Florida alleges $117 million Ponzi scheme based on viatical sales
Florida's Department of Banking and Finance (DBF) filed cease and desist orders on March 29, 2001, against 16 companies and 114 individuals who allegedly sold nonexistent viatical settlements in a Ponzi scheme that bilked Florida investors out of $117 million between 1996 and 2001.
What should consumers do?
If you were sold fake viatical investments by ABS or its sales force, contact Florida's Division of Banking and Finance, Central Florida Regional Office, who will tell you how to file for partial recovery of your money and how to file a complaint.
The DBF seeks to fine the scheme's participants for violating Florida's Securities and Investor Protection Act. The maximum fine is $5,000 for each transaction that violated the law, which could mean a $17.4 million penalty if the maximum fine is instated for each of the 3,483 documented Florida transactions which affected more than 600 individual consumers.
Investors allegedly were told they were buying into a viatical pool, but in fact were purchasing unregistered securities based mostly on nonexistent life insurance policies. The DBF has documented 6,640 sales nationwide. Investors were given a choice between receiving a 9.86 percent monthly return on their investment for three years, or receiving 42 percent in one lump sum after a three-year period. All returns were actually paid from the investors' own funds and those of other investors, constituting a Ponzi scheme.
Viatical settlements involve the purchase of life insurance policies from terminally ill people by investors, who pay less than the policy's face value, then pay premiums to keep the policy in force and ultimately collect the death benefit.
In the Florida case, DBF says, American Benefits Services, Inc. (ABS) marketed its unregistered securities as viaticals through a network of brokerage firms and individuals whose job it was to recruit new investors. It is those sellers who received cease and desist orders on March 29, 2001.
Eighty-five sellers were in the insurance business, and pitched ABS' phony investments to existing clients. DBF claims the promised high returns, trust in the insurance agents, and faith in the insurance company led investors to believe their investment was risk-free. Thirteen sellers were in the securities business, while the rest were unlicensed for either securities or insurance.
The $117 million collected from Florida residents was funneled to ABS' parent company, Financial Federated Title & Trust, supposedly to purchase viaticals. However, DBF says less than $6 million was used for that purpose. The remaining $111 million was used by the scheme's operators to pay commissions and purchase goods, including 36 luxury cars bought by an operator of Financial Federated. Investors were charged an 18 percent commission fee, of which 8 percent went to ABS and 10 percent went to the businesses and individuals who sold the fake securities.
"We discovered during the investigation that most of the insurance policies were nonexistent," says Gilford Robinson, director of the Central Florida Regional Office of the DBF. Robinson says the "large-scale Ponzi scheme victimized hundreds of Florida investors over the last two years."
The companies involved in the Ponzi scheme have filed for bankruptcy, so it's uncertain whether investors will be reimbursed.
The companies involved in the Ponzi scheme have filed for bankruptcy, so it's uncertain whether investors in the scheme will be reimbursed. DBF says victims can expect to receive no more than 10 to 15 cents in reparation for each dollar spent on the Ponzi scheme.
"We are going to pursue criminal action against some of these sellers," says DBF spokesperson Fred Carr. "Some violations are more egregious, in terms of the volume of investments sold, or the sellers' previous fraud activity. The bottom line is we are holding people accountable for their actions."
The companies and individuals receiving DBF's cease and desist orders have 21 days to either request a formal hearing or begin settlement negotiations that could result in payment of fines
No stranger to hot water
Florida first investigated ABS in 1999, when then-Insurance Commissioner Bill Nelson charged the company with deception and misrepresentation in the sale of viatical contracts. The Department of Insurance (DOI) alleged that ABS falsely claimed its viatical contracts were endorsed by the DOI and told investors the contracts were backed by the state's guaranty fund, which is actually used to pay claims of insolvent insurers.
The Ponzi scheme came to light during that investigation, when it was alleged that ABS' escrow lawyer, Jeffrey Paine, told sales agents they could use new investors' money to pay returns to other investors. The DOI subsequently seized documents and computers revealing that ABS, Financial Federated, and Paine sold the unregistered securities disguised as viatical contracts. Financial Federated is being prosecuted by the U.S. Attorney in South Florida. One of its principals has been sentenced to 55 years in prison. Both Paine and ABS' owner have pled guilty to fraud.