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News Release: 00-15
GRAY DAVIS, Governor
Date: 10/10/00
WILLIAM KENEFICK, Acting Commissioner
New Law Clarifies State Authority over "Viatical Investments"
Investments in "Death Futures" Among Top-Ten State Scams
Sacramento, October 10, 2000 — The Department of Corporations announced today that Governor Gray Davis has signed Senate Bill 1837 adding viatical settlement contracts to the definition of "securities" under the California Corporate Securities Law, clearly giving the department responsibility and oversight for viatical investments. The bill adds "viatical settlement contract or a fractionalized or pooled interest therein" to the law and closes a loophole created by a 1996 federal court case that questioned the applicability of federal and state securities laws to viatical investments.
Viatical investments remain one of the hottest investment products in the marketplace, and also one of the riskiest. Viatical investment companies solicit investors to buy interests in the death benefits provided for in life insurance policies of terminally ill patients, including AIDS and cancer patients. The insured receives a discounted percentage of the death benefits in cash, supposedly to improve the quality of their lives in the final days. Investors get the insured’s share of the death benefit when the insured dies, less a brokerage fee for the viatical investment broker.
Because of the uncertainties involved in predicting when a person is going to die, even a person with a disease considered terminal, these investments must be considered extremely speculative and are only appropriate for persons willing to risk losing all of their investment. Some commentators have described them as "death futures," because the investment involves betting on when someone is going to die. With new therapies coming onto the market every day, that is not a good bet.
These investments are being heavily marketed to seniors and investors with IRA accounts as humanitarian and profitable investment opportunities, but the department warns that they are entirely unsuitable investments for most investors because of their highly speculative nature and the risks inherent in them.
The department cites as an example a complaint by an eighty-four year old woman who had been persuaded to invest more than $85,000 on the promise that she would receive more than $139,000 when her investment matured upon the death of the insured, which was supposed to occur within 12 months, but has still not occurred years later. In many viatical investments, the death of the insured is predicted to occur within 12-24 months. If the insured remains alive past the predicted period for his or her death the value of the investment decreases significantly because the investors must continue to pay the premiums on the insurance policies.
The opportunity for fraud in these cases is high because of the role of the viatical broker in identifying and purchasing the insurance contracts on behalf of the investors. In Personal Choice Opportunities, a Palm Springs, California case involving a $100 million viatical scam, investors were told they were investing in promissory notes secured by viatical interests. However, the company never actually purchased any insurance contracts, and promoter David Laing was convicted of securities fraud and sentenced to federal prison.
Attached are Questions and Answers to help investors get the facts before they invest in a viatical investment or go to the Investor Education button on the website.
The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.
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