There is a corner of the insurance world where the return on an investment is a stranger’s funeral.
It has a plain name. A viatical settlement is a sale of a life insurance policy by the person insured under it, usually someone terminally ill, who takes cash now instead of leaving a death benefit later. The buyer takes over the premiums and collects when the seller dies.
For Mutual Benefits Corporation of Fort Lauderdale, Florida, that trade ran from about 1994 until May 2004 and raised more than $1.25 billion from approximately 30,000 investors, according to the Justice Department. Then the Securities and Exchange Commission shut it down.
The thing federal prosecutors and regulators kept circling was not the policies. It was the dates.
The product was a number of months
Mutual Benefits bought life insurance policies from people with AIDS, from the chronically ill, and from the elderly. Then it sliced the death benefits into fractional interests, meaning small shares of one policy sold to many buyers, and sold those shares to investors through what the Justice Department called an international network of sales agents.
Promotional materials told investors the product offered a fixed rate of return with low risk, and that their principal and returns were paid by insurance companies.
An investor’s brochure needed one figure above all others. How long the insured person was expected to live.
That figure sets everything. It sets the price the seller gets. It sets the annual return an investor can be promised. It sets how much money has to be set aside to keep paying the premiums until the death benefit arrives.
Get the life expectancy right and the arithmetic works for everyone. Get it wrong in one direction and the investor waits, and pays, and waits.
Why a wrong date does not look like a loss
This is the mechanic that makes viatical fraud so slow to surface.
A stock that fails announces itself. A viatical share that fails just sits there, quiet, while the insured person goes on living. There is no crash. There is only a premium bill that keeps arriving after the date the brochure implied it would stop.
Patience is exactly what a short life expectancy estimate buys the seller.
The SEC’s 2004 complaint alleged, in the Eleventh Circuit’s summary of it, that Mutual Benefits falsely represented to investors that its life expectancy figures had been produced by independent physicians, that 65 percent of its outstanding life insurance policies were sold to investors using fraudulent life expectancy figures, and that approximately 90 percent of its policies had already passed their assigned life expectancy. Those were allegations in a civil case. The criminal record, below, is where the doctors’ independence stopped being a question.
May 2004
The SEC filed in the Southern District of Florida on May 3, 2004 and obtained emergency relief. The operation stopped. On May 4, 2004 the court issued a temporary restraining order that barred new business and appointed a receiver, Roberto Martinez, over a portfolio the Eleventh Circuit later described as including at least 1,700 policies. The company’s premium trustee, a Fort Lauderdale lawyer named Anthony Livoti Jr., had by then been the designated trustee of thousands of the policies sold, with premiums that somebody still had to pay every month.
That was the civil side. The criminal case took years longer to build.
When charges came in December 2009, the Justice Department put investor losses at more than $800 million.
The number the court settled on
Thirteen people were charged. Joel Steinger, described by the Justice Department as the de facto head of Mutual Benefits, was the last of them convicted. He pleaded guilty to conspiracy to commit mail and wire fraud. On August 29, 2014, U.S. District Judge Robert N. Scola Jr. sentenced him to 20 years in prison, followed by three years of supervised release, and ordered him to forfeit $15 million.
The department’s release names three co-conspirators: Steven Steiner, Michael McNerney, and Livoti. Steiner received a fifteen-year sentence. Livoti, convicted by a Miami jury after a trial of nearly three months, was sentenced to ten years and ordered to pay more than $800 million in restitution.
Two different numbers travel together in the government’s own paperwork. The headline on the Justice Department and FBI releases calls it a $1 billion scheme. The body of the same releases says the operation raised more than $1.25 billion from investors before regulators stopped it, from approximately 30,000 victims. One product, and the product was a date.
What the plea put on the record
The evidence summarized at Steinger’s plea, according to the Justice Department, was that under his direction Mutual Benefits misrepresented the estimated life expectancies of the insured persons and the supposedly independent role of doctors determining those life expectancies.
The doctors were the whole product. A retail investor, often retired, could not read a medical file. The brochure said a physician had, and that the physician answered to no one. That was the sentence the plea took away.
The same evidence established that new investor money was used to pay premiums on policies bought by earlier investors, and to pay investors who asked for their money back. The department’s word for that was Ponzi-like.
The era that built the market
The viatical business did not start as a fraud. It started as an answer to a real problem.
People who were dying often held life insurance policies worth far more than anything else they owned, and they needed money while they were alive, for treatment, for rent, for care.
Selling the policy was a rational move for a person with months to live. Buying it was a rational move for an investor who could read a medical file.
Then the medicine changed. A study of 1,255 patients with advanced HIV at nine U.S. clinics, published in the New England Journal of Medicine in 1998, recorded a death rate of 29.4 per 100 person-years in the first quarter of 1995. By the second quarter of 1997 it was 8.8. The CDC’s estimate of annual deaths among people aged 13 and over with AIDS in the United States fell from 50,628 in 1995 to 18,851 in 1998, a decline of 63 percent.
That is a good outcome by every measure except one. Every viatical portfolio priced on the old prognosis was suddenly holding policies whose insureds were going to live for years. The premiums kept coming due. The death benefits did not arrive.
A market built on short life expectancies had a powerful reason to keep producing short life expectancies. Mutual Benefits was buying policies from people with AIDS from 1994 onward.
No exchange, no daily price, no feedback
Underneath the civil complaint and the criminal convictions sits the structure itself. An ordinary retail investor was buying a fractional interest in the death of a person they would never meet, on the strength of a projection they had no ability to check.
There was no exchange listing the shares. There was no daily price. The only feedback the investment ever gave was silence, and silence read as good news right up until it did not.
The Eleventh Circuit wrote the same thing about the people who bought in. “Investors had no ability to assess the accuracy of representations being made by MBC or the accuracy of the life-expectancy evaluations.”