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

• Decision Date: 25 June 2004
• Docket Number: No. 04-60573.,04-60573.
• Citation: 323 F.Supp.2d 1337
• Court: U.S. District Court — Southern District of Florida
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MUTUAL BENEFITS CORP., Joel Steinger a/k/a Joel Steiner, Leslie Steinger a/k/a Leslie Steiner, and Peter Lombardi, Defendants, Viatical Benefactors, LLC, Viatical Services, Inc., Kensington Management, Inc., Rainy Consulting Corp., Twin Groves Investments, Inc., P.J.L. Consulting, Inc., SKS Consulting, Inc., and Camden Consulting, Inc., Relief Defendants.

Page 1337

323 F.Supp.2d 1337

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MUTUAL BENEFITS CORP., Joel Steinger a/k/a Joel Steiner, Leslie Steinger a/k/a Leslie Steiner, and Peter Lombardi, Defendants Viatical Benefactors, LLC, Viatical Services, Inc., Kensington Management, Inc., Rainy Consulting Corp., Twin Groves Investments, Inc., P.J.L. Consulting, Inc., SKS Consulting, Inc., and Camden Consulting, Inc., Relief Defendants.

No. 04-60573.

United States District Court, S.D. Florida, Miami Division.

June 25, 2004.

Teresa J. Verges, Esq., Alise M. Johnson, Esq., Cheldy C. Dumornay, Esq., Linda S. Schmidt, Esq., Ryan D. O'Quinn, Esq., Securities and Exchange Commission, Miami, FL, Roberto Martinez, Esq., Colson Hickes Edison, Coral Gables, Laurel M. Isicoff, Esq., Kenneth R. Hartmann, Esq., David P. Milian, Esq., Kozyak Tropin & Throckmorton, P.A., Miami, FL, for Plaintiff.

Bruce A. Zimet, Esq., Fort Lauderdale, FL, Richard Ben-Veniste, Esq., Mayer, Brown, Rowe & Maw LLP, Chicago, IL, Benedict P. Kuehne, Esq., Jon A. Sale, Esq., Sale & Kuehne, Faith E. Gay, Esq., Lee Rubin, Esq., White & Case, LLP, Miami, FL, for Defendant.

ORDER DENYING DEFENDANTS' MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION

MORENO, District Judge.

Before the Court is an action commenced by the Securities and Exchange Commission for the violation of various federal securities regulations in the trade of life insurance policies of terminally ill people. Presently, the Court is called upon to decide whether the sale of these "viatical settlements" is beyond the scope of the federal securities laws. Specifically, Defendants contend that investments in viatical settlements are not investment contracts and as a result, the Securities and Exchange Commission has no jurisdiction to assert its claims. The Court here finds that, in light of the underlying principles of the federal securities laws, investments in viatical settlements are covered by the federal securities laws.

I. BACKGROUND

Defendant Mutual Benefit Corporation ("MBC") is a Florida corporation, formed in 1994 and located in Fort Lauderdale, Florida. Defendants Joel and Leslie Steinger are alleged principals of MBC. Defendant Peter Lombardi is president and sole shareholder of MBC.

In addition, the Securities and Exchange Commission ("SEC") has named the following parties as Relief Defendants: Viatical Benefactors, LLC; Viatical Services, Inc. ("VSI"); Kensington Management, Inc.; Rainy Consulting Corp.; Twin Groves Investment, Inc.; P.J.L. Consulting, Inc.; SKS Consulting, Inc.; and Camden Consulting, Inc. The SEC alleges that Relief Defendants are shell corporations controlled by Defendants or their family members. Complaint at ¶ 2. Further, the SEC alleges that investor funds were distributed to Relief Defendants in the form of "undisclosed `consulting fees.'" Id.

A. Viatical Settlement Industry

A viatical settlement is a transaction in which a terminally or chronically ill insured ("viator") sells the benefits of his life insurance policy to a third party in return for a lump-sum cash payment equal to a percentage of the policy's face value.¹ Viatical settlement providers purchase the policies from individual viators. Once purchased, these viatical settlement providers typically sell fractionalized interests in these policies to investors.

B. MBC's Activities

MBC is a viatical settlement provider.² MBC engages in both the procurement of viatical settlements and the sale of fractional interests in them to investors. Beginning in 1994 and extending to May, 2004, over 29,000 investors nationwide have invested over $1 billion in interests of viatical settlements offered by MBC. From the procurement of the settlements to the sale to investors, MBC undertook a number of activities.

With respect to the procurement of the viatical settlements, MBC located the policies, negotiated purchase prices, bid on policies, and obtained life expectancy evaluations of individual viators. In addition, it appears that MBC created the legal documents needed to conclude the transactions.

In order to sell the viatical settlements to investors, MBC solicited funds from investors directly and through agents. Investors were asked to identify a desired maturity date and submit a purchase agreement. MBC promised rates of return ranging from 12% to 72%. The rate of return was dependent upon the term of the investment, which was determined by the life expectancy evaluation. If the viator lives beyond his life expectancy, the term of the investment is extended and the premiums must either be paid from new investor funds assigned to other policies or by additional funds from the original investors.

Finally, following the placement of investor funds, MBC, through VSI, would pay the premiums, monitor the health of viators, collect the benefits upon death, and distribute the proceeds to investors.

C. SEC Enforcement

Plaintiff SEC filed its Complaint for Injunctive and Other Relief on May 3, 2004, alleging violations of various federal securities laws by Defendants Mutual Benefits Corporation, Joel Steinger, Leslie Steinger and Peter Lombardi. The Court entered a Temporary Restraining Order and an Order Appointing Receiver on May 4, 2004, and set an evidentiary hearing on Plaintiff's Motion for Preliminary Injunction on May 17, 2004. At the insistence of the parties, the Court continued the evidentiary hearing until June 10, 2004, at which time the parties presented evidence on the issue of whether or not the activities of Defendants are covered by the federal securities laws. In particular, the Court heard evidence on the issue of whether an investment in a viatical settlement constitutes an investment contract.

II. LEGAL ANALYSIS

The narrow issue before the Court is whether investments in viatical settlements constitute securities. Defendants petition the Court to dismiss the present action because they argue such investments are not covered by the federal securities laws, and as a result, this Court lacks subject matter jurisdiction. After carefully reviewing the numerous pleadings from the parties and surveying the relevant statutory and jurisprudential sources on the topic of the definition of a security, the Court has come to the conclusion that investments in viatical settlements constitute investment contracts, and as such, fall under the coverage of the federal securities laws.

A. Jurisdictional Standard

At the preliminary injunction stage, the SEC need only show a reasonable probability of ultimate success upon the question of the SEC's jurisdiction over the Defendants' conduct. SEC v. Unique Financial Concepts, Inc., et al., 196 F.3d 1195, 1199 (11th Cir.1999).

B. Historical Background of the Federal Securities Laws

From September 1, 1929 through the end of October of the same year, the aggregate value of stocks listed on the NYSE fell from $89 billion to $18 billion.³ Enacted in the early 1930's, the federal securities laws came in direct response to the stock market crash of late 1929 and the resulting depression that forged a political consensus in Congress to regulate securities. As noted by the Supreme Court, "`[i]t requires but little appreciation ... of what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail' in every facet of the securities industry." SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963)(quoting Silver v. New York Stock Exchange, 373 U.S. 341, 366, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963)).

Underpinning the complicated statutory framework of the federal securities laws are two unifying principles, repeated time and again in numerous Supreme Court opinions, that serve to guide courts in interpreting the law's application. After a survey of the relevant case law, the Court has identified the principle of flexibility in the law's application and the principle of full disclosure in the law's remedial thrust.

First and foremost, the federal securities laws were drafted and have consistently been interpreted from the perspective that flexibility in the law's applicability is paramount. In its seminal case on the interpretation of the term "investment contract", the Supreme Court declared that Congress purposefully gave a broad definition to what constitutes a security. SEC v. W.J. Howey Company, 328 U.S. 293, 299, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) (warning that the "statutory policy of affording broad protection to investors is not to be thwarted by unrealistic and irrelevant formulae"); see also Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967) (noting that "remedial legislation should be construed broadly to effectuate its purposes"), Pinter v. Dahl, 486 U.S. 622, 652, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988). Moreover in Reves v. Ernst & Young, the Court explained that the securities laws should be interpreted "against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts." 494 U.S. 56, 63, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). Through Howey and its progeny, the Supreme Court has consistently repeated the interpretive principle that courts should determine the contours of the term "security" from the posture that substance should be elevated over form, with a special sensitivity to the economic reality of the transaction, not its formal characteristics. See Tcherepnin, 389 U.S. at 336, 88 S.Ct. 548.

In addition to the principle of flexibility, the second unifying principle of the federal securities laws for courts to consider is the strong preference for full disclosure. Indeed, the remedial thrust of the federal securities laws is to establish full disclosure, not risk-free investment. See SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (holding that the primary purpose of the federal securities laws is to "substitute a...