[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
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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
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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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