S.E.C. v. Mutual Benefits Corp.

• Decision Date: 06 May 2005
• Docket Number: No. 04-14850.,04-14850.
• Citation: 408 F.3d 737
• Parties: SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee, v. MUTUAL BENEFITS CORP., Joel Steinger, a.k.a. Joel Steiner, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

408 F.3d 737

SECURITIES & EXCHANGE COMMISSION, Plaintiff-Appellee, v. MUTUAL BENEFITS CORP., Joel Steinger, a.k.a. Joel Steiner, et al., Defendants-Appellants.

No. 04-14850.

United States Court of Appeals, Eleventh Circuit.

May 6, 2005.

Marc Cooper, Colson, Hicks, Eidson, Colson & Matthews, Coral Gables, FL, William L. Olsen, Mayer, Brown, Rowe & Maw, LLP, Washington, DC, Bruce A. Zimet, Ft. Lauderdale, FL, Benedict P. Kuehne, Sale & Kuehne, P.A., John M. Hogan, Holland & Knight, LLP, Miami, FL, Lee H. Rubin, Mayer, Brown, Rowe & Maw, LLP, Palo Alto, CA, for Defendants-Appellants.

Christopher Paik, SEC, Washington, DC, for Plaintiff-Appellee.

Michael A. Hanzman, Hanzman & Criden, P.A., Coral Gables, FL, J. Steven Parker, Page Perry, LLC, Atlanta, GA, for Amici Curiae.

Appeal from the United States District Court for the Southern District of Florida.

Before CARNES and COX, Circuit Judges, and MILLS^*, District Judge.

COX, Circuit Judge:

In this interlocutory appeal, Defendants, Mutual Benefits Corp. ("MBC"), et al.,¹ appeal the decision of the district court denying their motion to dismiss for lack of subject matter jurisdiction. The district court denied the motion on the ground that investments in viatical settlement contracts are "investment contracts" within the meaning of the Securities Acts of 1933 and 1934. Sec. Exch. Comm'n v. Mutual Benefits Corp., 323 F.Supp.2d 1337 (S.D.Fla.2004). We affirm.

I. BACKGROUND AND PROCEDURAL HISTORY

The record reflects the following undisputed facts. MBC is a viatical settlement provider. A viatical settlement is a transaction in which a terminally ill insured sells the benefits of his life insurance policy to a third party in return for a lumpsum cash payment equal to a percentage of the policy's face value. The purchaser of the viatical settlement realizes a profit if, when the insured dies, the policy benefits paid are greater than the purchase price, adjusted for time value. Thus, in purchasing a viatical settlement, it is of paramount importance that an accurate determination be made of the insured's expected date of death. If the insured lives longer than expected, the purchaser of the policy will realize a reduced return, or may lose money on the investment.

Viatical settlement providers, like MBC, purchase policies from individual insureds and typically sell fractionalized interests in these policies to investors. Between 1994 and 2004, over 29,000 investors nationwide invested over $1 billion in viatical settlements offered by MBC. (R.4-193 at 2.) MBC identified terminally ill insureds, negotiated purchase prices, bid on policies, and obtained life expectancy evaluations. MBC recruited doctors to evaluate the health of an insured and produce a life-expectancy evaluation. MBC also created the legal documents needed to conclude all transactions. In order to sell viatical settlements to investors, MBC solicited funds from investors directly and through agents. Following the deposit of investor funds into escrow, MBC would pay premiums, monitor the health of the insureds, collect the benefits upon death, and distribute proceeds to investors.

Investors were asked to identify a desired maturity date and submit a purchase agreement on a form provided by MBC. The promised rate of return was dependent upon the term of the investment, which in turn was determined by the life expectancy evaluation. The actual rate of return, however, depended upon the date of the insured's death. If the insured lived beyond his life expectancy, the term of the investment was extended and the premiums had to be paid either from new investor funds assigned to other policies or by additional funds from the original investors. According to MBC, projected returns were substantial. MBC told investors that the policy of a person with a life expectancy of 12 months would yield a 12% return, assuming the person died when expected; it told potential investors that the policy of a person with a life expectancy of 72 months would yield a 72% return. (R.4-160 Pl.'s Ex. 44 at 13.)

MBC touted to potential investors its expertise in evaluating life expectancy, and thus its ability to make the venture successful. Robert Roberts, a former in-house sales director at MBC, testified that investors were told about MBC's expertise in selecting policies and the track record it claimed in predicting life expectancy. (R.4-160 at 205-08, 213-20.) Roberts was instructed to inform inquiring investors that MBC correctly estimated life expectancy 80% of the time. (Id. at 213-20.) At no time did investors or potential investors have access to insureds' medical files. Thus, they could not, on their own, engage doctors to perform life expectancy evaluations. (Id. at 173-76.)

MBC made a profit by contracting for the right to purchase interests in life insurance policies and then selling those interests to investors at marked-up prices. A portion of the price paid by investors was set aside to pay premiums on the policy in question. MBC required investors to deposit the purchase price of the investment with an escrow agent before MBC selected a policy that fit the investment goals of the individual investor based on the price the investor wanted to pay and the life-expectancy period that the investor desired.

MBC used several different purchase agreements, the specific terms of which varied depending on the investor's state of residence. One purchase agreement allowed an investor to withdraw his deposit for only three days after certain disclosures required by Florida law were made. (Id. Pl.'s Ex. 74 at 7.) Another allowed an investor to withdraw his deposit for only seven days after the date of deposit. (Id. Pl.'s Ex. 44 at 2.) After any such window closed, an investor had to accept one of the policies offered by MBC. As one of the purchase agreements stated:

Purchaser may refuse any [] policy selection, but not rescind the Agreement, within five (5) business days following the date Purchaser receives that information [about the policy selection] from MBC .... If Purchaser validly rejects a proposed death benefit interest, MBC will attempt to locate and propose another such policy as soon as reasonably possible.²

(Id.)

While MBC was supposed to perform the life expectancy evaluation prior to closing on a settlement with an insured, (see R.4-139 at 119), MBC commonly did not send the information to the doctors retained by MBC for a life expectancy evaluation until after the closing. (See R.4-140 at 67.) There is evidence in the record that MBC, in fact, routinely did not receive life-expectancy evaluations until after closing. Melanie Goldberg was the person at MBC responsible for preparing the post-closing information to be sent to investors. She explained that she worked from a spreadsheet listing recently "closed" policies. (R.4-140 at 6, 16-18.) This "closed" list provided the insureds' names, their life expectancies, and the closing dates. (Id. at 17.) Goldberg routinely received medical records after a closing and sent them to one of the doctors used by MBC. (Id. at 17, 20-21.) Later, she got the medical reports back from the doctors and sent them to investors. (Id. at 21.) When drafting reports for doctors to sign, Goldberg testified that she (in accordance with MBC policy) entered the date MBC acquired a particular policy as the date of the medical report. (Id. at 54-55.) Doctors' reports were always pre-dated, she explained, because "it had to look like it was being reviewed at the time the viator was selling the policy ... that it had to show that it was reviewed at the time the file was sold, not afterwards." (Id.)

After closing on a policy, MBC assumed certain responsibilities for paying premiums due. At least 1,000 policies were held in MBC's name for the benefit of thousands of investors who purchased fractionalized interests in those policies. (R.4-160 at 309-20.) Most of these agreements, purchased between 1995 and 1996, are subject to an early version of the purchase agreement that required no further investment beyond the funds investors initially submitted. (Id.) Premiums on those policies were paid directly out of MBC's operating account. (Id.) The agreements other investors entered into with MBC set up a multi-level system for payment of premiums. At the first level, MBC would escrow sufficient funds to pay future premiums through the date of the estimated life expectancy of a given insured, or at the discretion of MBC, longer. (Id. Pl.'s Ex. 44 at 7.) MBC would then seek any available disability premium waiver from the applicable insurance company. (Id. Defs.' Ex. 49 at 2.) Next, MBC would establish a reserve from interest on escrowed funds and unused premiums "for payment of premiums on those policies with respect to which the insured outlives his/her projected life expectancy." (Id. Pl.'s Ex. 44 at 7.) MBC's affiliate, Viatical Services, Inc., would establish a "premium reserve to pay any unpaid premiums" if the reserve established by MBC and its trustee were exhausted. (Id.) Lastly, the investor would be responsible for his own pro rata share. (Id. Defs.' Ex. 49 at 2.) The record further reflects that MBC exercised discretion in the payment of premiums. For instance, money set aside for one set of policies was used to pay premiums for another set. (R.4-139 at 48, 75-77.) A total of $4.52 million was transferred from the escrow account set up for one set of policies to an escrow account set up for another. (R.4-160 Pl.'s Ex. 3 at 1-2.) As a result, no investor was ever asked to pay additional premiums, despite escrow deficiencies.

The Securities and Exchange Commission ("SEC") filed this action seeking injunctive and other relief, alleging violations of various federal securities laws by Defendants. In its complaint, the SEC alleges that in raising money for its viatical settlement enterprise, MBC falsely represented to investors that its life expectancy figures had been...