[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
               





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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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