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RETIREMENT PROTECTION: FIGHTING FRAUD IN

THE SALE OF DEATH

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 26, 2002

Printed for the use of the Committee on Financial Services

Serial No. 107–55

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Texas

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Ohio, Vice Chairman

PETER T. KING, New York

ROBERT W. NEY, Texas

CHRISTOPHER COX, California

DAVE WELDON, Florida

WALTER B. JONES, North Carolina

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

ERIC CANTOR, Virginia

PATRICK J. TIBERI, Ohio

LUIS V. GUTIERREZ, Illinois

KEN BENTSEN, Texas

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

MICHAEL CAPUANO, Massachusetts

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

(III)

C O N T E N T S

Page

Hearing held on:

February 26, 2002 ............................................................................................ 1

Appendix:

February 26, 2002 ............................................................................................ 25

WITNESSES

TUESDAY, FEBRUARY 26, 2002

Beriault, Greg, Postal Inspector, Fraud Team Leader, U.S. Postal Inspection

Service, Indianapolis, IN ..................................................................................... 8

Covington, Hon. J. Lee II, Director, Ohio Department of Insurance .................. 6

Geyer, Thomas E., Assistant Director, Ohio Department of Commerce ............. 15

Lazar, John W., class representative in lawsuit against Liberte Capital Corp.,

Clinton Township, MI .......................................................................................... 11

Lewis, David M. Esq., President, Life Settlement Institute ................................ 13

Mercer, Stephen B., Esq., Attorney, Sandler & Mercer, PC, Rockville, MD;

publisher ‘‘AIDS Practice Manual’’; co-author, ‘‘Viatical Settlements,’’ 1996

to 2000 ................................................................................................................... 10

APPENDIX

Prepared statements:

Kelly, Hon. Sue W. ........................................................................................... 26

Oxley, Hon. Michael G. .................................................................................... 28

Gutierrez, Hon. Luis V. .................................................................................... 30

Jones Tubbs, Hon. Stephanie .......................................................................... 32

Rogers, Hon. Mike ............................................................................................ 33

Beriault, Greg ................................................................................................... 34

Covington, Hon. J. Lee II ................................................................................. 46

Geyer, Thomas E. ............................................................................................. 57

Lazar, Wayne .................................................................................................... 63

Lewis, David M. ................................................................................................ 65

Mercer, Stephen B., Esq. ................................................................................. 71

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kelly, Hon. Sue W.:

State Viatical Laws Chart ............................................................................... 80

Gutierrez, Hon. Luis V.:

Written questions for Lee Covington, David M. Lewis and Steve Mercer ... 81

Lazar, Wayne:

Andrew C. Storar Esq. and Gerald R. Kowalski Esq., statements for

the record ....................................................................................................... 96

‘‘Liberte Losses Hit Small City Hard,’’ Toledo Blade, February 24, 2002 ... 82

List of constituents and amount of money lost .............................................. 85

Letters from concerned citizens ....................................................................... 87

Mercer, Stephen B., Esq.:

Aids Advocacy, District of Columbia Bar Association ................................... 99

NAIC’s Compendium of State Laws on Insurance Topics .................................... 107

State Securities Administrators’ Regulatory Positions on Viatical

Investments .......................................................................................................... 112

Wolk, Gloria Grening, prepared statement ........................................................... 114

(1)

RETIREMENT PROTECTION: FIGHTING FRAUD

IN THE SALE OF DEATH

TUESDAY, FEBRUARY 26, 2002

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, DC.

The subcommittee met, pursuant to call, at 2:00 p.m., in room

2220, Cannon House Office Building, Hon. Sue W. Kelly,

[chairwoman of the subcommittee], presiding.

Present: Chairwoman Kelly; Representatives Cantor, Ney, Tiberi,

Gutierrez, and S. Jones.

Chairwoman KELLY. Good afternoon. This hearing of the

Subcommittee on Oversight and Investigations will come to order.

I want to thank all Members of Congress who are present today,

and there are some coming.

Without objection, all Members present will participate fully in

the hearing, and all opening statements and questions will be

made part of the official hearing record.

Today, we will examine a sector of the financial services industry

that attempts to assist the elderly and terminally ill in meeting

their financial obligations. Viatical settlements involve buying life

insurance policies from elderly or terminally ill individuals at a discount, then marketing the policies as investments.

In a proper transaction, the policyholder assigns the policy to a

viatical settlement company for a percentage of the policy’s face

value. The settlement company then sells the policy to a thirdparty investor. The settlement company or the investor becomes

the beneficiary to the policy, pays the premiums, and collects the

face value of the policy after the original policyholder dies.

This industry began, in large measure, as a noble means for allowing AIDS patients to pay the costs of their steep medical bills

before death. Unfortunately, bad actors have taken advantage of a

situation to create or buy phony policies and then fraudulently bilk

investors who expect a healthy return. When you look at the

viatical settlement industry, you see that viaticals start out as insurance policies, but end up as securities sold as investments.

We have reviewed the status of viaticals’ regulation by the States

and—we have to turn that chart over—we have a chart here that

you will see on that stand—and we have found that some States

treat viaticals as securities or as insurance, and some States treat

it as both, and some States don’t regulate it at all.

One case that illustrates the potential for both insurance and securities fraud is the Liberte Capital case in Ohio. Last month, 17

2

people associated with a viatical settlement company, Liberte Capital Group, were indicted on 160 counts of fraud, money laundering, and other illegal acts. The defendants allegedly bought insurance policies that were actually invalid because of hidden medical conditions, then sold them to investors. When the insurance

companies that originally wrote the policies found out about the

medical problems, they canceled the policies, leaving the investors

holding worthless paper.

Prosecutors say the investors lost nearly $105 million between

1996 and 2000. On top of that, Liberte Capital’s accountant allegedly embezzled millions from the firm’s escrow account that should

have been used to pay premiums and the investors.

In Texas alone, State authorities have obtained criminal convictions in 13 separate multimillion-dollar viatical cases since 2000,

and just yesterday, the SEC announced that it has filed a lawsuit

in Texas against a new scam that defrauded more than 480 elderly

investors out of over $30 million.

There are important questions for the Financial Services Committee to consider about viaticals:

Is there sufficient coordination between insurance regulators, securities regulators, and law enforcement officials to ensure that

viatical fraud can be prosecuted, and, better yet, prevented?

Is there consistent regulatory treatment of viaticals by States, or

should this subcommittee consider mandating some uniformity in

treatment?

In this regard, I, in particular, and we as a subcommittee want

to thank our colleague, Representative Mike Rogers from Michigan,

who was instrumental in drafting H.R. 1408, the Financial Services

Antifraud Act, to enable law enforcement to share critical information. The bill easily passed the House last year, but unfortunately,

remains stuck in the Senate.

Representative Rogers planned to be here, but he is stuck in a

snowstorm in Detroit.

Ohio is showing the way for other States grappling with viatical

fraud. It recently passed a comprehensive law that addresses both

the insurance and the securities aspects of a viatical settlement.

Our witnesses today can discuss the impact of that law and the

Liberte case, the extent of fraud in the industry and the implications for the future regulation of viatical settlements. We will hear

from senior officials from the State of Ohio, a criminal investigator

involved in the case, two attorneys with experience and expertise

in this area, and an industry representative with experience in securities litigation. We will thank them for their attendance and we

do look forward to their testimony.

I would like to inform the Members who are here that it is my

intention to enforce the rule that limits statements and questions

to 5 minutes each. And I would appreciate their cooperation in this.

And I turn now—Mr. Gutierrez is not here, but since I have spoken, I am going to turn to Ms. Jones, who was the first to arrive

from the Democratic side.

[The prepared statement of Hon. Sue W. Kelly can be found on

page 26 in the appendix.]

Mrs. Jones.

3

Mrs. JONES. There is something about being on time; I get to be

Ranking, with not much seniority.

Good afternoon to Chairwoman Kelly, Ranking Members, in

absentia, other Members of the Oversight subcommittee. I seek

unanimous consent that my statement be included in the record.

We are here to hear from various witnesses this afternoon concerning retirement protection as well as fighting fraud. We have

heard horror stories of Georgia dealing with crematories, and now

we read about investment fraud with the viatical settlement. It is

appropriate for this subcommittee to take up this matter and seek

solutions that will prevent injury to consumers, investors, insurance companies, and families who face trying times with terminally

ill family members.

I would like to, since I am from the State of Ohio, welcome our

first witness, J. Lee Covington, the Director of the Ohio Department of Insurance. I am pleased that he is here to present regulations passed by the Ohio legislature to provide greater protection

and regulation in this area.

And to our other distinguished panelists, even though you are

not Buckeyes, we are glad to have you here to testify.

Retirement protection, as we have seen with the declining economy, as well as with the Enron case, is critical and has received

heightened review. One area of retirement protection that has received tremendous attention is the viatical settlements. This industry has grown tremendously since 1990.

And I will just enter the rest of my statement for the record. I

am just pleased to have an opportunity to be here, Madam Chairwoman, and would like to say to the members of the panel and my

colleagues, I am scheduled to be on a panel at American University

this afternoon with some law students over there, so I will be leaving early, but it does not diminish my interest in this area.

I also for the record, Madam Chairwoman, would like to put into

the record a question that I would hope that members of this panel

will address, and that is the question as to who, in fact, owns the

insurance policy once it is sold? Is the insurance policy owned by

the individual who actually purchased that policy or is it owned by

those who subsequently have an opportunity to, for lack of a better

term, ‘‘negotiate’’ the policy?

I would hope that as we go through this process, we will attempt

to address that issue in our discussions, and I would hope that

members of the panel would address that issue as well.

Again, Mr. Covington, welcome to Washington, DC. And if I have

any time left, I yield the balance of my time.

Chairwoman KELLY. Thank you, Mrs. Jones. And with the unanimous consent of the subcommittee, we will insert that question in

the record, and if we do not have time to verbally get a response,

we will ask for a written response.

I would like to now go to Mr. Tiberi, who actually is the man who

represents, I understand, Mr. Covington and Mr. Geyer, and perhaps you would like to introduce these people, Mr. Tiberi.

Mr. TIBERI. Well, I will allow my colleague from Ohio, who is a

former Chairman of the Insurance Committee, to introduce one of

the members. But it is great that you are having this hearing

today, Madam Chairwoman. I am pleased that my plane was not

4

canceled in Columbus, the snow was starting there, but it is great

to have the panelists here.

And I have got to tell you, Madam Chairwoman, the subcommittee is in store for, at least from two members, some outstanding testimony. I had the privilege to work with both Mr.

Geyer and Mr. Covington when I was in the legislature. I think you

will find them both to be pros, not taking anything away from the

other members of the panel.

This is an important issue. Ohio has dealt with it in a strong,

bipartisan way. And I think they have provided the leadership for

other States as well.

With that, I know Mr. Ney has an opening statement, So I will

allow him, if I could, to have the balance of my time.

Chairwoman KELLY. By all means. I understand that Mr. Gutierrez and I are surrounded by Ohioans, so we will let you all speak.

Mr. NEY. Thank you. I wasn’t stuck in the snow either. As you

can tell, I was a little bit south, more toward San Juan, Puerto

Rico, and so I got a little bit of sun. But I am back, and I just

wanted to take a second to actually commend both gentlemen, the

entire panel, but obviously, Commissioner Lee Covington and Securities Commissioner Tom Geyer. They are both part of a superb

regulatory team. I think the State of Ohio—I chaired the Insurance

Committee in the Senate. We had great leaders there, too, as part

of our regulatory team that has continued to this day.

So I just, Madam Chairwoman, want to say that I think we are

one of the better regulated States in the Nation when it comes to

financial services, providing the people of Ohio with stable and tenable financial markets. And also Lee Covington and Tom Geyer are

both nationally recognized as being in the forefront of their fields.

The case of Liberte Capital and their working in uncovering the

rampant fraud in that company is a perfect example of their hard

work, skill, and dedication.

So, I am happy to be able to commend both of you and introduce

you.

Mrs. JONES. Mr. Ney, would you yield just a moment for me,

please?

Mr. NEY. Yes, ma’am.

Mrs. JONES. Mr. Geyer, please forgive me. I did not want to not

recognize you. You didn’t come see me. No, I am kidding. All joking

aside, I just to want to welcome you as well. I apologize.

Thank you.

Chairwoman KELLY. Thank you.

Mr. Tiberi, do you have an opening statement?

Mr. TIBERI. No, I will go ahead and introduce two of the guests

whenever you would like.

Chairwoman KELLY. By all means. Let me let you do that, because then I will go to Mr. Gutierrez for his opening statement.

Mr. TIBERI Just briefly introducing the two Ohioans, Madam

Chairwoman. Mr. Covington, as you have already heard, is the Director of Insurance in the State of Ohio, having been appointed by

Governor Bob Taft in March of 1999. In his first 2 years, Director

Covington has worked to reorganize the Department and retool it,

retool the financial regulations of the Ohio Department of Insurance, after receiving some of the highest scores at the National AsVerDate 11-MAY-2000 10:07 Aug 28, 2002 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\78132.TXT HBANK1 PsN: HBANK1
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sociation of Insurance Commissioners accreditation review team in

2001.

He is considered one of the best in the country at what he does.

He worked to pass the governor’s patient protection bill and initiated a comprehensive health insurance prompt pay review to improve the speed at which consumers and providers receive health

insurance payments.

Director Covington has been recognized nationally for his efforts

in insurance regulation and featured regionally for his work to

modernize insurance regulation in Ohio and across the country.

And he lives in the congressional district that I represent. Thank

you for being here today, Director Covington.

Assistant Director Geyer, prior to his appointment to the Department of Commerce as the Assistant Director, served as commissioner for the Ohio Division of Securities from 1996 to 2000, partly

under former Governor Voinovich and now under Governor Taft.

He received his Bachelor’s degree from the University of Notre

Dame and his law degree from the Ohio State University. He also

serves as a Professor at Capital Law University in Columbus, Ohio.

Thank you, Madam Chairwoman.

Chairwoman KELLY. Thank you very much.

Mr. Gutierrez.

Mr. GUTIERREZ. I would like to submit my opening statement for

the record so that we can proceed directly to the testimony of the

witnesses.

[The prepared statement of Hon. Luis V. Guiterrez can be found

on page 30 in the appendix.]

Chairwoman KELLY. Thank you very much.

Mr. Cantor, have you an opening statement?

Mr. CANTOR. Madam Chairwoman, not at this time.

Chairwoman KELLY. Thank you very much. If there are no more

opening statements, then I would like to just quickly introduce the

rest of the members of the panel. We have heard that Mr. Covington is the Director of the Ohio Department of Insurance and one

of the Nation’s leading insurance experts who has testified often

before the subcommittee.

Next we have Mr. Greg Beriault, Fraud Team Leader from the

Indianapolis field office of the U.S. Postal Inspection Service, who

had a major role in the Liberte Capital case.

And Steven Mercer comes next. He is from the local law firm of

Sandler & Mercer, an expert and author of a handbook used by the

DC Bar.

And following him we have Mr. John W. Lazar, the Class Representative in the class action suit against Liberte Capital. And we

understand that his attorney, Gerald Kowalski, is here with him

today.

And David Lewis follows him, General Counsel of Stonestreet Financial, another expert speaking on behalf of the life settlement industry.

Following him will be Thomas Geyer, the Assistant Director of

Commerce for the State of Ohio, former Commissioner of Securities, and another national leader in his field.

6

We thank all of you for joining us here today, and we appreciate

the fact you are willing to share your thoughts and expertise with

this subcommittee.

Without objection, your written statements and any attachments

will be made part of the record. You will each now be recognized

for a 5-minute summary of your testimony. There are lights in

front of you, right here, that will indicate how much time you have.

The green light signifies you are in the first 4 minutes of your summary, the yellow light will turn when you have 1 minute remaining, and the red light will turn when your time has expired. I

would appreciate your trying to keep track of the time so that we

can fit all of the Members’ questions in as well. And, Members, I

would remind you that I will also hold your questioning periods to

the 5-minute rule.

We begin with Mr. Covington.

STATEMENT OF HON. J. LEE COVINGTON II, DIRECTOR, OHIO

DEPARTMENT OF INSURANCE

Mr. COVINGTON. Madam Chairwoman, Members of the subcommittee, thank you very much for the opportunity to be here

today to address the problem of viatical fraud and the steps that

I have taken to combat this type of insurance fraud in the State

of Ohio.

I commend the Chair and the subcommittee for your interest in

this important issue. I thank the subcommittee and the House of

Representatives for its favorable action on Chairman Oxley’s Financial Services Antifraud Network Act of 2001.

Because the Chair has done such an excellent job of describing

how viaticals work, I will not provide another explanation, but will

reserve that to questions. I will note there is a very good chart in

the back of my formal testimony. I may help you walk through

that, because it is somewhat complex.

I will highlight again that the social benefit of viaticals may be

extremely valuable for some terminally ill persons and senior citizens. The money obtained through those transactions can be used

for anything from experimental medical treatments not covered by

insurance to paying off accumulated bills.

Unfortunately, fraud jeopardizes the very existence of this industry. In the largest fraud investigation ever undertaken in the history of the Ohio Department of Insurance, we uncovered a scheme

that defrauded over 3,000 victims of more than $100 million. Our

joint investigation with several Federal agencies, including the

United States Postal Service, resulted in the indictment of 15 individuals who fraudulently obtained multiple life insurance policies,

and the indictment of the owner of Liberte Capital Group, a Toledo

area viatical settlement company.

In this case, viators fraudulently obtained insurance policies by

lying about their bad health conditions or conspiring to have other

persons take required blood tests and/or physicals.

Because of this investigation, 85 insurance companies were able

to rescind most of the fraudulent policies, saving the companies

more than $25 million. The victims of this fraud are both investors

and insurance companies and these companies’ legitimate cusVerDate 11-MAY-2000 10:07 Aug 28, 2002 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\78132.TXT HBANK1 PsN: HBANK1
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tomers who end up paying more through higher insurance premiums.

In addition to our aggressive antifraud criminal investigation efforts, the Ohio Department of Insurance has been active on the legislative front as well, developing and working on a new law to prevent this type of fraud.

In January of 2001, Ohio passed legislation based on the model

developed by and adopted by the National Association of Insurance

Commissioners in March of 2001, and I am proud to report that

Ohio was the first State to adopt this model. This new law creates

criminal penalties and gives the department the authority to request an injunction ordering the immediate termination of any potentially harmful activities during an investigation which can prevent or limit the scope of damages and the number of victims.

It prohibits viatical settlements within 2 years of issuing a life

insurance policy unless the individual meets one of four legitimate

exceptions.

Third, it requires a notice to the insurer of any viatical settlement which allows an insurance company to examine the policy for

potential fraud and, if present, to rescind the policy very early on

in the process.

And fourth, it clarifies that viatical settlement transactions are

securities under Ohio law and are subject to all regulations associated with securities.

Although I have focused on Ohio’s activities and accomplishments, I know this is a high priority for other States. At least 12

other States have or have pending bills and regulations to update

their laws by adopting the 2001 NAIC model. A majority of States,

29, have similar laws and are expected to determine if they need

to revise their current laws to provide additional protections

against insurance fraud.

State insurance regulators, through the NAIC, also acted previously to protect terminally ill through consumer protections, including model laws adopted in 1993 and 1998. Unfortunately, until

1999, when John Hancock Insurance Company took the first court

action to rescind fraudulent policies, no one ever knew that these

transactions would be adulterated by the acts of criminals ready to

perpetrate fraud. In a little over a year, the NAIC took action and

the Ohio Department took action to put in place protections for this

type of fraud.

Congress can help State regulators in our effort to combat insurance fraud, and the House of Representatives has already done so

by passing Chairman Oxley’s Financial Services Antifraud Network

Act of 2001. This bill is a giant step forward, and I strongly support immediate action in the U.S. Senate to pass this legislation.

This legislation will be extremely beneficial, because it provides

State regulators access to an existing network of criminal and administrative databases, including the Federal Bureau of Investigation’s Antifraud database, and the actions that you referenced,

Madam Chairwoman, that individual in Texas who had been previously barred by the SEC, and this will allow us to share information and to combat fraud more effectively across the country.

According to the Coalition Against Insurance Fraud, insurance

fraud costs American families almost $1,000 a year in extra preVerDate 11-MAY-2000 10:07 Aug 28, 2002 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\DOCS\78132.TXT HBANK1 PsN: HBANK1
8

miums. It is a tax imposed on each American by criminals, and we

must do everything we can do to stop this action.

I see that my time is out, and I will be happy to answer questions at the appropriate time. Thank you, Madam Chairwoman.

[The prepared statement of Hon. Jay Lee Covington II can be

found on page 46 in the appendix.]

Chairwoman KELLY. Well done, Mr. Covington. Thank you very

much.

Let’s go to Mr. Beriault.

STATEMENT OF GREG BERIAULT, POSTAL INSPECTOR, FRAUD

TEAM LEADER, INDIANAPOLIS FIELD OFFICE, U.S. POSTAL

INSPECTION SERVICE

Mr. BERIAULT. Good afternoon, Chairwoman Kelly, and distinguished Members of the subcommittee. I am Postal Inspector Greg

Beriault, fraud team leader at the U.S. Postal Inspection Service’s

Indianapolis field office. Thank you for the opportunity to testify

today on the mission of the Postal Inspection Service and our leadership role in the campaign to end viatical settlement fraud, a rising menace to consumers, the insurance industry, and law enforcement.

Mail fraud investigations are often broad in scope and typically

involve members of the American public as victims. One such fraud

I have become involved with is viatical settlement fraud. The victims of viatical settlement fraud include the public, who are investors, and the insurance industry.

In May of 1999, members of the Postal Inspection Service’s Indianapolis field office fraud team were made aware of a growing

problem of fraud related to viatical settlements. Based upon discussions with the insurance community, law enforcement, and State

regulatory agencies, it became apparent there was a need to address this issue. A working group of eight postal inspectors was established. This working group met in Indianapolis in August of

1999 to develop a plan for the Inspection Service’s viatical fraud

initiative.

In August of 1999, the U.S. Postal Inspection Service established

a national task force responsible for developing a strategy for the

successful identification, investigation, and prosecution of individuals involved in this fraud. The task force worked from the Indianapolis field office and was named Operation ‘‘Clean Sheet.’’ In November of 1999, the task force became a joint investigative effort

with the FBI, and has also worked closely with the other State law

enforcement and regulatory agencies.

Through analysis of the intelligence gathered, the OCS task force

was able to identify many of the major offenders and assist law enforcement in identifying targets. The OCS task force was responsible for initiating, coordinating, and supporting these field investigations.

On May 19th, 2000, eight simultaneous search warrants were executed at various locations throughout the United States. Each

search warrant was the result of investigations relative to the

viatical settlement fraud. This effort involved more than 200 Federal, State, and local law enforcement officers.

9

The OCS task force was very successful in forging a cooperative

effort among regulatory agencies and State and Federal law enforcement nationwide. There are approximately 40 known investigations nationwide. To date, there have been approximately 100

arrests and 75 convictions made relative to viatical settlement

fraud. The majority of these investigations are still ongoing.

The Liberte Capital Group investigation in Ohio is a good example of the cooperative effort among State and Federal agencies.

Agencies participating in this investigation include the U.S. Postal

Inspection Service, Ohio Department of Insurance, Federal Bureau

of Investigation, Internal Revenue Service and Department of Justice.

Due to the complexity of this fraud, a single case often involves

an insured party, insurance agent, insurance company, viatical settlement company, viatical broker and investors, all living in different parts of the country. Therefore, various State and Federal

jurisdictional boundaries are affected by these investigations.

Due to this dispersion, coordination with the Department of Justice and State prosecutorial authorities has been very instrumental

in the successful prosecution of these cases. As with most fraud

cases, senior citizens are often targeted by fraudsters and, unfortunately, end up as victims. Viatical settlement fraud is particularly

insidious as it frequently entices its victims into investing their life

savings.

The investment and viatical settlement also appeals to the humanitarian side of the investors. They perceive themselves as helping a terminally ill person pay for the medical attention needed

and to live as comfortably as possible in their final days.

Another reason we believe that investors have become victims of

this fraud so easily is that the life insurance industry is one of the

oldest and most trusted industries in our Nation. For generations

people have trusted in life insurance and faithfully paid their premiums, only to receive what was due upon the death of the insured. Most investors recognize the risks associated with speculative investments.

However, when you discuss life insurance, most people think of

a safe, secure investment. The distinction between the insurance

industry and the viatical settlement industry may not be fully appreciated or understood by most investors.

Finally, because of the nature of the fraud and the obvious need

to keep information about the insured private, there is a reluctance

by investors to follow up or ask a lot of questions about their investment. When the investment does not pay off due to the death

of the insured, they are most often reluctant to complain, because

in effect they are complaining that the insured did not die as projected.

The prevention efforts of the task force which focused primarily

on identification and investigation, also included outreach to consumers protection groups, the insurance and business community,

and oversight regulatory agencies. Although our efforts have had a

significant impact in reducing the fraud in this industry, the Postal

Inspection Service emphasizes the importance of consumer awareness and prevention as the best protection for customers.

10

There are many challenges facing law enforcement, regulatory

agencies and insurance companies as they continue to combat and

prevent fraud from occurring in the viatical settlement industry. In

working as a task force leader, I have had the opportunity to talk

with many individuals from the insurance industry, State regulatory agencies, prosecutors and law enforcement. There are certain

issues that surfaced during each conversation. And these issues I

would just state simply as follows.

I see I have run out of time here. But the primary issues that

seem to come up and surface as you speak with prosecutors and

law enforcement and the regulatory agencies, the main areas of

concern are the life expectancy projections, the issue of insurable

interest, and certainly a concern over the life settlement—which is

now where most of these companies are headed toward is the life

settlement—where we are talking about the senior settlements.

Thank you.

[The prepared statement of Greg Beriault can be found on page

34 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Beriault.

Let’s go now to Mr. Mercer.

STATEMENT OF STEPHEN B. MERCER, ESQ., ATTORNEY,

SANDLER & MERCER, P.C.

Mr. MERCER. Thank you. Good afternoon, Madam Chairwoman,

and other Members of the panel. I am an attorney in private practice, as has already been recognized. And in 1992, I began to work

with the Whitman-Walker Clinic, Legal Services Clinic, which is a

local non-profit agency that provides many services to HIV and

AIDS persons. And one of the areas that I have been working in

is working with folks who were trying to sell their life insurance.

Now, the point that I want to stress for the panel is that, in reviewing the fraud in the industry, not to overlook how important

these transactions can be for persons who are terminally ill. The

money that is realized from these sales can go toward housing,

food, medicine, and it keeps them off other programs that may use

up resources that are very much needed for folks in their situations. So remember that these transactions are very important to

persons living with HIV and AIDS, and that, in seeking to regulate

out the fraud or the potential for fraud, that that can’t be forgotten.

In my experience, what I generally have encountered—because

most potential viators that are looking to engage in ‘‘clean sheeting’’ are not seeking the advice of attorneys—is the sort of day-today issues that confront viators that are looking to sell their policies. These are issues of confidentiality, these are issues of deceptive sales practices, and these are issues related to low prices that

are partly due to the increased life expectancy of persons with HIV,

but also resulting from scarce capital in the marketplace.

And while fraud has a lot to do with it, I also believe that the

structure of the marketplace as it stands right now, where it is unregulated by Federal securities law, provides for a situation where

the viatical settlement companies have absolutely every incentive

to increase commissions, administrative charges and other fees,

and they do not have any commonality of interest with the investor.

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And so even the investor that isn’t defrauded is not realizing a

reasonable rate of return, which means there is less money for potential viators. And I believe the primary reason that the day-today investor is not seeing a good rate of return is because this is

an area that should be subject to securities regulation, but is not.

And there is a case that the panel I am sure is familiar with, SEC

v. Life Partners, that should be corrected.

Information is vital to investors, and to achieve a commonality

of interest between the viatical settlement companies and the investors, so that they both have a stake in the profitability of the

transaction. Given the viatical settlement company, that stake

should also give them incentive to fet out the fraud in the underlying transaction. And if you are not creating this match between

one investor and one viator, then you are also serving to protect

the confidentiality interest of the viator by removing that particular match.

In other words, I am essentially talking about providing—if these

transactions are subject to securities regulations, then you are in

a situation where viatical companies can pool the risks, avoid the

uncertainties of an individual transaction, and strive for the predictability of many transactions so that qualified investors can

have a reasonable rate of return, there can be more money in the

marketplace for potential viators, and the overall structure of the

market is fashioned in such a way to protect issues of confidentiality.

Just one other point I did make in my written statement, that

if there is going to be proposed legislation about viatical settlements, there are also tax consequences that need to be considered.

In 1996 Congress enacted as part of HIPAA some tax reforms to

exempt the proceeds of many viatical settlements from income tax.

But with the advancing treatments of HIV/AIDS, sort of the carving out of the income tax for viatical settlements has now largely

disappeared, because folks are living more than 2 years, and many

of the prices are not coming up to the minimum pricing standards

of the NAIC, and so you have viatical transactions now subject to

income tax. And that should be something that should also be considered. Thank you.

[The prepared statement of Stephen B. Mercer Esq. can be found

on page 71 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Mercer.

Now, Mr. Lazar.

STATEMENT OF JOHN W. LAZAR, CLASS REPRESENTATIVE IN

LAWSUIT AGAINST LIBERTE CAPITAL CORP.

Mr LAZAR. Ladies and gentlemen, I am John Wayne Lazar, 78

years old, and a resident of Clinton Township, Michigan. I was

born and raised in the Detroit area. I am a widower, and I have

two sons and five wonderful grandchildren.

I proudly served my country in the Navy between 1943 and 1945.

After my military service, I earned a bachelor’s degree in industrial

engineering from Lawrence Institute of Technology. For 40 years I

worked in the automotive industry in various engineering and

management positions. I retired in 1991 and moved to Florida to

enjoy the retirement that I worked so hard for.

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In approximately 1997, I began reading about viatical settlements. I read articles in the Wall Street Journal and even saw a

favorable report on 60 Minutes. I was quite interested in the use

of viatical settlements for my retirement investments. I then contacted a number of viatical companies, obtained written material,

and reviewed the material in detail. Viatical settlements were marketed as safe, secure, guaranteed, and humanitarian investments.

I was assured that they were safer than CDs and provided a higher

rate of return. Furthermore, I was told that an investment in a

viatical settlement would assist individuals with AIDS and other

terminal illnesses who were in desperate need of financial help

during the last days of their life. I was told that this was a noble

investment.

After carefully reviewing the investment material, I decided to

invest nearly all of my retirement savings, consisting of approximately $120,000 in an IRA and $50,000 in other savings. Because

of the living uncertainty of this type of investment, I elected to invest this money in Liberte Capital for only 1 year. I was guaranteed a return of 14 percent, paid in quarterly installments.

I received three quarterly interest payments and no more. My

principal has never been returned. I have moved back to Michigan,

back to Clinton Township, to be close to one of my sons. I presently

live on my monthly Social Security payment and the interest I am

earning as a result of the sale of my home in Florida.

Needless to say, my financial situation has been devastated by

the fraudulent activities of Liberte Capital. I am a class representative in a lawsuit that has been filed to recoup our investments.

My attorneys have advised that at best we can expect only a small

portion of our investments to be returned. As a class representative, I have spoken to Liberte Capital investors across the country.

Most Liberte Capital investors are senior citizens who like me invested all or a significant portion of their life savings.

Many of these investors have had to sell their homes and move

into apartments in order to make ends meet. Other investors have

had to return to the work force. Some investors forgo the amenities

which they planned for and struggle to afford the necessities of

daily living such as utilities, food, and medical care.

I am attaching to this statement a few letters from investors that

have accurately portrayed their situations. I could attach hundreds

more such letters.

I am also attaching an article that appeared recently in the Toledo, Ohio newspaper, The Blade, which explains the devastating

impact that the fraudulent activities of the Liberte Capital have

had on a small town in Indiana.

I thank you for the opportunity to appear before you today. On

behalf of all of the Liberte investors, I request your help in dealing

with this devastating situation. In addition to this statement, I

would like also to submit a statement prepared by my attorneys,

Andy Storer and Jy Kowalski. Thank you.

[The prepared statement of John W. Lazar can be found on page

63 in the appendix.]

Chairwoman KELLY. Thank you, Mr. Lazar. My heart just absolutely hurts for you and the other people who are caught in the

same situation.

13

Let’s go to Mr. Lewis.

STATEMENT OF DAVID M. LEWIS, ESQ., PRESIDENT, LIFE

SETTLEMENT INSTITUTE

Mr. LEWIS. Thank you. Good afternoon. My name is David Lewis,

and I am appearing before the subcommittee today in my capacity

as President of the Life Settlement Institute. By way of background, I have been a practicing Attorney for 31 years, including

4 years as a Staff Attorney in the Division of Enforcement of the

SEC.

The Life Settlement Institute is a trade association whose members are institutionally funded life settlement providers and financing entities. Life Settlement Institute members do not use private

investor funds to purchase policies, but instead solely use financing

provided by banks, insurance companies, and institutional sources

of capital.

As an aside, Life Settlement Institute members have worked

with the trustee in the Liberte case to purchase policies from the

bankruptcy estate. These funds will be used to cover at least some

of the investor losses.

Viatical life settlements provide meaningful alternatives to persons facing terminal illnesses or who have life insurance policies

they no longer want or can afford. A life settlement transaction,

however, is different from a traditional viatical settlement. In a

viatical settlement, the insured has a terminal illness and their life

expectancy is normally estimated to be 2 years or less. The transaction is designed to provide needed funds to assist persons with

short life expectancies in improving the quality of their life.

In a life settlement, the insured is a senior citizen who is over

the age of 65, does not have a terminal illness, has an estimated

life expectancy of up to 12 years. A life settlement gives policyholders a new option to consider in their financial planning. Typically a person who has a life insurance policy they no longer want

or need can do one of two things: one, stop paying the premium

and let the policy lapse; or, two, surrender the policy to the issuing

insurance company for the cash surrender value.

As you may know, a majority of life insurance policies held by

persons over the age of 65 merely lapse with no value to the insured. A life settlement allows the senior citizen owner of the policy

to obtain more value for their policy than they could receive from

the issuing insurance company.

I would like to share with you some examples of the benefits of

life settlement transactions to seniors. One of our members recently closed on a transaction with a 69-year-old male from Pennsylvania who had a $500,000 term life policy where he could not

afford the renewal premiums. He had an estimated life expectancy

of approximately 7 years. The policy had no cash value. The Life

Settlement Institute member was able to pay the senior $100,000

for his policy, and the senior used the proceeds to pay for his longterm care needs.

In another recent transaction, a member purchased a $750,000

universal life policy from a 72-year-old female from New Jersey

who had an estimated life expectancy of 6 years. The policy had a

cash surrender value of $40,000. The member was able to pay the

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senior $165,000, and the funds enabled her and her husband to

stay in their family home.

These examples and many others that we could provide demonstrate the value to seniors of the availability of this new financial option.

At the present time 35 States regulate, through their insurance

regulators, traditional viatical transactions. And of that group, approximately 13 also regulate life settlements. Only approximately

20 States regulate the sale of viatical or life settlements to private

investors. In most cases, this regulation is through their securities

regulators. Last year, the NAIC promulgated its Viatical Settlements model act. The ‘‘model act’’ regulates both traditional viatical

settlements and life settlements.

The Life Settlement Institute and its members have worked

closely with the NAIC viatical working group that developed the

model act, and we commend Commissioner Dunlap of Louisiana,

the chair, and the other working group members for their diligent

efforts.

The alleged fraud resulting in the Liberte case and others like

it around the country were not caused by anything inherently

wrong in a viatical or life settlement transaction, but were caused

by persons taking advantage of a perceived regulatory vacuum,

which vacuum is largely the result of the life partners case mentioned by Mr. Mercer, and this allowed these con artists to practice

their scheme on an unsuspecting public.

There is nothing new about the fraud in the Liberte case. When

I was a young lawyer working at the SEC in the 1970s, the Enron

of its day was a case called Equity Funding, in which a large public

company cooked its books by creating phony life insurance policies

that it resold to reinsurance companies.

We applaud the efforts of Ohio regulators and those elsewhere

who are cracking down on fraudulent activities. Increased regulation and the enforcement thereof will minimize if not eliminate

these abusive activities. The abuses highlighted in the Liberte case,

which is fraud in the sale of viatical policies to private investors

and fraud with respect to obtaining life insurance policies, can be,

we believe, addressed in the future with the following initiatives.

First, on the Federal level, the amendment of the Federal Securities Act of 1933, so that the packaging and sale of interests in life

insurance policies to private investors are deemed to be securities

under that act and are regulated by the SEC. This legislation is

needed to correct the current Federal case law on the subject, as

mentioned by Mr. Mercer. The Federal securities laws have served

the public and the Nation’s businesses well over the years, and

there is no reason to believe that they would not work just as well

in regulating the sale of viatical or life settlements to private investors.

Second, on the State level, we urge the passage in every State

of legislation patterned after the NAIC model act. The model act

provides for strong regulation of the viatical settlement industry to

be conducted by the Department of Insurance in each State.

Importantly, the model act also includes many provisions that

strongly support the use of institutional funds for the purchase of

life insurance policies.

15

Chairwoman KELLY. Mr. Lewis, I am sorry to intupt you, but you

are out of time. You may sum up.

Mr. LEWIS. I am finished. It is another sentence. We just believe

that the use of institutional funds with the stringent due diligence

requirements that are attendant to its use is the best way to promote an industry that provides a valuable service to seniors and

to protect such potentially vulnerable individuals from fraudulent

businesses.

Thank you for allowing me to appear before you today. I would

be pleased to answer any questions that the subcommittee Members have. Thank you.

[The prepared statement of David M. Lewis Esq. can be found on

page 65 in the appendix.]

Chairwoman KELLY. Thank you very much. You understand that

your full written statement has been made a part of the record.

We turn now to Mr. Geyer.

STATEMENT OF THOMAS E. GEYER, ASSISTANT DIRECTOR,

OHIO DEPARTMENT OF COMMERCE

Mr. GEYER. Thank you, Chairwoman Kelly. And, Mr. Tiberi,

thank you for that kind introduction. It is a privilege to be here

this afternoon to talk about the securities law aspects of viatical

settlements. And as you have heard from the previous witnesses,

the securities component arises when the viatical settlement provider or other company solicits investors to provide money to fund

the payout to the insured. The investor is induced to invest, with

the promise that they will receive the death benefit or a fraction

of the death benefit in an amount that exceeds their original investments.

This creates a return on the investment. And in securities law,

we call this type of arrangement an investment contract, which is

a type of security. Once a transaction constitutes a security, securities laws impose three requirements:

First, people selling securities must be licensed or properly exempted from licensure.

Second, the securities product itself must be registered or properly exempted from registration.

And third, there must be full and fair disclosure of all material

terms and conditions of the transaction.

This three-part framework of oversight provides essential investor protections. Unfortunately, in some cases investors in viaticals

have not had the benefit of these protections because viaticals have

proven to be fertile ground for fraud and other securities law violations.

In Ohio alone, we initiated our first securities enforcement action

in June of 1998. Since that time we have initiated 30 actions, 26

of which have been finalized. All of those final actions have found

that the viatical product was not properly registered, or exempted

from registration, meaning there was no compliance with the laws

requiring full and fair disclosure.

Half of the cases have involved the unlicensed sale of securities,

meaning that the person consummating the transaction had no assurance that that person had any competency with respect to financial or investment matters, and one in five has involved

16

misstatements or omissions of material facts. And examples of common omissions and misstatements are included in my written

statement.

In addition to our enforcement efforts, we also focus on investor

education. We think it is very important to help educate Ohioans,

put them in a position to make informed investment decisions.

Among our resources we offer a 1–800 investor hotline, a searchable database on our website, numerous brochures, and dozens of

educational programs each year. We believe it is essential that investors educate themselves as more and more investment opportunities are available to them.

Our experience with securities law violations in Ohio is in no

way unique. In 1999, the North American Securities Administrators Association, NASAA, named viaticals as one of the country’s

top 10 financial scams.

As you can see from the chart, 34 States’ security regulators do

assert jurisdiction over viatical products as securities. There is

some level of uniformity among the States, although obviously

more can be done. I would caution however, though, in some of

those States perhaps the insurance regulator has sole jurisdiction

over the viatical, perhaps prohibiting the security regulator from

asserting jurisdiction.

But uniformity is critical. Certainly it maximizes investor protection, but it also promotes fairness, because businesses know the

rules of the game, and no State will become a haven for scofflaws.

Returning to a discussion of our experience in Ohio, as Mr. Covington pointed out, the Department of Commerce worked closely

with the Department of Insurance to sponsor the Ohio legislation,

House Bill 551. To my knowledge, 551 is the first single comprehensive bill that addressed both the State securities law and the

State insurance aspects of viaticals.

It represented a wonderful level of regulatory cooperation, and I

think this cooperation is essential as we move forward into this

new financial marketplace. Federal legislation, like H.R. 1408 that

provides the tools to regulators, go a long way to establishing cooperation and giving them the tools to prevent fraud.

Just to conclude, whether you believe viaticals are socially valuable or whether you think they are abhorrent, because they derive

their return from death, the fact is that they are here, and we

must continue to help our citizens educate themselves so that they

can make informed investment decisions. Meaningful regulation is

essential to ensure that neither viators nor investors are defrauded.

As demonstrated in Ohio, there is an opportunity for functional

regulation and cooperation among regulators. And the regulators,

along with the legislative bodies, must remain vigilant to ensure

that the viaticals marketplace is one characterized by full disclosure, the absence of fraud, fair payouts to viators, and fair returns

to investors.

Thank you very much.

[The prepared statement of Thomas E. Geyer can be found on

page 57 in the appendix.]

Chairwoman KELLY. We thank you very much.

17

I also want to thank David Epstein and Robert Gordon for producing this chart that we have over here. They are the staffers who

put this together. And I find it fascinating in this chart that if you

look at it you can see that the regulations, the laws, are such a

patchwork all across the United States. Wyoming has an F, but so

does Rhode Island. So it is all the way across the United States.

Georgia and Hawaii all arrive at an F. On the other hand, Alaska

has an A-plus. And you go back and find Nevada with an A-plus.

[The information referred to can be found on page 80 of the appendix.]

So for seniors across the Nation, and for senior groups across the

Nation, it has got to be very difficult to advise seniors with regard

to what could otherwise be a logical investment for them.

Also, as in Mr. Lazar’s case, he was trying to do something to

help people. And I think it is one of the important reasons why we

are having this hearing today. We need to have some kind of uniformity so that everyone understands. And obviously, it sounds to

me from your testimony as though what we also need is transparency.

I would like to just start the questioning by saying that—turning

to you, Mr. Geyer, and going on with that—my original statement.

Can you give me any reason why we have some States that are

regulating viaticals as securities and others that aren’t? And the

courts seem to be all over the map on this one.

Mr. GEYER. Madam Chairwoman, I wish I could give you a real

good answer. The best answer I can give you is, again, States serving as the laboratory of regulation. And in some States you may

have a strong insurance regulator, and the legislature has decided

that the insurance commissioner or the insurance department

should oversee both the insurance side as well as when viaticals

are sold to investors.

I think that is the case at least in Connecticut and perhaps a

couple of other States as well. Other States where you perhaps

have a division of labor between the State securities administrator

and the insurance regulators, that is where you have seen the

State securities people step forward.

I think confusion has also been heightened because of the Life

Partners decision. Many people assume that since a viatical is not

a security under Federal law, the assumption is it is not a security

under State law. Of course, that is not the case. We have a complementary set of regulations. So if regulation is going to be maintained on the State level, we certainly need to improve the uniformity and we need to improve the cooperation between securities

and insurance regulators.

Chairwoman KELLY. I would like to ask that same question of

you, Mr. Covington. There are 15 States that appear not to have

any regulation at all, and they obviously missed the boat in 1993,

they missed the boat again in 1998, and I don’t think that they

have passed any act in 2001. We haven’t passed that act, it is sitting over in the Senate.

I am interested that those 15 States have no financial licensing

requirements, no antifraud provisions, and no advertising standards. When the NAIC does good work and Ohio responds like this

immediately, why is it so hard to get other States to respond?

18

Mr. COVINGTON. Madam Chairwoman, I obviously can’t speak for

the conditions of the situation in each of those States. I can tell you

that we see patterns where there is greater abuse. For example, in

the fraud area, we have seen a lot of activity in Ohio and Florida,

Texas, California, and unfortunately sometimes in the legislative

process it takes something bad to happen before people act.

So different States may have different levels of activity in this

area, and I would commend the NAIC for acting very, very quickly

when we discovered this type of fraud was occurring in 1999, and

frankly, in just a little over a year, formally adopted a model law,

and then States acted on that very quickly.

One of the issues with that was that the law was passed in the

late part of the year, December, March, and a lot of legislative sessions had completed their work by that time. So that may be an

explanation as well, but I think it has to do more with the activity

that has been seen in those States.

Chairwoman KELLY. I want to go again, Mr. Covington, to you

and just simply I thank you for your testimony in support of the

antifraud bill that we passed. The GAO has given us several names

of viatical fraud artists who had previous criminal convictions, like

that guy in Texas, but particularly since the viaticals are a crossover insurance securities product, isn’t it just plain common sense

that the regulators and the law enforcement agencies should have

access to the viatical agent’s past disciplinary and criminal records

to protect the consumers? It seems to me like that is just common

sense.

Mr. COVINGTON. Madam Chairwoman, this will be my shortest

answer. Absolutely.

Chairwoman KELLY. Any of the rest of you want to join in on

that comment? Do you feel the same way, Mr. Geyer?

Mr. GEYER. Yes, ma’am. Again, to the extent that we can coordinate our efforts, I know that like the NAIC, the securities regulators have the trade group NASAA, and we work very hard on

uniformity, and the more that we can tap into mutual databases

and share information, the better off we will be to protect those in

the marketplace.

Chairwoman KELLY. I want to ask one final question, because

my time is almost out. Mr. Covington testified that the insurance

fraud cost American families almost $1,000 a year and Mr. Beriault

and Mr. Lazar noted that our elderly and seniors in particular are

vulnerable targets for fraud artists. Have your offices undertaken

an educational effort with seniors groups about viaticals, and how

can we in Congress work with you to promote better retirement

protection for seniors?

Mr. COVINGTON. Madam Chairwoman, there are a number of

things that we have done to educate seniors. In the State of Ohio

and in many States, most States I think, there is a senior health

insurance program that is supported by the Congress. There is

Federal funding matched in many States, including Ohio, that provides funding. So one thing that we would advocate is to continue

that funding. We have seen a reduction in that funding, which

hampers our ability to educate seniors. We have in Ohio over 1,400

volunteers in all 88 counties, and last year alone, we educated over

340,000 seniors, about 35,000 of those one-on-one. We have a

19

website that they can access, and in addition to that, one of the

things that you are seeing today—now, some may say seniors don’t

use the website, but we are seeing more seniors do that. And second, seniors’ children want to get online and be able to access that

for their seniors. And we are seeing an increased activity. We have

11,000 people who visit our website every week.

So those are some of the things that we can do to educate seniors, and the Congress can help us do that.

Chairwoman KELLY. Thanks. Mr. Beriault, do you want to answer that question?

Mr. BERIAULT. Yes, as part of the task force, we recognize the

importance of educating the public and certainly the seniors, and

we were successful in partnering with the AARP. And they did

issue an article related to viatical settlement fraud which identified

the risk to the investors, and we were most appreciative of that.

It included our 1-800 number and provided—and my understanding was that that went to 20 million homes. So certainly, organizations like that are very helpful in getting the message out.

Chairwoman KELLY. Mr. Beriault, do you have a copy of that article so we can put it in as part of the record?

Mr. BERIAULT. I will get you a copy. I don’t have one with me,

but I will provide you with a copy.

Chairwoman KELLY. If you would do that, we would like to put

that in as part of the record, please.

Mr. Geyer, do you want to jump in here?

Mr. GEYER. Yes, ma’am. Thank you. Similar to what Director

Covington does in the Department of Insurance, Division of Securities makes outreach programs throughout the year. In particular,

April of each month we designate as Investor Savings and Education Month, and we make presentations to help promote financial

literacy. I have spoken from age groups ranging from second graders all the way to senior citizens, and certainly when we speak to

seniors or groups like that will emphasize viatical settlements or

other opportunities that they may be subject to. But I agree. Investor education is critical as more and more complex financial instruments become available to our citizens.

Chairwoman KELLY. Thank you very much. Let us go to Mr.

Gutierrez.

Mr. GUTIERREZ. Thank you. Mr. Mercer, what can the Federal

Government do to prevent abuses in the viatical settlement workplace?

Mr. MERCER. Well, I think there are two areas. One has been

touched on in terms of the relationship between the promoter and

the investor by subjecting the sale of viatical investments to Federal securities law. Viators, whom I represent, have a stake in a

robust viatical settlements marketplace, and to the extent that investors are experiencing and enjoying a reasonable rate of return

on their investment because they are able to make a more informed

decision about their investment, then that is going to benefit the

folks that I work with.

And another point that I touched upon in my opening statement

was looking again at the tax implications of viatical settlements,

because the structuring of those tax rates back in 1996 now to a

large extent are outdated, and you have folks that are selling their

20

policies and getting taxed on it, and, of course, there are now 1099s

that accompany all of the transactions. So it adds another stress

factor in their lives that are already filled with stress.

Now, another area, though, too has to do with the consumer protection side as it relates to viators. Now, in my experience representing viators in litigation that were harmed by abusive sales

tactics of brokers, one of the problems that I encountered was that

we did not have the benefit of consumer protection statutes, because, for example, in Maryland we were exempted because it was

more in the nature of a service than a good, and yet although the

NAIC has spearheaded much in the way of disclosure requirements

early on in this emerging industry of viatical settlements, part of

the problem is if you are in private litigation you are trying to go

after the perpetrator and you have got a viator that maybe lives

in Washington, works in Maryland and is dealing with a broker in

Florida, and an ultimate purchaser that might be in another State,

is you run into these conflicts about whether you are coming in

under a State’s model, you know, insurance regulation and whether

you have to proceed by the filing of an administrative complaint

with an insurance commissioner, whether you may have a private

right of action under a State consumer protection statute that may

provide for recoupment of attorney’s fees and enforcement costs or

liquidated damages.

So, there may be a component here also under Federal law of

Federal consumer protection that may also help what are very frequently multi-State transactions; whereas, much insurance transactions are sort of State-to-State, where you have the in-State person dealing with a local State office. Viatical settlements for viators

are very different. They are typically multi-State.

Mr. GUTIERREZ. Let me ask Mr. Covington or Mr. Lewis. Maybe

somebody on the panel knows. Does viaticals fraud cost every purchaser of insurance $1,000 a year?

Mr. COVINGTON. Madam Chairwoman, Representative, that is all

insurance fraud.

Mr. GUTIERREZ. I thought I was going to say a thousand bucks.

That is a lot of money, almost what I pay for my whole insurance

policy.

Mr. COVINGTON. But Madam Chairwoman, Representative, I

might note that based on my understanding, a Florida grand jury

found that over half of all viatical settlements involve some type

of fraud. Now, I can’t confirm that. I wasn’t there, but reports that

I have seen indicate that the grand jury, when I testified, this

fraud really jeopardizes the very existence of this industry. I think

we cannot have an industry that has that degree of fraud and deceit within it.

Mr. GUTIERREZ. I agree. Well, I think one of the things that—

I am obviously, always concerned about insurance companies. That

is why I ran for Congress, I was so concerned about them, and

their bad rate of return. And the viaticals, that is the best-case scenario that Mr. Lewis gave us of somebody has a face value of

$40,000 and someone generously gave them $160,000 for the

$40,000, and 6 years when you put it in a pool, I mean, sometimes

it is going to be less. Sometimes it is going to be more. If you actually regulate it like Mr. Mercer, there should be a lot of money to

21

be made. There is a $590,000 difference. Even a 10 percent return,

it would take 15 years for that person to take that $160,000 and

convert it into $750,000. So it seems to me that there could be a

lot of people that could be benefited by these types of insurance,

and if that is—I imagine, Mr. Lewis, you gave us your best case

scenario. I have never seen an insurance industry spokesperson not

give us their best case scenario as they come before these committees. So it seems to me that there is a lot of money and we probably could do a lot of good for a lot of people, if that is the best

case scenario. Maybe we could do even better than $160,000, if we

actually pooled and people saw a reasonable return and a greater

level of safety.

Thank you, Mr. Chairwoman, for bringing this matter to the attention of this subcommittee.

Chairwoman KELLY. Thank you, Mr. Gutierrez.

Mr. Tiberi.

Mr. TIBERI. Thank you, Madam Chairwoman. My question is to

all the witnesses here. Starting with Director Covington, do you

think that we here in Congress should define a viatical settlement—change the law and define it as a security so the SEC can

regulate it?

Mr. COVINGTON. Madam Chairwoman, Congressman, because I

am not the expert on the securities side of this, I am not sure I

am the best person to answer that question. So if I could, I will

defer to the others on the panel. I don’t know the intricacies of securities regulation between the State and Federal Government. I

just know insurance.

Mr. TIBERI. It is just an opinion. We won’t hold you to anything.

Mr. BERIAULT. I would just say that, you know, based on my experience with this industry and the amount of fraud that—and

talking to the people in the industry, that certainly, that may be

one of the best ways to get control of the industry and eliminate

some of this fraud. Steps need to be taken so that there is full disclosure and that the investors recognize the risks that are involved

in these investments, and that relates to the escrow accounts, full

disclosures involving the escrow accounts, certainly full disclosure

relating to the medical prognosis, methodology used, you know,

who, in fact, is giving it, what is their track record, what is their

confidence level, all of the things along these lines, are they—is it

an arm’s-length relationship with the viatical company. In some

cases they are employees of the viatical company, in which case

there is certainly a strong incentive to have aggressive mortality

rates. Historical information about the annual rates of return. And

all of these things seem to point toward some kind of security regulation. Financial statements, independent audits, all of these things

I think need to be done to protect the investors.

Mr. TIBERI. Thank you.

Mr. Mercer.

Mr. MERCER. As I indicated earlier, I absolutely believe that a

relationship between the promoter and the investor should be subject to Federal securities law. It is the classic situation where you

have an investor solely depending upon the expertise of the promoter in making an investment decision, and the investor does not

have information available through other means.

22

Mr. TIBERI. OK. Mr. Lazar.

Mr. LAZAR. Judging by what I have heard so far, there is no

question in my mind that securitization is required and a necessity

for conformity throughout the Nation; the same thing as regulated

by the insurance companies should be regulated by viaticals. I don’t

see any difference between them. I just wonder if it works in reverse.

Mr. TIBERI. Thank you.

Mr. LEWIS. We strongly believe that an amendment to the Securities Act really makes a lot of sense, and would I think go the furthest and the quickest of cleaning up the investment side of problems in this industry. Clearly today the SEC regulates myriads—

all kinds of—hundreds of different kinds of investments, and I

think, you know, it is not free from problems, but it is proving to

be a very effective system. And we strongly believe that that is the

way that things—the quickest way I could think of to solve this

problem.

Mr. TIBERI. Thank you.

Mr. GEYER. Madam Chairwoman, Mr. Tiberi, yes, not only would

you then make the Federal disclosure laws applicable, the Federal

antifraud standards become applicable. Then you also on the back

end give tremendously more resources to the enforcement efforts

against fraud in the viatical transaction. So, sure, I think that

would be a tific step forward, again, if you are trying to make this

a credible marketplace.

Mr. TIBERI. Just a follow-up to the panel, starting with you, Mr.

Geyer. The antifraud bill that we passed here in the House that

became law, how do you think that would deter fraud in this area?

Mr. GEYER. Madam Chairwoman, Mr. Tiberi, I think that would

be a wonderful resource, because it would allow agencies when they

are confronted either with a bad actor or a license applicant, to tap

into a database and discover previous bad acts, discover criminal

convictions. It is unfortunate that sometimes regulators operate in

a vacuum, and the more we can share information the better off

we would be.

Mr. TIBERI. Mr. Covington.

Mr. COVINGTON. I completely agree. I think that this is, as I said,

a giant step forward in our abilities, providing us additional steps

to combat fraud. So we strongly support immediate action by the

Senate on this bill.

Mr. BERIAULT. Yes. I concur with both of these gentlemen. I

think it would be an invaluable tool for investigators, and certainly

in cases like viatical settlement fraud it would be of a great benefit

to us in identifying who the major offenders are and what their

past is and help us in our investigations.

Mr. TIBERI. Mr. Mercer, do you agree?

Mr. MERCER. Those certainly sound like reasonable comments,

that the more disclosure you have and the more information, the

more an informed decision can be made by an investor or by a

viator.

Mr. TIBERI. Any other comments?

Mr. LEWIS. We would support conceptually—I am not really that

familiar with the bill, but I must say our industry—the company

I am connected with, we do intense background checks as best we

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can on people we deal with to try and fet out if they have problems,

and anything that will improve that system and make it more efficient and provide more information to legitimate users in the private world and for Government, it makes a lot of sense.

Mr. TIBERI. Thank you.

Chairwoman KELLY. Thank you, Mr. Tiberi.

Mr. Lazar, I know you have a plane to catch. I want to get you

out of here so you don’t have to feel stressed about that, but I want

to ask you two quick questions. As a consumer, when you learned

about viaticals in the Wall Street Journal or 60 Minutes, did you

know that they are subjected to totally different regulations in different States?

Mr. LAZAR. I was aware of it.

Chairwoman KELLY. You were aware of it?

Mr. LAZAR. Yeah.

Chairwoman KELLY. OK. I noted that Florida now has adopted

the most recent comprehensive model law on viaticals, including licensing requirements, antifraud provisions and advertising standards. If this law had been in place in 1997 and you had known

more about the risks of viaticals and the types of fraud that can

occur, would you have acted differently?

Mr. LAZAR. Yes.

Chairwoman KELLY. Is this an area where you think we need to

get all the States to have similar laws, to similarly improve their

laws?

Mr. LAZAR. Oh, yeah.

Chairwoman KELLY. You think so?

Mr. LAZAR. Oh, yeah.

Chairwoman KELLY. Thank you very much. I want to thank all

of the members of our panel. I do note that some people—Mike is

not the only one who is stuck in an airport. There are several other

Members. So I want to hold the hearing record open without objection for the next 30 days for Members to submit written questions

to the witnesses so we can place their responses in the record.

This panel is excused with our great appreciation and thanks for

your time, and I want to thank all the Members for all of their assistance in making the hearing possible. The hearing is adjourned.

[Whereupon, at 3:17 p.m., the hearing was adjourned.]

(25)

A P P E N D I X

February 26, 2002

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