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News Release: 03-04
GRAY DAVIS, Governor
Date: 03/20/03
DEMETRIOS A. BOUTRIS, Commissioner
Department of Corporations Takes Enforcement Action Against Insurance Agents Selling Unlawful and Fraudulent Viatical Investments
** INVESTOR ALERT **
Sacramento, March 20, 2003 — The Davis Administration today announced that the Department of Corporations has issued Desist and Refrain orders against several firms and individuals, some of whom are insurance agents, involved in the offer and sale of viatical investments in Northern California.
"California consumers need to be careful about where they place their trust," said California Corporations Commissioner Demetrios A. Boutris. "You wouldn't trust your doctor to sell you securities, why should you trust your insurance agent? Californians should always contact the Department of Corporations to make sure the person selling them securities is licensed to do so."
In a viatical or life settlement investment, a person sells the death benefits in his or her life insurance policy at a discount to an agent or broker. The agent or broker then sells fractional interests to investors, who become either co-owners or beneficiaries of the policy benefit. When the insured person dies, the benefit is paid to all owners or beneficiaries, with interest. Viaticals and life settlements are securities by definition under California law. Unless specific exemptions are met, the offer and sale of these investments must be reviewed and approved by the Department of Corporations, and they must be sold by either a licensed securities broker or an agent of a licensed securities broker.
The Department of Corporations discovered that life insurance agents Clifford Palm and Ronald Mack, doing business as Palm Estate Services (Palm), and Robert Eberle, Michael Lange, and life insurance agent Barbara Eberle, operating as Lexus Financial Group (Lexus), offered and sold unqualified, nonexempt "bonded insurance settlements" to investors in Northern California. Donald Neuhaus, doing business as Cash for Life and American Financial Services, Inc., purchased life insurance policy benefits and sold fractional life benefit interests through his agents, Palm and Lexus. None of these individuals or companies holds a California broker-dealer license.
Agents promised investors returns as high as 150 percent in three years, and guaranteed the investment through a "fidelity" bond, but failed to tell investors that the bond was issued by a company incorporated in Vanuatu, South Pacific that is not licensed by the Department of Insurance to issue bonds in California.
The Department of Corporations cautions people who are considering making a viatical investment that, while there are sound, reputable companies that offer viatical investments, they are by nature highly risky investments, with abundant opportunities for fraud. If the company holding the insurance policy misappropriates investor funds, the policy may be cancelled or the investors may be obligated to pay the premiums, which can be several hundred thousand dollars per year. Potential investors should always call the Department's toll-free telephone number, 1-866-ASK-CORP (1-866-275-2677), to verify that the investment they are considering has been registered and to find out if a company or individual is properly licensed to sell securities.
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 or call 1-866-ASK-CORP (1-866-275-2677).
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