Important note: Information in this article was accurate in 1995. The state of the art may have changed since the publication date.
The Associated Press - 31 Aug 95
"This is a very unique case and not reflective of the industry as a whole," Troy Petenbrink, spokesman for the National Association of People With AIDS, said Thursday.
The National Association of People With AIDS, which intervened in the case, said the decision was narrow and was not expected to harm the broader $200 million industry, an important source of financial security for AIDS patients, many of whom lose their jobs due to the disease.
The Securities and Exchange Commission last year sued Life Partners Inc. of Waco, Texas, the nation's largest organizer of so-called viatical settlements, which enable AIDS patients and other terminally ill people to cash in their life insurance policy's death benefits.
The SEC argued Life Partners broke securities laws by repackaging the life insurance policies for investors in such a way that they constituted investment contracts.
U.S. District Judge Royce C. Lamberth agreed with the SEC and ordered a preliminary injunction against Life Partners. He ordered the firm to transfer its estimated $100 million in insurance policies to an independent third party.
The president of Life Partners, Brian D. Pardo, contended his business would be unaffected by the court order and that it already signs over policies to independent trusts.
"We don't see it as having a major impact on our business," Pardo said.
Pardo said Life Partners would appeal a portion of the judge's ruling that said Life Partners sold unregistered investment contracts and consequently violated a number of other securities laws. If Life Partners loses the appeal, "then we will comply" with securities laws, Pardo said.
Lamberth's decision dealt with the methods Life Partners uses to repackage the life insurance policies and sell interests in those policies to investors.
The SEC does not believe all viatical settlements should be regulated under federal securities laws, since insurance is regulated by the states. The case should not affect other viatical businesses in which investors directly buy insurance policies.
Life Partners buys, at a discount, insurance policies of people with full-blown AIDS who are mentally competent and have a life expectancy of less than two years. That gives AIDS patients ready cash for medical bills and other expenses.
Life Partners then markets the opportunity to buy a portion of the policies, pitching them as attractive investments. When the AIDS victim dies, the insurance benefits are paid to Life Partners, which then pays the investors, according to Lambert's ruling.
"It's a peculiar way in which the defendants have packaged the investments," said Leo Orenstein, an SEC attorney who handled the case.
Lamberth observed that despite an "exhaustive" two year investigation, the SEC did not produce charges "that any investor, terminally ill patient, or insurance company has been defrauded, misled, or is in any way dissatisfied with an LPI viatical settlement."
Pardo viewed the ruling as somewhat of a vindication, particularly in that the judge found SEC charges that Pardo and Life Partners misled investors "are less than overwhelming."
But Lamberth said the SEC had made a strong case for court action by noting Pardo had previously run afoul of securities laws and faced two judgments from the thrift and bank regulators that exceeded $900,000. Pardo said he has paid off the judgments.
Copyright 1995/The Associated Press. Reproduced with permission. Reproduction of this article (other than one copy for personal reference) must be cleared through the Permissions Desk, The Associated Press, 50 Rockefeller Plaza, New York, NY 10020.
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Copyright © 1995 - Associated Press. Reproduction of this article (other than one copy for personal reference) must be cleared through the AP Permissions Desk.
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