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Life Settlements

Life Settlements

Tuesday, May 18, 2010

Texas called Wild West Of Life Settlements.

As most know, life settlement legislation varies from state to state. Texas has been pegged as the "Wild West" for life settlements by Dave Lieber of the Star Telegram. He asserts that lax regulation and oversight fuel fly by night schemes. I can't disagree more from a life settlement broker's perspective. Their compliance requirements are thorough and involved. In fact, they have to approve every single page of a life settlement broker's website before it can be considered in compliance. Nonetheless, he has an interesting point of view. Below is an excerpt so you can make up your own mind:

Ninety-nine years ago, legendary U.S. Supreme Court Justice Oliver Wendell Holmes Jr. wrote an opinion that a life insurance policy was a person's property and could be sold.

A century later, the concept has morphed into "life settlement" contracts, also called "death bets" or "death contracts."

People who need quick cash can sell their policies to licensed brokers, who then sell them to third-party investors.

The investors pay the premiums until the person dies. Then all the benefits go to the investors instead of the original beneficiaries. If someone lives longer than expected, investors may lose money. Otherwise, the investor wins.

"You're betting on death," says Joe Rotunda, director of the Texas State Securities Board's enforcement division. "You're betting somebody is going to die by a certain date and you're not going to have to shell out any additional money until you see a return on your investment. It sounds good, but there's a lot of risk involved."

Life insurance policies are often bundled together and sold on Wall Street. These are called "death bonds." Investors don't know whose policies they are buying.

Under Texas law, policies sold this way must be registered as securities. But in practice, some life settlement contracts are kept off the grid. Brokers aren't always licensed, and the policies they sell aren't registered. That can lead to fraud.

In fact, Rotunda says of the Texas life settlement industry, "It is the Wild West."

"It's always been a problem, but the amount of fraud we're seeing now has, anecdotally, increased tremendously," he said.

As enforcement division chief, Rotunda leads investigations into life settlement cases. In April, the board accused a Plano company of not being licensed and registered and of making misleading promises to investors. Deception is a key component of making a case for securities fraud.

But enforcement is tough. Life settlements are not regulated as thoroughly as much of the rest of the insurance and securities market, Rotunda says. One problem: The term life settlement does not appear in the Texas Securities Act.

That means each allegation of fraud has to be individually examined to see if it can meet the broad terms for securities described in state law.

"It's not as straightforward or black-and-white as it would be in other states," Rotunda says.

That has made Texas attractive to some slick operators, others say.

"Texas is a hot spot," says Gloria Wolk, a North Carolina-based consumer advocate who focuses on life settlement fraud. "Texas has more people working as brokers and providers than any other state because they don't provide oversight. There is no regulation. When things get really hot about some company, with too many complaints, then the state goes and does something."

Rotunda acknowledges that his hands are sometimes tied by the law but says his agency still goes after those who break the rules.

Read more: http://www.star-telegram.com/2010/05/01/2156969/texas-is-the-wild-west-of-life.html#ixzz0v1CUYfqf