premiums through the date of the estimated life expectancy of a given insured. D would also seek a premium waiver based on insured disability, if available. D would establish a reserve from interest on escrowed funds and unused premiums 'for payment of premiums on those policies with respect to which the insured outlives his/her projected life expectancy.' D also established a 'premium reserve to pay any unpaid premiums' if the reserve established by D and its trustee were exhausted. Lastly, the investor would be responsible for his pro rata share. D exercised discretion in the payment of premiums and commingled the funds earmarked for one policy to pay premiums on another. This totaled $4.52 million. As a result, no investor was ever asked to pay additional premiums, despite escrow deficiencies. P sought injunctive and other relief, alleging violations of various federal securities laws. P alleged that D falsely represented to investors that its life expectancy figures had been produced by independent physicians, that 65 % of its outstanding life insurance policies were sold to investors using fraudulent life expectancy figures, and that approximately 90% of its policies had already passed their assigned life expectancy. As a result of the failure of older policies to mature, shortfalls in escrowed premium funds forced D to establish a premium payment scheme similar to traditional 'Ponzi' schemes. The district court heard evidence on the issue of whether the activities of D were subject to federal securities laws. The court concluded that these viatical settlement contracts met the test established in Howey and qualified as 'investment contracts.' The district court certified its order for interlocutory appeal. D appealed. D contends that viatical settlement contracts are not 'investment contracts' because they depend entirely upon the mortality of the insured, rather than the post-purchase managerial or entrepreneurial efforts of the viatical settlement provider.