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11th Circuit: Investments in Viatical Settlements Were Securities

A district court properly found that investments in viatical settlements were investment contracts and were securities as defined in the federal securities laws. According to the 11th U.S. Circuit Court of Appeals, investors in the viatical settlement contracts "were offered what amounts to a classic investment contract," as they "were offered and sold an investment in a common enterprise in which they were promised profits that were dependent on the efforts of the promoters."

In a viatical settlement, a person sells the benefits of a life insurance policy for a lump-sum payment of a stated percentage of the policy's face value. The purchaser then becomes the beneficiary, and often sells fractional interests in these policies to investors.

In this case, the SEC filed a civil action against the viatical company claiming that the firm misrepresented its life expectancy figures and failed to disclose that approximately 90 percent of its policies had already passed their assigned life expectancy. The company asserted that these interests were not securities under the Howey test and were not subject to the federal securities laws. According to the issuer, the interests were not securities because any return was determined by the mortality of the insured rather than on any post purchase managerial or entrepreneurial efforts of the viatical settlement provider.

The district court (SD Fla) found that the expectation of profits from these investments was derived predominately from the efforts of others, and that a flexible reading of the investment contract definition would also further the remedial purposes of the securities laws. On interlocutory appeal, the appellate panel agreed.

The appellate court found that the court below had properly rejected the "bright line" test used by the U.S. Circuit Court of Appeals for the District of Columbia Circuit in its 1996 decision (1996-97 CCH Dec. para 99,256), SEC v. Life Partners, Inc.. In this case, the court found that fractional interests in viatical settlement contracts were not securities subject to the federal securities laws because the profits from their purchase did not primarily depend on the efforts of a party other than the investors.

In rejecting this view, the 11th Circuit stated that "there is no basis for excluding pre-purchase managerial activities from the analysis" of whether the interests meet the Howey requirement of an expectation of profit derived solely on the efforts of the promoter or a third party. "Significant pre-purchase managerial activities undertaken to insure the success of the investment may also satisfy Howey," stated the court. The panel noted that "investment schemes may often involve a combination of both pre- and post-purchase managerial activities, both of which should be taken into consideration in determining whether Howey's test is satisfied."

‚SEC v. Mutual Benefits Corp. (11thCir) will be published in a forthcoming report.