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Vermont to viatical company: Cease and desist

One of the self-proclaimed "good guys" of the viatical settlement industry has been ordered to stop doing business in Vermont.

On July 6, 2001, the Vermont Commissioner of Banking, Insurance, Securities, and Health Care Administration, Elizabeth R. Costle, ordered Florida-based Mutual Benefits Corporation (MBC) to cease and desist selling viatical settlements in Vermont.

Fraudulent life insurance policies and viatical settlements

Those who are already terminally ill generally can't buy life insurance, and life insurers can lose a lot of money when policyholders die shortly after receiving their policies.

Life insurance companies can also lose out if they do not discover fraudulent applications within the first two years of the policy — known as the contestability period.

Thus, viatical investors can reap profits at the expense of insurers when life insurance policies are bought fraudulently and turned into viaticals.

MBC, which claims to be the largest viatical settlement company in the United States, purchases life insurance policies, often from the terminally ill who need money for health care, and resells interest in those policies to investors, who pay policyholders a portion of the face value, then take the full benefit when the policyholder dies.

According to Costle, in a number of cases, MBC had strong evidence that some policies had been purchased fraudulently by terminally ill buyers — a process known as "clean-sheeting" — but failed to notify Vermont investors of their suspicions as required by Vermont law.

Although this practice may not have hurt Vermont investors, according to Blythe McLaughlin, deputy commissioner of securities in Vermont, the fact that MBC didn't fully and fairly disclose this information, and then went on to profit from these clean-sheeted insurance policies, is one of the major reasons for the cease and desist order.

MBC denies any alleged violations of Vermont law, and says that the company only purchases life insurance policies after the two-year contestability period has passed. As a result of this rule, according to MBC, the insurers were already legally obligated to honor the policy, regardless of any clean-sheeting.

MBC also plans to challenge the order on the grounds that viaticals are not securities, and so they could not have violated Vermont securities laws.

"The department strongly feels that we have jurisdiction in this matter to protect insurers and consumers in Vermont," says McLaughlin.

The commissioner also found that MBC wrote life expectancy letters about the life insurance policyholders who had sold their policies to MBC that were rubber stamped by a purportedly independent physician, who is now under indictment in Florida for criminal conspiracy to defraud investors. These letters were allegedly used to deceive Vermont investors as to the investment returns of the viatical settlements.

According to the commissioner, insurance agents acting as representatives of MBC emphasized the credibility of the physician and virtually guaranteed that the policy would pay off in the time frame illustrated in the life expectancy letters. Only 8 percent of the policies sold in Vermont matured within the expected time frame.

MBC, on the other hand, still maintains that it is one of the "good guys."

"For the past five years, we have fought to rid this industry of individuals who have broken the law and have taken advantage of the terminally ill and private investors who have purchased their life insurance policies," says Steven Steiner, vice president of MBC.

MBC sold 59 viatical settlements for $1.4 million to 25 Vermont investors from 1997 to 2000, all of which violated various provisions of the state's securities laws, according to Costle.

"MBC's scheme has defrauded not only investors but also insurance companies licensed to do business here," says McLaughlin.

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