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The Business Journal of Phoenix - April 7, 1997http://phoenix.bizjournals.com/phoenix/stories/1997/04/07/focus4.html

Friday, April 4, 1997

Gambling on terminally ill draws regulatorsThe Business Journal of Phoenix - by Sougata Mukherjee The Business Journal Washington Bureau

WASHINGTON -- An industry that spawns millions of dollars in settlement money by gambling on

terminally ill patients soon may face increased scrutiny from state insurance commissioners and

federal securities regulators.

Securities commissioners in at least three states -- Texas, Iowa and Arizona -- are looking closely at

Waco, Texas-based Life Partner's, and its relationships with licensees and investors. The licensees

work similar to sales agents who find terminally ill life-insurance policy holders interested in cashing

out on their insurance policy.

Life Parnters is a "viatical" settlement company. Such companies purchase life insurance policies held

by people with terminal illness. The company gives the policy holder a percentage of the insurance

policy in cash. In return, the policy holder names the company as the beneficiary. The company then

sells the policy to individual investors for a commission. In the past two years, the industry has

mushroomed to more than 60 companies nationwide, according to the industry's own association.

Fearing fraud and deception, state and federal regulators now are seeking tighter control of the

viatical settlement industry.

The Securities & Exchange Commission already has frozen the assets of a Florida viatical companythat allegedly was selling bogus policies to individuals. The company, Boca Raton, Fla.-based United

Benefits Group Inc., has since gone out of business.

The SEC also wants to determine whether the viaticals that are selling and buying products are

similar to investment contracts. But the agency let a major deadline pass recently when it decided not

to appeal a District of Columbia Circuit Court ruling that said one of the nation's largest viatical

settlement companies was not dealing with securities and, therefore, should not be regulated by the

SEC.

In the landmark SEC v. Life Partners case, the court ruled last year that Life Partners was not selling

investment contracts and therefore does not fall under the SEC's regulatory authority. The SECappealed, requesting the panel reconsider its decision. The court denied SEC's petition last December,

and the SEC had 90 days to petition the nation's highest court for review. That deadline passed March

20.

Senior SEC officials following the viatical industry said the agency could take up similar cases in

another state and get a favorable judgment. If two federal courts have contrasting judgments on the

same issue, the U.S. Supreme Court eventually could decide whether the viatical companies should

come under federal supervision.

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"The D.C. court ruling should be enough for the SEC to withdraw its case," said Thomas Kirby, lead

counsel for Waco, Texas-based Life Partners. "The ruling still leaves enough room for the SEC to go

after rogue businesses and companies who are not playing by the rules."

But the SEC isn't the only problem for the viatical industry's big player.

Some industry critics predict the viatical settlement companies could face more angry investors in the

coming months because the return on investment on these policies is becoming smaller and smaller.

Terminally ill patients are living longer, especially AIDS patients who are being helped by new drugs.That's cutting into the potential profit for investors, who have to continue to pay premiums on the

insurance policy.

As for the SEC trying to bring the viatical industry under its wing of supervision, Kirby said, "This

(viatical) business can't sustain the expense and delay involved in complying with federal securities

law."

"Everybody is now focused on whether the SEC will file similar complaints in other jurisdictions and

try to get an opposite ruling," said Vanessa Sciarra, an attorney with Holland & Knight in Miami who

represents some viatical settlement companies. "This is really a big deal."

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