    [House Hearing, 107 Congress]
    [From the U.S. Government Publishing Office]

           RETIREMENT PROTECTION: FIGHTING FRAUD IN THE SALE OF DEATH

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                          OVERSIGHT AND INVESTIGATIONS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 26, 2002

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 107-55

                            U.S. GOVERNMENT PRINTING OFFICE
    78-132                          WASHINGTON : 2002
    _____________________________________________________________________________
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
    MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
        Chair                            PAUL E. KANJORSKI, Pennsylvania
    DOUG BEREUTER, Nebraska              MAXINE WATERS, California
    RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
    SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
    MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
    PETER T. KING, New York              MELVIN L. WATT, North Carolina
    EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
    FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
    ROBERT W. NEY, Texas                 JAMES H. MALONEY, Connecticut
    BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
    SUE W. KELLY, New York               JULIA CARSON, Indiana
    RON PAUL, Texas                      BRAD SHERMAN, California
    PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
    CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
    DAVE WELDON, Florida                 BARBARA LEE, California
    JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
    BOB RILEY, Alabama                   JAY INSLEE, Washington
    STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
    DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
    WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
    DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
    JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
    MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
    PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
    CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
    JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
    VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
    GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
    ERIC CANTOR, Virginia                STEVE ISRAEL, New York
    FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
    MELISSA A. HART, Pennsylvania
    SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
    MIKE FERGUSON, New Jersey
    MIKE ROGERS, Michigan
    PATRICK J. TIBERI, Ohio

                 Terry Haines, Chief Counsel and Staff Director
                                     ------

                  Subcommittee on Oversight and Investigations

                         SUE W. KELLY, New York, Chair

    RON PAUL, Ohio, Vice Chairman        LUIS V. GUTIERREZ, Illinois
    PETER T. KING, New York              KEN BENTSEN, Texas
    ROBERT W. NEY, Texas                 JAY INSLEE, Washington
    CHRISTOPHER COX, California          JANICE D. SCHAKOWSKY, Illinois
    DAVE WELDON, Florida                 DENNIS MOORE, Kansas
    WALTER B. JONES, North Carolina      MICHAEL CAPUANO, Massachusetts
    JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
    VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
    ERIC CANTOR, Virginia                WILLIAM LACY CLAY, Missouri
    PATRICK J. TIBERI, Ohio
                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 26, 2002............................................     1
    Appendix:
        February 26, 2002............................................    25

                                   WITNESSES
                           Tuesday, February 26, 2002

    Beriault, Greg, Postal Inspector, Fraud Team Leader, U.S. Postal
      Inspection Service, Indianapolis, IN...........................     8
    Covington, Hon. J. Lee II, Director, Ohio Department of Insurance     6
    Geyer, Thomas E., Assistant Director, Ohio Department of Commerce    15
    Lazar, John W., class representative in lawsuit against Liberte
      Capital Corp., Clinton Township, MI............................    11
    Lewis, David M. Esq., President, Life Settlement Institute.......    13
    Mercer, Stephen B., Esq., Attorney, Sandler & Mercer, PC,
      Rockville, MD; publisher ``AIDS Practice Manual''; co-author,
      ``Viatical Settlements,'' 1996 to 2000.........................    10

                                    APPENDIX

    Prepared statements:
        Kelly, Hon. Sue W............................................    26
        Oxley, Hon. Michael G........................................    28
        Gutierrez, Hon. Luis V.......................................    30
        Jones Tubbs, Hon. Stephanie..................................    32
        Rogers, Hon. Mike............................................    33
        Beriault, Greg...............................................    34
        Covington, Hon. J. Lee II....................................    46
        Geyer, Thomas E..............................................    57
        Lazar, Wayne.................................................    63
        Lewis, David M...............................................    65
        Mercer, Stephen B., Esq......................................    71

                  Additional Material Submitted for the Record

    Kelly, Hon. Sue W.:
        State Viatical Laws Chart....................................    80
    Gutierrez, Hon. Luis V.:
        Written questions for Lee Covington, David M. Lewis and Steve
          Mercer.....................................................    81
    Lazar, Wayne:
        Andrew C. Storar Esq. and Gerald R. Kowalski Esq., statements
          for the record.............................................    96
        ``Liberte Losses Hit Small City Hard,'' Toledo Blade,
          February 24, 2002..........................................    82
        List of constituents and amount of money lost................    85
        Letters from concerned citizens..............................    87
    Mercer, Stephen B., Esq.:
        Aids Advocacy, District of Columbia Bar Association..........    99
    NAIC's Compendium of State Laws on Insurance Topics..............   107
    State Securities Administrators' Regulatory Positions on Viatical
      Investments....................................................   112
    Wolk, Gloria Grening, prepared statement.........................   114

           RETIREMENT PROTECTION: FIGHTING FRAUD IN THE SALE OF DEATH

                                  ----------

                           TUESDAY, FEBRUARY 26, 2002

                 U.S. House of Representatives,
          Subcommittee on Oversight and Investigations,
                               Committee on Financial Services,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 2:00 p.m., in
    room 2220, Cannon House Office Building, Hon. Sue W. Kelly,
    [chairwoman of the subcommittee], presiding.
        Present: Chairwoman Kelly; Representatives Cantor, Ney,
    Tiberi, Gutierrez, and S. Jones.
        Chairwoman Kelly. Good afternoon. This hearing of the
    Subcommittee on Oversight and Investigations will come to
    order. I want to thank all Members of Congress who are present
    today, and there are some coming.
        Without objection, all Members present will participate
    fully in the hearing, and all opening statements and questions
    will be made part of the official hearing record.
        Today, we will examine a sector of the financial services
    industry that attempts to assist the elderly and terminally ill
    in meeting their financial obligations. Viatical settlements
    involve buying life insurance policies from elderly or
    terminally ill individuals at a discount, then marketing the
    policies as investments.
        In a proper transaction, the policyholder assigns the
    policy to a viatical settlement company for a percentage of the
    policy's face value. The settlement company then sells the
    policy to a third-party investor. The settlement company or the
    investor becomes the beneficiary to the policy, pays the
    premiums, and collects the face value of the policy after the
    original policyholder dies.
        This industry began, in large measure, as a noble means for
    allowing AIDS patients to pay the costs of their steep medical
    bills before death. Unfortunately, bad actors have taken
    advantage of a situation to create or buy phony policies and
    then fraudulently bilk investors who expect a healthy return.
    When you look at the viatical settlement industry, you see that
    viaticals start out as insurance policies, but end up as
    securities sold as investments.
        We have reviewed the status of viaticals' regulation by the
    States and--we have to turn that chart over--we have a chart
    here that you will see on that stand--and we have found that
    some States treat viaticals as securities or as insurance, and
    some States treat it as both, and some States don't regulate it
    at all.
        One case that illustrates the potential for both insurance
    and securities fraud is the Liberte Capital case in Ohio. Last
    month, 17 people associated with a viatical settlement company,
    Liberte Capital Group, were indicted on 160 counts of fraud,
    money laundering, and other illegal acts. The defendants
    allegedly bought insurance policies that were actually invalid
    because of hidden medical conditions, then sold them to
    investors. When the insurance companies that originally wrote
    the policies found out about the medical problems, they
    canceled the policies, leaving the investors holding worthless
    paper.
        Prosecutors say the investors lost nearly $105 million
    between 1996 and 2000. On top of that, Liberte Capital's
    accountant allegedly embezzled millions from the firm's escrow
    account that should have been used to pay premiums and the
    investors.
        In Texas alone, State authorities have obtained criminal
    convictions in 13 separate multimillion-dollar viatical cases
    since 2000, and just yesterday, the SEC announced that it has
    filed a lawsuit in Texas against a new scam that defrauded more
    than 480 elderly investors out of over $30 million.
        There are important questions for the Financial Services
    Committee to consider about viaticals:
        Is there sufficient coordination between insurance
    regulators, securities regulators, and law enforcement
    officials to ensure that viatical fraud can be prosecuted, and,
    better yet, prevented?
        Is there consistent regulatory treatment of viaticals by
    States, or should this subcommittee consider mandating some
    uniformity in treatment?
        In this regard, I, in particular, and we as a subcommittee
    want to thank our colleague, Representative Mike Rogers from
    Michigan, who was instrumental in drafting H.R. 1408, the
    Financial Services Antifraud Act, to enable law enforcement to
    share critical information. The bill easily passed the House
    last year, but unfortunately, remains stuck in the Senate.
        Representative Rogers planned to be here, but he is stuck
    in a snowstorm in Detroit.
        Ohio is showing the way for other States grappling with
    viatical fraud. It recently passed a comprehensive law that
    addresses both the insurance and the securities aspects of a
    viatical settlement. Our witnesses today can discuss the impact
    of that law and the Liberte case, the extent of fraud in the
    industry and the implications for the future regulation of
    viatical settlements. We will hear from senior officials from
    the State of Ohio, a criminal investigator involved in the
    case, two attorneys with experience and expertise in this area,
    and an industry representative with experience in securities
    litigation. We will thank them for their attendance and we do
    look forward to their testimony.
        I would like to inform the Members who are here that it is
    my intention to enforce the rule that limits statements and
    questions to 5 minutes each. And I would appreciate their
    cooperation in this.
        And I turn now--Mr. Gutierrez is not here, but since I have
    spoken, I am going to turn to Ms. Jones, who was the first to
    arrive from the Democratic side.
        [The prepared statement of Hon. Sue W. Kelly can be found
    on page 26 in the appendix.]
        Mrs. Jones.
        Mrs. Jones. There is something about being on time; I get
    to be Ranking, with not much seniority.
        Good afternoon to Chairwoman Kelly, Ranking Members, in
    absentia, other Members of the Oversight subcommittee. I seek
    unanimous consent that my statement be included in the record.
        We are here to hear from various witnesses this afternoon
    concerning retirement protection as well as fighting fraud. We
    have heard horror stories of Georgia dealing with crematories,
    and now we read about investment fraud with the viatical
    settlement. It is appropriate for this subcommittee to take up
    this matter and seek solutions that will prevent injury to
    consumers, investors, insurance companies, and families who
    face trying times with terminally ill family members.
        I would like to, since I am from the State of Ohio, welcome
    our first witness, J. Lee Covington, the Director of the Ohio
    Department of Insurance. I am pleased that he is here to
    present regulations passed by the Ohio legislature to provide
    greater protection and regulation in this area.
        And to our other distinguished panelists, even though you
    are not Buckeyes, we are glad to have you here to testify.
        Retirement protection, as we have seen with the declining
    economy, as well as with the Enron case, is critical and has
    received heightened review. One area of retirement protection
    that has received tremendous attention is the viatical
    settlements. This industry has grown tremendously since 1990.
        And I will just enter the rest of my statement for the
    record. I am just pleased to have an opportunity to be here,
    Madam Chairwoman, and would like to say to the members of the
    panel and my colleagues, I am scheduled to be on a panel at
    American University this afternoon with some law students over
    there, so I will be leaving early, but it does not diminish my
    interest in this area.
        I also for the record, Madam Chairwoman, would like to put
    into the record a question that I would hope that members of
    this panel will address, and that is the question as to who, in
    fact, owns the insurance policy once it is sold? Is the
    insurance policy owned by the individual who actually purchased
    that policy or is it owned by those who subsequently have an
    opportunity to, for lack of a better term, ``negotiate'' the
    policy?
        I would hope that as we go through this process, we will
    attempt to address that issue in our discussions, and I would
    hope that members of the panel would address that issue as
    well.
        Again, Mr. Covington, welcome to Washington, DC. And if I
    have any time left, I yield the balance of my time.
        Chairwoman Kelly. Thank you, Mrs. Jones. And with the
    unanimous consent of the subcommittee, we will insert that
    question in the record, and if we do not have time to verbally
    get a response, we will ask for a written response.
        I would like to now go to Mr. Tiberi, who actually is the
    man who represents, I understand, Mr. Covington and Mr. Geyer,
    and perhaps you would like to introduce these people, Mr.
    Tiberi.
        Mr. Tiberi. Well, I will allow my colleague from Ohio, who
    is a former Chairman of the Insurance Committee, to introduce
    one of the members. But it is great that you are having this
    hearing today, Madam Chairwoman. I am pleased that my plane was
    not canceled in Columbus, the snow was starting there, but it
    is great to have the panelists here.
        And I have got to tell you, Madam Chairwoman, the
    subcommittee is in store for, at least from two members, some
    outstanding testimony. I had the privilege to work with both
    Mr. Geyer and Mr. Covington when I was in the legislature. I
    think you will find them both to be pros, not taking anything
    away from the other members of the panel.
        This is an important issue. Ohio has dealt with it in a
    strong, bipartisan way. And I think they have provided the
    leadership for other States as well.
        With that, I know Mr. Ney has an opening statement, So I
    will allow him, if I could, to have the balance of my time.
        Chairwoman Kelly. By all means. I understand that Mr.
    Gutierrez and I are surrounded by Ohioans, so we will let you
    all speak.
        Mr. Ney. Thank you. I wasn't stuck in the snow either. As
    you can tell, I was a little bit south, more toward San Juan,
    Puerto Rico, and so I got a little bit of sun. But I am back,
    and I just wanted to take a second to actually commend both
    gentlemen, the entire panel, but obviously, Commissioner Lee
    Covington and Securities Commissioner Tom Geyer. They are both
    part of a superb regulatory team. I think the State of Ohio--I
    chaired the Insurance Committee in the Senate. We had great
    leaders there, too, as part of our regulatory team that has
    continued to this day.
        So I just, Madam Chairwoman, want to say that I think we
    are one of the better regulated States in the Nation when it
    comes to financial services, providing the people of Ohio with
    stable and tenable financial markets. And also Lee Covington
    and Tom Geyer are both nationally recognized as being in the
    forefront of their fields. The case of Liberte Capital and
    their working in uncovering the rampant fraud in that company
    is a perfect example of their hard work, skill, and dedication.
        So, I am happy to be able to commend both of you and
    introduce you.
        Mrs. Jones. Mr. Ney, would you yield just a moment for me,
    please?
        Mr. Ney. Yes, ma'am.
        Mrs. Jones. Mr. Geyer, please forgive me. I did not want to
    not recognize you. You didn't come see me. No, I am kidding.
    All joking aside, I just to want to welcome you as well. I
    apologize.
        Thank you.
        Chairwoman Kelly. Thank you.
        Mr. Tiberi, do you have an opening statement?
        Mr. Tiberi. No, I will go ahead and introduce two of the
    guests whenever you would like.
        Chairwoman Kelly. By all means. Let me let you do that,
    because then I will go to Mr. Gutierrez for his opening
    statement.
        Mr. Tiberi Just briefly introducing the two Ohioans, Madam
    Chairwoman. Mr. Covington, as you have already heard, is the
    Director of Insurance in the State of Ohio, having been
    appointed by Governor Bob Taft in March of 1999. In his first 2
    years, Director Covington has worked to reorganize the
    Department and retool it, retool the financial regulations of
    the Ohio Department of Insurance, after receiving some of the
    highest scores at the National Association of Insurance
    Commissioners accreditation review team in 2001.
        He is considered one of the best in the country at what he
    does. He worked to pass the governor's patient protection bill
    and initiated a comprehensive health insurance prompt pay
    review to improve the speed at which consumers and providers
    receive health insurance payments.
        Director Covington has been recognized nationally for his
    efforts in insurance regulation and featured regionally for his
    work to modernize insurance regulation in Ohio and across the
    country. And he lives in the congressional district that I
    represent. Thank you for being here today, Director Covington.
        Assistant Director Geyer, prior to his appointment to the
    Department of Commerce as the Assistant Director, served as
    commissioner for the Ohio Division of Securities from 1996 to
    2000, partly under former Governor Voinovich and now under
    Governor Taft. He received his Bachelor's degree from the
    University of Notre Dame and his law degree from the Ohio State
    University. He also serves as a Professor at Capital Law
    University in Columbus, Ohio.
        Thank you, Madam Chairwoman.
        Chairwoman Kelly. Thank you very much.
        Mr. Gutierrez.
        Mr. Gutierrez. I would like to submit my opening statement
    for the record so that we can proceed directly to the testimony
    of the witnesses.
        [The prepared statement of Hon. Luis V. Guiterrez can be
    found on page 30 in the appendix.]
        Chairwoman Kelly. Thank you very much.
        Mr. Cantor, have you an opening statement?
        Mr. Cantor. Madam Chairwoman, not at this time.
        Chairwoman Kelly. Thank you very much. If there are no more
    opening statements, then I would like to just quickly introduce
    the rest of the members of the panel. We have heard that Mr.
    Covington is the Director of the Ohio Department of Insurance
    and one of the Nation's leading insurance experts who has
    testified often before the subcommittee.
        Next we have Mr. Greg Beriault, Fraud Team Leader from the
    Indianapolis field office of the U.S. Postal Inspection
    Service, who had a major role in the Liberte Capital case.
        And Steven Mercer comes next. He is from the local law firm
    of Sandler & Mercer, an expert and author of a handbook used by
    the DC Bar.
        And following him we have Mr. John W. Lazar, the Class
    Representative in the class action suit against Liberte
    Capital. And we understand that his attorney, Gerald Kowalski,
    is here with him today.
        And David Lewis follows him, General Counsel of Stonestreet
    Financial, another expert speaking on behalf of the life
    settlement industry.
        Following him will be Thomas Geyer, the Assistant Director
    of Commerce for the State of Ohio, former Commissioner of
    Securities, and another national leader in his field.
        We thank all of you for joining us here today, and we
    appreciate the fact you are willing to share your thoughts and
    expertise with this subcommittee.
        Without objection, your written statements and any
    attachments will be made part of the record. You will each now
    be recognized for a 5-minute summary of your testimony. There
    are lights in front of you, right here, that will indicate how
    much time you have. The green light signifies you are in the
    first 4 minutes of your summary, the yellow light will turn
    when you have 1 minute remaining, and the red light will turn
    when your time has expired. I would appreciate your trying to
    keep track of the time so that we can fit all of the Members'
    questions in as well. And, Members, I would remind you that I
    will also hold your questioning periods to the 5-minute rule.
        We begin with Mr. Covington.

         STATEMENT OF HON. J. LEE COVINGTON II, DIRECTOR, OHIO
                        DEPARTMENT OF INSURANCE

        Mr. Covington. Madam Chairwoman, Members of the
    subcommittee, thank you very much for the opportunity to be
    here today to address the problem of viatical fraud and the
    steps that I have taken to combat this type of insurance fraud
    in the State of Ohio.
        I commend the Chair and the subcommittee for your interest
    in this important issue. I thank the subcommittee and the House
    of Representatives for its favorable action on Chairman Oxley's
    Financial Services Antifraud Network Act of 2001.
        Because the Chair has done such an excellent job of
    describing how viaticals work, I will not provide another
    explanation, but will reserve that to questions. I will note
    there is a very good chart in the back of my formal testimony.
    I may help you walk through that, because it is somewhat
    complex.
        I will highlight again that the social benefit of viaticals
    may be extremely valuable for some terminally ill persons and
    senior citizens. The money obtained through those transactions
    can be used for anything from experimental medical treatments
    not covered by insurance to paying off accumulated bills.
        Unfortunately, fraud jeopardizes the very existence of this
    industry. In the largest fraud investigation ever undertaken in
    the history of the Ohio Department of Insurance, we uncovered a
    scheme that defrauded over 3,000 victims of more than $100
    million. Our joint investigation with several Federal agencies,
    including the United States Postal Service, resulted in the
    indictment of 15 individuals who fraudulently obtained multiple
    life insurance policies, and the indictment of the owner of
    Liberte Capital Group, a Toledo area viatical settlement
    company.
        In this case, viators fraudulently obtained insurance
    policies by lying about their bad health conditions or
    conspiring to have other persons take required blood tests and/
    or physicals.
        Because of this investigation, 85 insurance companies were
    able to rescind most of the fraudulent policies, saving the
    companies more than $25 million. The victims of this fraud are
    both investors and insurance companies and these companies'
    legitimate customers who end up paying more through higher
    insurance premiums.
        In addition to our aggressive antifraud criminal
    investigation efforts, the Ohio Department of Insurance has
    been active on the legislative front as well, developing and
    working on a new law to prevent this type of fraud.
        In January of 2001, Ohio passed legislation based on the
    model developed by and adopted by the National Association of
    Insurance Commissioners in March of 2001, and I am proud to
    report that Ohio was the first State to adopt this model. This
    new law creates criminal penalties and gives the department the
    authority to request an injunction ordering the immediate
    termination of any potentially harmful activities during an
    investigation which can prevent or limit the scope of damages
    and the number of victims.
        It prohibits viatical settlements within 2 years of issuing
    a life insurance policy unless the individual meets one of four
    legitimate exceptions.
        Third, it requires a notice to the insurer of any viatical
    settlement which allows an insurance company to examine the
    policy for potential fraud and, if present, to rescind the
    policy very early on in the process.
        And fourth, it clarifies that viatical settlement
    transactions are securities under Ohio law and are subject to
    all regulations associated with securities.
        Although I have focused on Ohio's activities and
    accomplishments, I know this is a high priority for other
    States. At least 12 other States have or have pending bills and
    regulations to update their laws by adopting the 2001 NAIC
    model. A majority of States, 29, have similar laws and are
    expected to determine if they need to revise their current laws
    to provide additional protections against insurance fraud.
        State insurance regulators, through the NAIC, also acted
    previously to protect terminally ill through consumer
    protections, including model laws adopted in 1993 and 1998.
    Unfortunately, until 1999, when John Hancock Insurance Company
    took the first court action to rescind fraudulent policies, no
    one ever knew that these transactions would be adulterated by
    the acts of criminals ready to perpetrate fraud. In a little
    over a year, the NAIC took action and the Ohio Department took
    action to put in place protections for this type of fraud.
        Congress can help State regulators in our effort to combat
    insurance fraud, and the House of Representatives has already
    done so by passing Chairman Oxley's Financial Services
    Antifraud Network Act of 2001. This bill is a giant step
    forward, and I strongly support immediate action in the U.S.
    Senate to pass this legislation.
        This legislation will be extremely beneficial, because it
    provides State regulators access to an existing network of
    criminal and administrative databases, including the Federal
    Bureau of Investigation's Antifraud database, and the actions
    that you referenced, Madam Chairwoman, that individual in Texas
    who had been previously barred by the SEC, and this will allow
    us to share information and to combat fraud more effectively
    across the country.
        According to the Coalition Against Insurance Fraud,
    insurance fraud costs American families almost $1,000 a year in
    extra premiums. It is a tax imposed on each American by
    criminals, and we must do everything we can do to stop this
    action.
        I see that my time is out, and I will be happy to answer
    questions at the appropriate time. Thank you, Madam Chairwoman.
        [The prepared statement of Hon. Jay Lee Covington II can be
    found on page 46 in the appendix.]
        Chairwoman Kelly. Well done, Mr. Covington. Thank you very
    much.
        Let's go to Mr. Beriault.

       STATEMENT OF GREG BERIAULT, POSTAL INSPECTOR, FRAUD TEAM
       LEADER, INDIANAPOLIS FIELD OFFICE, U.S. POSTAL INSPECTION
                                SERVICE

        Mr. Beriault. Good afternoon, Chairwoman Kelly, and
    distinguished Members of the subcommittee. I am Postal
    Inspector Greg Beriault, fraud team leader at the U.S. Postal
    Inspection Service's Indianapolis field office. Thank you for
    the opportunity to testify today on the mission of the Postal
    Inspection Service and our leadership role in the campaign to
    end viatical settlement fraud, a rising menace to consumers,
    the insurance industry, and law enforcement.
        Mail fraud investigations are often broad in scope and
    typically involve members of the American public as victims.
    One such fraud I have become involved with is viatical
    settlement fraud. The victims of viatical settlement fraud
    include the public, who are investors, and the insurance
    industry.
        In May of 1999, members of the Postal Inspection Service's
    Indianapolis field office fraud team were made aware of a
    growing problem of fraud related to viatical settlements. Based
    upon discussions with the insurance community, law enforcement,
    and State regulatory agencies, it became apparent there was a
    need to address this issue. A working group of eight postal
    inspectors was established. This working group met in
    Indianapolis in August of 1999 to develop a plan for the
    Inspection Service's viatical fraud initiative.
        In August of 1999, the U.S. Postal Inspection Service
    established a national task force responsible for developing a
    strategy for the successful identification, investigation, and
    prosecution of individuals involved in this fraud. The task
    force worked from the Indianapolis field office and was named
    Operation ``Clean Sheet.'' In November of 1999, the task force
    became a joint investigative effort with the FBI, and has also
    worked closely with the other State law enforcement and
    regulatory agencies.
        Through analysis of the intelligence gathered, the OCS task
    force was able to identify many of the major offenders and
    assist law enforcement in identifying targets. The OCS task
    force was responsible for initiating, coordinating, and
    supporting these field investigations.
        On May 19th, 2000, eight simultaneous search warrants were
    executed at various locations throughout the United States.
    Each search warrant was the result of investigations relative
    to the viatical settlement fraud. This effort involved more
    than 200 Federal, State, and local law enforcement officers.
        The OCS task force was very successful in forging a
    cooperative effort among regulatory agencies and State and
    Federal law enforcement nationwide. There are approximately 40
    known investigations nationwide. To date, there have been
    approximately 100 arrests and 75 convictions made relative to
    viatical settlement fraud. The majority of these investigations
    are still ongoing.
        The Liberte Capital Group investigation in Ohio is a good
    example of the cooperative effort among State and Federal
    agencies. Agencies participating in this investigation include
    the U.S. Postal Inspection Service, Ohio Department of
    Insurance, Federal Bureau of Investigation, Internal Revenue
    Service and Department of Justice.
        Due to the complexity of this fraud, a single case often
    involves an insured party, insurance agent, insurance company,
    viatical settlement company, viatical broker and investors, all
    living in different parts of the country. Therefore, various
    State and Federal jurisdictional boundaries are affected by
    these investigations.
        Due to this dispersion, coordination with the Department of
    Justice and State prosecutorial authorities has been very
    instrumental in the successful prosecution of these cases. As
    with most fraud cases, senior citizens are often targeted by
    fraudsters and, unfortunately, end up as victims. Viatical
    settlement fraud is particularly insidious as it frequently
    entices its victims into investing their life savings.
        The investment and viatical settlement also appeals to the
    humanitarian side of the investors. They perceive themselves as
    helping a terminally ill person pay for the medical attention
    needed and to live as comfortably as possible in their final
    days.
        Another reason we believe that investors have become
    victims of this fraud so easily is that the life insurance
    industry is one of the oldest and most trusted industries in
    our Nation. For generations people have trusted in life
    insurance and faithfully paid their premiums, only to receive
    what was due upon the death of the insured. Most investors
    recognize the risks associated with speculative investments.
        However, when you discuss life insurance, most people think
    of a safe, secure investment. The distinction between the
    insurance industry and the viatical settlement industry may not
    be fully appreciated or understood by most investors.
        Finally, because of the nature of the fraud and the obvious
    need to keep information about the insured private, there is a
    reluctance by investors to follow up or ask a lot of questions
    about their investment. When the investment does not pay off
    due to the death of the insured, they are most often reluctant
    to complain, because in effect they are complaining that the
    insured did not die as projected.
        The prevention efforts of the task force which focused
    primarily on identification and investigation, also included
    outreach to consumers protection groups, the insurance and
    business community, and oversight regulatory agencies. Although
    our efforts have had a significant impact in reducing the fraud
    in this industry, the Postal Inspection Service emphasizes the
    importance of consumer awareness and prevention as the best
    protection for customers.
        There are many challenges facing law enforcement,
    regulatory agencies and insurance companies as they continue to
    combat and prevent fraud from occurring in the viatical
    settlement industry. In working as a task force leader, I have
    had the opportunity to talk with many individuals from the
    insurance industry, State regulatory agencies, prosecutors and
    law enforcement. There are certain issues that surfaced during
    each conversation. And these issues I would just state simply
    as follows.
        I see I have run out of time here. But the primary issues
    that seem to come up and surface as you speak with prosecutors
    and law enforcement and the regulatory agencies, the main areas
    of concern are the life expectancy projections, the issue of
    insurable interest, and certainly a concern over the life
    settlement--which is now where most of these companies are
    headed toward is the life settlement--where we are talking
    about the senior settlements. Thank you.
        [The prepared statement of Greg Beriault can be found on
    page 34 in the appendix.]
        Chairwoman Kelly. Thank you very much, Mr. Beriault.
        Let's go now to Mr. Mercer.

       STATEMENT OF STEPHEN B. MERCER, ESQ., ATTORNEY, SANDLER &
                              MERCER, P.C.

        Mr. Mercer. Thank you. Good afternoon, Madam Chairwoman,
    and other Members of the panel. I am an attorney in private
    practice, as has already been recognized. And in 1992, I began
    to work with the Whitman-Walker Clinic, Legal Services Clinic,
    which is a local non-profit agency that provides many services
    to HIV and AIDS persons. And one of the areas that I have been
    working in is working with folks who were trying to sell their
    life insurance.
        Now, the point that I want to stress for the panel is that,
    in reviewing the fraud in the industry, not to overlook how
    important these transactions can be for persons who are
    terminally ill. The money that is realized from these sales can
    go toward housing, food, medicine, and it keeps them off other
    programs that may use up resources that are very much needed
    for folks in their situations. So remember that these
    transactions are very important to persons living with HIV and
    AIDS, and that, in seeking to regulate out the fraud or the
    potential for fraud, that that can't be forgotten.
        In my experience, what I generally have encountered--
    because most potential viators that are looking to engage in
    ``clean sheeting'' are not seeking the advice of attorneys--is
    the sort of day-to-day issues that confront viators that are
    looking to sell their policies. These are issues of
    confidentiality, these are issues of deceptive sales practices,
    and these are issues related to low prices that are partly due
    to the increased life expectancy of persons with HIV, but also
    resulting from scarce capital in the marketplace.
        And while fraud has a lot to do with it, I also believe
    that the structure of the marketplace as it stands right now,
    where it is unregulated by Federal securities law, provides for
    a situation where the viatical settlement companies have
    absolutely every incentive to increase commissions,
    administrative charges and other fees, and they do not have any
    commonality of interest with the investor.
        And so even the investor that isn't defrauded is not
    realizing a reasonable rate of return, which means there is
    less money for potential viators. And I believe the primary
    reason that the day-to-day investor is not seeing a good rate
    of return is because this is an area that should be subject to
    securities regulation, but is not. And there is a case that the
    panel I am sure is familiar with, SEC v. Life Partners, that
    should be corrected.
        Information is vital to investors, and to achieve a
    commonality of interest between the viatical settlement
    companies and the investors, so that they both have a stake in
    the profitability of the transaction. Given the viatical
    settlement company, that stake should also give them incentive
    to fet out the fraud in the underlying transaction. And if you
    are not creating this match between one investor and one
    viator, then you are also serving to protect the
    confidentiality interest of the viator by removing that
    particular match.
        In other words, I am essentially talking about providing--
    if these transactions are subject to securities regulations,
    then you are in a situation where viatical companies can pool
    the risks, avoid the uncertainties of an individual
    transaction, and strive for the predictability of many
    transactions so that qualified investors can have a reasonable
    rate of return, there can be more money in the marketplace for
    potential viators, and the overall structure of the market is
    fashioned in such a way to protect issues of confidentiality.
        Just one other point I did make in my written statement,
    that if there is going to be proposed legislation about
    viatical settlements, there are also tax consequences that need
    to be considered. In 1996 Congress enacted as part of HIPAA
    some tax reforms to exempt the proceeds of many viatical
    settlements from income tax. But with the advancing treatments
    of HIV/AIDS, sort of the carving out of the income tax for
    viatical settlements has now largely disappeared, because folks
    are living more than 2 years, and many of the prices are not
    coming up to the minimum pricing standards of the NAIC, and so
    you have viatical transactions now subject to income tax. And
    that should be something that should also be considered. Thank
    you.
        [The prepared statement of Stephen B. Mercer Esq. can be
    found on page 71 in the appendix.]
        Chairwoman Kelly. Thank you very much, Mr. Mercer.
        Now, Mr. Lazar.

      STATEMENT OF JOHN W. LAZAR, CLASS REPRESENTATIVE IN LAWSUIT
                     AGAINST LIBERTE CAPITAL CORP.

        Mr Lazar. Ladies and gentlemen, I am John Wayne Lazar, 78
    years old, and a resident of Clinton Township, Michigan. I was
    born and raised in the Detroit area. I am a widower, and I have
    two sons and five wonderful grandchildren.
        I proudly served my country in the Navy between 1943 and
    1945. After my military service, I earned a bachelor's degree
    in industrial engineering from Lawrence Institute of
    Technology. For 40 years I worked in the automotive industry in
    various engineering and management positions. I retired in 1991
    and moved to Florida to enjoy the retirement that I worked so
    hard for.
        In approximately 1997, I began reading about viatical
    settlements. I read articles in the Wall Street Journal and
    even saw a favorable report on 60 Minutes. I was quite
    interested in the use of viatical settlements for my retirement
    investments. I then contacted a number of viatical companies,
    obtained written material, and reviewed the material in detail.
    Viatical settlements were marketed as safe, secure, guaranteed,
    and humanitarian investments. I was assured that they were
    safer than CDs and provided a higher rate of return.
    Furthermore, I was told that an investment in a viatical
    settlement would assist individuals with AIDS and other
    terminal illnesses who were in desperate need of financial help
    during the last days of their life. I was told that this was a
    noble investment.
        After carefully reviewing the investment material, I
    decided to invest nearly all of my retirement savings,
    consisting of approximately $120,000 in an IRA and $50,000 in
    other savings. Because of the living uncertainty of this type
    of investment, I elected to invest this money in Liberte
    Capital for only 1 year. I was guaranteed a return of 14
    percent, paid in quarterly installments.
        I received three quarterly interest payments and no more.
    My principal has never been returned. I have moved back to
    Michigan, back to Clinton Township, to be close to one of my
    sons. I presently live on my monthly Social Security payment
    and the interest I am earning as a result of the sale of my
    home in Florida.
        Needless to say, my financial situation has been devastated
    by the fraudulent activities of Liberte Capital. I am a class
    representative in a lawsuit that has been filed to recoup our
    investments. My attorneys have advised that at best we can
    expect only a small portion of our investments to be returned.
    As a class representative, I have spoken to Liberte Capital
    investors across the country. Most Liberte Capital investors
    are senior citizens who like me invested all or a significant
    portion of their life savings.
        Many of these investors have had to sell their homes and
    move into apartments in order to make ends meet. Other
    investors have had to return to the work force. Some investors
    forgo the amenities which they planned for and struggle to
    afford the necessities of daily living such as utilities, food,
    and medical care.
        I am attaching to this statement a few letters from
    investors that have accurately portrayed their situations. I
    could attach hundreds more such letters.
        I am also attaching an article that appeared recently in
    the Toledo, Ohio newspaper, The Blade, which explains the
    devastating impact that the fraudulent activities of the
    Liberte Capital have had on a small town in Indiana.
        I thank you for the opportunity to appear before you today.
    On behalf of all of the Liberte investors, I request your help
    in dealing with this devastating situation. In addition to this
    statement, I would like also to submit a statement prepared by
    my attorneys, Andy Storer and Jy Kowalski. Thank you.
        [The prepared statement of John W. Lazar can be found on
    page 63 in the appendix.]
        Chairwoman Kelly. Thank you, Mr. Lazar. My heart just
    absolutely hurts for you and the other people who are caught in
    the same situation.
        Let's go to Mr. Lewis.

     STATEMENT OF DAVID M. LEWIS, ESQ., PRESIDENT, LIFE SETTLEMENT
                               INSTITUTE

        Mr. Lewis. Thank you. Good afternoon. My name is David
    Lewis, and I am appearing before the subcommittee today in my
    capacity as President of the Life Settlement Institute. By way
    of background, I have been a practicing Attorney for 31 years,
    including 4 years as a Staff Attorney in the Division of
    Enforcement of the SEC.
        The Life Settlement Institute is a trade association whose
    members are institutionally funded life settlement providers
    and financing entities. Life Settlement Institute members do
    not use private investor funds to purchase policies, but
    instead solely use financing provided by banks, insurance
    companies, and institutional sources of capital.
        As an aside, Life Settlement Institute members have worked
    with the trustee in the Liberte case to purchase policies from
    the bankruptcy estate. These funds will be used to cover at
    least some of the investor losses.
        Viatical life settlements provide meaningful alternatives
    to persons facing terminal illnesses or who have life insurance
    policies they no longer want or can afford. A life settlement
    transaction, however, is different from a traditional viatical
    settlement. In a viatical settlement, the insured has a
    terminal illness and their life expectancy is normally
    estimated to be 2 years or less. The transaction is designed to
    provide needed funds to assist persons with short life
    expectancies in improving the quality of their life.
        In a life settlement, the insured is a senior citizen who
    is over the age of 65, does not have a terminal illness, has an
    estimated life expectancy of up to 12 years. A life settlement
    gives policyholders a new option to consider in their financial
    planning. Typically a person who has a life insurance policy
    they no longer want or need can do one of two things: one, stop
    paying the premium and let the policy lapse; or, two, surrender
    the policy to the issuing insurance company for the cash
    surrender value.
        As you may know, a majority of life insurance policies held
    by persons over the age of 65 merely lapse with no value to the
    insured. A life settlement allows the senior citizen owner of
    the policy to obtain more value for their policy than they
    could receive from the issuing insurance company.
        I would like to share with you some examples of the
    benefits of life settlement transactions to seniors. One of our
    members recently closed on a transaction with a 69-year-old
    male from Pennsylvania who had a $500,000 term life policy
    where he could not afford the renewal premiums. He had an
    estimated life expectancy of approximately 7 years. The policy
    had no cash value. The Life Settlement Institute member was
    able to pay the senior $100,000 for his policy, and the senior
    used the proceeds to pay for his long-term care needs.
        In another recent transaction, a member purchased a
    $750,000 universal life policy from a 72-year-old female from
    New Jersey who had an estimated life expectancy of 6 years. The
    policy had a cash surrender value of $40,000. The member was
    able to pay the senior $165,000, and the funds enabled her and
    her husband to stay in their family home.
        These examples and many others that we could provide
    demonstrate the value to seniors of the availability of this
    new financial option.
        At the present time 35 States regulate, through their
    insurance regulators, traditional viatical transactions. And of
    that group, approximately 13 also regulate life settlements.
    Only approximately 20 States regulate the sale of viatical or
    life settlements to private investors. In most cases, this
    regulation is through their securities regulators. Last year,
    the NAIC promulgated its Viatical Settlements model act. The
    ``model act'' regulates both traditional viatical settlements
    and life settlements.
        The Life Settlement Institute and its members have worked
    closely with the NAIC viatical working group that developed the
    model act, and we commend Commissioner Dunlap of Louisiana, the
    chair, and the other working group members for their diligent
    efforts.
        The alleged fraud resulting in the Liberte 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, which vacuum is largely the result of the
    life partners case mentioned by Mr. Mercer, and this allowed
    these con artists to practice their scheme on an unsuspecting
    public.
        There is nothing new about the fraud in the Liberte case.
    When I was a young lawyer working at the SEC in the 1970s, the
    Enron of its day was a case called Equity Funding, in which a
    large public company cooked its books by creating phony life
    insurance policies that it resold to reinsurance companies.
        We applaud the efforts of Ohio regulators and those
    elsewhere who are cracking down on fraudulent activities.
    Increased regulation and the enforcement thereof will minimize
    if not eliminate these abusive activities. The abuses
    highlighted in the Liberte case, which is fraud in the sale of
    viatical policies to private investors and fraud with respect
    to obtaining life insurance policies, can be, we believe,
    addressed in the future with the following initiatives.
        First, on the Federal level, the amendment of the Federal
    Securities Act of 1933, so that the packaging and sale of
    interests in life insurance policies to private investors are
    deemed to be securities under that act and are regulated by the
    SEC. This legislation is needed to correct the current Federal
    case law on the subject, as mentioned by Mr. Mercer. The
    Federal securities laws have served the public and the Nation's
    businesses well over the years, and there is no reason to
    believe that they would not work just as well in regulating the
    sale of viatical or life settlements to private investors.
        Second, on the State level, we urge the passage in every
    State of legislation patterned after the NAIC model act. The
    model act provides for strong regulation of the viatical
    settlement industry to be conducted by the Department of
    Insurance in each State.
        Importantly, the model act also includes many provisions
    that strongly support the use of institutional funds for the
    purchase of life insurance policies.
        Chairwoman Kelly. Mr. Lewis, I am sorry to intupt you, but
    you are out of time. You may sum up.
        Mr. Lewis. I am finished. It is another sentence. We just
    believe that the use of institutional funds with the stringent
    due diligence requirements that are attendant to its use is the
    best way to promote an industry that provides a valuable
    service to seniors and to protect such potentially vulnerable
    individuals from fraudulent businesses.
        Thank you for allowing me to appear before you today. I
    would be pleased to answer any questions that the subcommittee
    Members have. Thank you.
        [The prepared statement of David M. Lewis Esq. can be found
    on page 65 in the appendix.]
        Chairwoman Kelly. Thank you very much. You understand that
    your full written statement has been made a part of the record.
        We turn now to Mr. Geyer.

        STATEMENT OF THOMAS E. GEYER, ASSISTANT DIRECTOR, OHIO
                         DEPARTMENT OF COMMERCE

        Mr. Geyer. Thank you, Chairwoman Kelly. And, Mr. Tiberi,
    thank you for that kind introduction. It is a privilege to be
    here this afternoon to talk about the securities law aspects of
    viatical settlements. And as you have heard from the previous
    witnesses, the securities component arises when the viatical
    settlement provider or other company solicits investors to
    provide money to fund the payout to the insured. The investor
    is induced to invest, with the promise that they will receive
    the death benefit or a fraction of the death benefit in an
    amount that exceeds their original investments.
        This creates a return on the investment. And in securities
    law, we call this type of arrangement an investment contract,
    which is a type of security. Once a transaction constitutes a
    security, securities laws impose three requirements:
        First, people selling securities must be licensed or
    properly exempted from licensure.
        Second, the securities product itself must be registered or
    properly exempted from registration.
        And third, there must be full and fair disclosure of all
    material terms and conditions of the transaction.
        This three-part framework of oversight provides essential
    investor protections. Unfortunately, in some cases investors in
    viaticals have not had the benefit of these protections because
    viaticals have proven to be fertile ground for fraud and other
    securities law violations.
        In Ohio alone, we initiated our first securities
    enforcement action in June of 1998. Since that time we have
    initiated 30 actions, 26 of which have been finalized. All of
    those final actions have found that the viatical product was
    not properly registered, or exempted from registration, meaning
    there was no compliance with the laws requiring full and fair
    disclosure.
        Half of the cases have involved the unlicensed sale of
    securities, meaning that the person consummating the
    transaction had no assurance that that person had any
    competency with respect to financial or investment matters, and
    one in five has involved misstatements or omissions of material
    facts. And examples of common omissions and misstatements are
    included in my written statement.
        In addition to our enforcement efforts, we also focus on
    investor education. We think it is very important to help
    educate Ohioans, put them in a position to make informed
    investment decisions. Among our resources we offer a 1-800
    investor hotline, a searchable database on our website,
    numerous brochures, and dozens of educational programs each
    year. We believe it is essential that investors educate
    themselves as more and more investment opportunities are
    available to them.
        Our experience with securities law violations in Ohio is in
    no way unique. In 1999, the North American Securities
    Administrators Association, NASAA, named viaticals as one of
    the country's top 10 financial scams.
        As you can see from the chart, 34 States' security
    regulators do assert jurisdiction over viatical products as
    securities. There is some level of uniformity among the States,
    although obviously more can be done. I would caution however,
    though, in some of those States perhaps the insurance regulator
    has sole jurisdiction over the viatical, perhaps prohibiting
    the security regulator from asserting jurisdiction.
        But uniformity is critical. Certainly it maximizes investor
    protection, but it also promotes fairness, because businesses
    know the rules of the game, and no State will become a haven
    for scofflaws.
        Returning to a discussion of our experience in Ohio, as Mr.
    Covington pointed out, the Department of Commerce worked
    closely with the Department of Insurance to sponsor the Ohio
    legislation, House Bill 551. To my knowledge, 551 is the first
    single comprehensive bill that addressed both the State
    securities law and the State insurance aspects of viaticals.
        It represented a wonderful level of regulatory cooperation,
    and I think this cooperation is essential as we move forward
    into this new financial marketplace. Federal legislation, like
    H.R. 1408 that provides the tools to regulators, go a long way
    to establishing cooperation and giving them the tools to
    prevent fraud.
        Just to conclude, whether you believe viaticals are
    socially valuable or whether you think they are abhorrent,
    because they derive their return from death, the fact is that
    they are here, and we must continue to help our citizens
    educate themselves so that they can make informed investment
    decisions. Meaningful regulation is essential to ensure that
    neither viators nor investors are defrauded.
        As demonstrated in Ohio, there is an opportunity for
    functional regulation and cooperation among regulators. And the
    regulators, along with the legislative bodies, must remain
    vigilant to ensure that the viaticals marketplace is one
    characterized by full disclosure, the absence of fraud, fair
    payouts to viators, and fair returns to investors.
        Thank you very much.
        [The prepared statement of Thomas E. Geyer can be found on
    page 57 in the appendix.]
        Chairwoman Kelly. We thank you very much.
        I also want to thank David Epstein and Robert Gordon for
    producing this chart that we have over here. They are the
    staffers who put this together. And I find it fascinating in
    this chart that if you look at it you can see that the
    regulations, the laws, are such a patchwork all across the
    United States. Wyoming has an F, but so does Rhode Island. So
    it is all the way across the United States. Georgia and Hawaii
    all arrive at an F. On the other hand, Alaska has an A-plus.
    And you go back and find Nevada with an A-plus.
        [The information referred to can be found on page 80 of the
    appendix.]
        So for seniors across the Nation, and for senior groups
    across the Nation, it has got to be very difficult to advise
    seniors with regard to what could otherwise be a logical
    investment for them.
        Also, as in Mr. Lazar's case, he was trying to do something
    to help people. And I think it is one of the important reasons
    why we are having this hearing today. We need to have some kind
    of uniformity so that everyone understands. And obviously, it
    sounds to me from your testimony as though what we also need is
    transparency.
        I would like to just start the questioning by saying that--
    turning to you, Mr. Geyer, and going on with that--my original
    statement. Can you give me any reason why we have some States
    that are regulating viaticals as securities and others that
    aren't? And the courts seem to be all over the map on this one.
        Mr. Geyer.  Madam Chairwoman, I wish I could give you a
    real good answer. The best answer I can give you is, again,
    States serving as the laboratory of regulation. And in some
    States you may have a strong insurance regulator, and the
    legislature has decided that the insurance commissioner or the
    insurance department should oversee both the insurance side as
    well as when viaticals are sold to investors.
        I think that is the case at least in Connecticut and
    perhaps a couple of other States as well. Other States where
    you perhaps have a division of labor between the State
    securities administrator and the insurance regulators, that is
    where you have seen the State securities people step forward.
        I think confusion has also been heightened because of the
    Life Partners decision. Many people assume that since a
    viatical is not a security under Federal law, the assumption is
    it is not a security under State law. Of course, that is not
    the case. We have a complementary set of regulations. So if
    regulation is going to be maintained on the State level, we
    certainly need to improve the uniformity and we need to improve
    the cooperation between securities and insurance regulators.
        Chairwoman Kelly. I would like to ask that same question of
    you, Mr. Covington. There are 15 States that appear not to have
    any regulation at all, and they obviously missed the boat in
    1993, they missed the boat again in 1998, and I don't think
    that they have passed any act in 2001. We haven't passed that
    act, it is sitting over in the Senate.
        I am interested that those 15 States have no financial
    licensing requirements, no antifraud provisions, and no
    advertising standards. When the NAIC does good work and Ohio
    responds like this immediately, why is it so hard to get other
    States to respond?
        Mr. Covington. Madam Chairwoman, I obviously can't speak
    for the conditions of the situation in each of those States. I
    can tell you that we see patterns where there is greater abuse.
    For example, in the fraud area, we have seen a lot of activity
    in Ohio and Florida, Texas, California, and unfortunately
    sometimes in the legislative process it takes something bad to
    happen before people act.
        So different States may have different levels of activity
    in this area, and I would commend the NAIC for acting very,
    very quickly when we discovered this type of fraud was
    occurring in 1999, and frankly, in just a little over a year,
    formally adopted a model law, and then States acted on that
    very quickly.
        One of the issues with that was that the law was passed in
    the late part of the year, December, March, and a lot of
    legislative sessions had completed their work by that time. So
    that may be an explanation as well, but I think it has to do
    more with the activity that has been seen in those States.
        Chairwoman Kelly. I want to go again, Mr. Covington, to you
    and just simply I thank you for your testimony in support of
    the antifraud bill that we passed. The GAO has given us several
    names of viatical fraud artists who had previous criminal
    convictions, like that guy in Texas, but particularly since the
    viaticals are a crossover insurance securities product, isn't
    it just plain common sense that the regulators and the law
    enforcement agencies should have access to the viatical agent's
    past disciplinary and criminal records to protect the
    consumers? It seems to me like that is just common sense.
        Mr. Covington. Madam Chairwoman, this will be my shortest
    answer. Absolutely.
        Chairwoman Kelly. Any of the rest of you want to join in on
    that comment? Do you feel the same way, Mr. Geyer?
        Mr. Geyer. Yes, ma'am. Again, to the extent that we can
    coordinate our efforts, I know that like the NAIC, the
    securities regulators have the trade group NASAA, and we work
    very hard on uniformity, and the more that we can tap into
    mutual databases and share information, the better off we will
    be to protect those in the marketplace.
        Chairwoman Kelly. I want to ask one final question, because
    my time is almost out. Mr. Covington testified that the
    insurance fraud cost American families almost $1,000 a year and
    Mr. Beriault and Mr. Lazar noted that our elderly and seniors
    in particular are vulnerable targets for fraud artists. Have
    your offices undertaken an educational effort with seniors
    groups about viaticals, and how can we in Congress work with
    you to promote better retirement protection for seniors?
        Mr. Covington. Madam Chairwoman, there are a number of
    things that we have done to educate seniors. In the State of
    Ohio and in many States, most States I think, there is a senior
    health insurance program that is supported by the Congress.
    There is Federal funding matched in many States, including
    Ohio, that provides funding. So one thing that we would
    advocate is to continue that funding. We have seen a reduction
    in that funding, which hampers our ability to educate seniors.
    We have in Ohio over 1,400 volunteers in all 88 counties, and
    last year alone, we educated over 340,000 seniors, about 35,000
    of those one-on-one. We have a website that they can access,
    and in addition to that, one of the things that you are seeing
    today--now, some may say seniors don't use the website, but we
    are seeing more seniors do that. And second, seniors' children
    want to get online and be able to access that for their
    seniors. And we are seeing an increased activity. We have
    11,000 people who visit our website every week.
        So those are some of the things that we can do to educate
    seniors, and the Congress can help us do that.
        Chairwoman Kelly. Thanks. Mr. Beriault, do you want to
    answer that question?
        Mr. Beriault. Yes, as part of the task force, we recognize
    the importance of educating the public and certainly the
    seniors, and we were successful in partnering with the AARP.
    And they did issue an article related to viatical settlement
    fraud which identified the risk to the investors, and we were
    most appreciative of that. It included our 1-800 number and
    provided--and my understanding was that that went to 20 million
    homes. So certainly, organizations like that are very helpful
    in getting the message out.
        Chairwoman Kelly. Mr. Beriault, do you have a copy of that
    article so we can put it in as part of the record?
        Mr. Beriault. I will get you a copy. I don't have one with
    me, but I will provide you with a copy.
        Chairwoman Kelly. If you would do that, we would like to
    put that in as part of the record, please.
        Mr. Geyer, do you want to jump in here?
        Mr. Geyer. Yes, ma'am. Thank you. Similar to what Director
    Covington does in the Department of Insurance, Division of
    Securities makes outreach programs throughout the year. In
    particular, April of each month we designate as Investor
    Savings and Education Month, and we make presentations to help
    promote financial literacy. I have spoken from age groups
    ranging from second graders all the way to senior citizens, and
    certainly when we speak to seniors or groups like that will
    emphasize viatical settlements or other opportunities that they
    may be subject to. But I agree. Investor education is critical
    as more and more complex financial instruments become available
    to our citizens.
        Chairwoman Kelly. Thank you very much. Let us go to Mr.
    Gutierrez.
        Mr. Gutierrez. Thank you. Mr. Mercer, what can the Federal
    Government do to prevent abuses in the viatical settlement
    workplace?
        Mr. Mercer. Well, I think there are two areas. One has been
    touched on in terms of the relationship between the promoter
    and the investor by subjecting the sale of viatical investments
    to Federal securities law. Viators, whom I represent, have a
    stake in a robust viatical settlements marketplace, and to the
    extent that investors are experiencing and enjoying a
    reasonable rate of return on their investment because they are
    able to make a more informed decision about their investment,
    then that is going to benefit the folks that I work with.
        And another point that I touched upon in my opening
    statement was looking again at the tax implications of viatical
    settlements, because the structuring of those tax rates back in
    1996 now to a large extent are outdated, and you have folks
    that are selling their policies and getting taxed on it, and,
    of course, there are now 1099s that accompany all of the
    transactions. So it adds another stress factor in their lives
    that are already filled with stress.
        Now, another area, though, too has to do with the consumer
    protection side as it relates to viators. Now, in my experience
    representing viators in litigation that were harmed by abusive
    sales tactics of brokers, one of the problems that I
    encountered was that we did not have the benefit of consumer
    protection statutes, because, for example, in Maryland we were
    exempted because it was more in the nature of a service than a
    good, and yet although the NAIC has spearheaded much in the way
    of disclosure requirements early on in this emerging industry
    of viatical settlements, part of the problem is if you are in
    private litigation you are trying to go after the perpetrator
    and you have got a viator that maybe lives in Washington, works
    in Maryland and is dealing with a broker in Florida, and an
    ultimate purchaser that might be in another State, is you run
    into these conflicts about whether you are coming in under a
    State's model, you know, insurance regulation and whether you
    have to proceed by the filing of an administrative complaint
    with an insurance commissioner, whether you may have a private
    right of action under a State consumer protection statute that
    may provide for recoupment of attorney's fees and enforcement
    costs or liquidated damages.
        So, there may be a component here also under Federal law of
    Federal consumer protection that may also help what are very
    frequently multi-State transactions; whereas, much insurance
    transactions are sort of State-to-State, where you have the in-
    State person dealing with a local State office. Viatical
    settlements for viators are very different. They are typically
    multi-State.
        Mr. Gutierrez. Let me ask Mr. Covington or Mr. Lewis. Maybe
    somebody on the panel knows. Does viaticals fraud cost every
    purchaser of insurance $1,000 a year?
        Mr. Covington. Madam Chairwoman, Representative, that is
    all insurance fraud.
        Mr. Gutierrez. I thought I was going to say a thousand
    bucks. That is a lot of money, almost what I pay for my whole
    insurance policy.
        Mr. Covington. But Madam Chairwoman, Representative, I
    might note that based on my understanding, a Florida grand jury
    found that over half of all viatical settlements involve some
    type of fraud. Now, I can't confirm that. I wasn't there, but
    reports that I have seen indicate that the grand jury, when I
    testified, this fraud really jeopardizes the very existence of
    this industry. I think we cannot have an industry that has that
    degree of fraud and deceit within it.
        Mr. Gutierrez. I agree. Well, I think one of the things
    that--I am obviously, always concerned about insurance
    companies. That is why I ran for Congress, I was so concerned
    about them, and their bad rate of return. And the viaticals,
    that is the best-case scenario that Mr. Lewis gave us of
    somebody has a face value of $40,000 and someone generously
    gave them $160,000 for the $40,000, and 6 years when you put it
    in a pool, I mean, sometimes it is going to be less. Sometimes
    it is going to be more. If you actually regulate it like Mr.
    Mercer, there should be a lot of money to be made. There is a
    $590,000 difference. Even a 10 percent return, it would take 15
    years for that person to take that $160,000 and convert it into
    $750,000. So it seems to me that there could be a lot of people
    that could be benefited by these types of insurance, and if
    that is--I imagine, Mr. Lewis, you gave us your best case
    scenario. I have never seen an insurance industry spokesperson
    not give us their best case scenario as they come before these
    committees. So it seems to me that there is a lot of money and
    we probably could do a lot of good for a lot of people, if that
    is the best case scenario. Maybe we could do even better than
    $160,000, if we actually pooled and people saw a reasonable
    return and a greater level of safety.
        Thank you, Mr. Chairwoman, for bringing this matter to the
    attention of this subcommittee.
        Chairwoman Kelly. Thank you, Mr. Gutierrez.
        Mr. Tiberi.
        Mr. Tiberi. Thank you, Madam Chairwoman. My question is to
    all the witnesses here. Starting with Director Covington, do
    you think that we here in Congress should define a viatical
    settlement--change the law and define it as a security so the
    SEC can regulate it?
        Mr. Covington. Madam Chairwoman, Congressman, because I am
    not the expert on the securities side of this, I am not sure I
    am the best person to answer that question. So if I could, I
    will defer to the others on the panel. I don't know the
    intricacies of securities regulation between the State and
    Federal Government. I just know insurance.
        Mr. Tiberi. It is just an opinion. We won't hold you to
    anything.
        Mr. Beriault. I would just say that, you know, based on my
    experience with this industry and the amount of fraud that--and
    talking to the people in the industry, that certainly, that may
    be one of the best ways to get control of the industry and
    eliminate some of this fraud. Steps need to be taken so that
    there is full disclosure and that the investors recognize the
    risks that are involved in these investments, and that relates
    to the escrow accounts, full disclosures involving the escrow
    accounts, certainly full disclosure relating to the medical
    prognosis, methodology used, you know, who, in fact, is giving
    it, what is their track record, what is their confidence level,
    all of the things along these lines, are they--is it an arm's-
    length relationship with the viatical company. In some cases
    they are employees of the viatical company, in which case there
    is certainly a strong incentive to have aggressive mortality
    rates. Historical information about the annual rates of return.
    And all of these things seem to point toward some kind of
    security regulation. Financial statements, independent audits,
    all of these things I think need to be done to protect the
    investors.
        Mr. Tiberi. Thank you.
        Mr. Mercer.
        Mr. Mercer. As I indicated earlier, I absolutely believe
    that a relationship between the promoter and the investor
    should be subject to Federal securities law. It is the classic
    situation where you have an investor solely depending upon the
    expertise of the promoter in making an investment decision, and
    the investor does not have information available through other
    means.
        Mr. Tiberi. OK. Mr. Lazar.
        Mr. Lazar. Judging by what I have heard so far, there is no
    question in my mind that securitization is required and a
    necessity for conformity throughout the Nation; the same thing
    as regulated by the insurance companies should be regulated by
    viaticals. I don't see any difference between them. I just
    wonder if it works in reverse.
        Mr. Tiberi. Thank you.
        Mr. Lewis. We strongly believe that an amendment to the
    Securities Act really makes a lot of sense, and would I think
    go the furthest and the quickest of cleaning up the investment
    side of problems in this industry. Clearly today the SEC
    regulates myriads--all kinds of--hundreds of different kinds of
    investments, and I think, you know, it is not free from
    problems, but it is proving to be a very effective system. And
    we strongly believe that that is the way that things--the
    quickest way I could think of to solve this problem.
        Mr. Tiberi. Thank you.
        Mr. Geyer. Madam Chairwoman, Mr. Tiberi, yes, not only
    would you then make the Federal disclosure laws applicable, the
    Federal antifraud standards become applicable. Then you also on
    the back end give tremendously more resources to the
    enforcement efforts against fraud in the viatical transaction.
    So, sure, I think that would be a tific step forward, again, if
    you are trying to make this a credible marketplace.
        Mr. Tiberi. Just a follow-up to the panel, starting with
    you, Mr. Geyer. The antifraud bill that we passed here in the
    House that became law, how do you think that would deter fraud
    in this area?
        Mr. Geyer. Madam Chairwoman, Mr. Tiberi, I think that would
    be a wonderful resource, because it would allow agencies when
    they are confronted either with a bad actor or a license
    applicant, to tap into a database and discover previous bad
    acts, discover criminal convictions. It is unfortunate that
    sometimes regulators operate in a vacuum, and the more we can
    share information the better off we would be.
        Mr. Tiberi. Mr. Covington.
        Mr. Covington. I completely agree. I think that this is, as
    I said, a giant step forward in our abilities, providing us
    additional steps to combat fraud. So we strongly support
    immediate action by the Senate on this bill.
        Mr. Beriault. Yes. I concur with both of these gentlemen. I
    think it would be an invaluable tool for investigators, and
    certainly in cases like viatical settlement fraud it would be
    of a great benefit to us in identifying who the major offenders
    are and what their past is and help us in our investigations.
        Mr. Tiberi. Mr. Mercer, do you agree?
        Mr. Mercer. Those certainly sound like reasonable comments,
    that the more disclosure you have and the more information, the
    more an informed decision can be made by an investor or by a
    viator.
        Mr. Tiberi. Any other comments?
        Mr. Lewis. We would support conceptually--I am not really
    that familiar with the bill, but I must say our industry--the
    company I am connected with, we do intense background checks as
    best we can on people we deal with to try and fet out if they
    have problems, and anything that will improve that system and
    make it more efficient and provide more information to
    legitimate users in the private world and for Government, it
    makes a lot of sense.
        Mr. Tiberi. Thank you.
        Chairwoman Kelly. Thank you, Mr. Tiberi.
        Mr. Lazar, I know you have a plane to catch. I want to get
    you out of here so you don't have to feel stressed about that,
    but I want to ask you two quick questions. As a consumer, when
    you learned about viaticals in the Wall Street Journal or 60
    Minutes, did you know that they are subjected to totally
    different regulations in different States?
        Mr. Lazar. I was aware of it.
        Chairwoman Kelly. You were aware of it?
        Mr. Lazar. Yeah.
        Chairwoman Kelly. OK. I noted that Florida now has adopted
    the most recent comprehensive model law on viaticals, including
    licensing requirements, antifraud provisions and advertising
    standards. If this law had been in place in 1997 and you had
    known more about the risks of viaticals and the types of fraud
    that can occur, would you have acted differently?
        Mr. Lazar. Yes.
        Chairwoman Kelly. Is this an area where you think we need
    to get all the States to have similar laws, to similarly
    improve their laws?
        Mr. Lazar. Oh, yeah.
        Chairwoman Kelly. You think so?
        Mr. Lazar. Oh, yeah.
        Chairwoman Kelly. Thank you very much. I want to thank all
    of the members of our panel. I do note that some people--Mike
    is not the only one who is stuck in an airport. There are
    several other Members. So I want to hold the hearing record
    open without objection for the next 30 days for Members to
    submit written questions to the witnesses so we can place their
    responses in the record.
        This panel is excused with our great appreciation and
    thanks for your time, and I want to thank all the Members for
    all of their assistance in making the hearing possible. The
    hearing is adjourned.
        [Whereupon, at 3:17 p.m., the hearing was adjourned.]
                                A P P E N D I X

                               February 26, 2002
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