In August, the Securities and Exchange Commission ("SEC") filed an action in the federal district court in Sacramento, California, seeking to shut down a $25 million dollar Ponzi scheme that purportedly duped seniors into investing in fractional interests in life insurance policies.
The scheme, developed and organized by a father-daughter team, allegedly sold fractional interests in a particular life insurance policy to senior citizens and then failed to use the money to cover the premiums on the policy. Instead, the SEC alleges that the money was used to cover the father-daughter team’s business/personal expenses and the premiums on other insurance policies (owned by a different group of investors) that would otherwise lapse if the premiums were not paid. Essentially, each new investor was paying the premiums for policies of earlier investors.
Operating through two corporations incorporated in Nevada and one incorporated in Wyoming, the father-daughter team offered and sold these investments as "bonded life settlements" or "bonded senior settlements." The sale included representations that the investment was “bonded" and that each investor could expect returns as high as 125%. Using internet websites, mailings, advertisements, and seminars, sales agents hired by the father-daughter team contacted seniors nationwide. As a result, over 40 life insurance policies were sold to at least 500 investors in more than 20 states.
To facilitate the scheme, a life insurance policy was purchased from a policy broker and each “investor" was named on the insurance company’s records as a beneficiary of a “fractional" interest in the death benefits. When the insured died, each investor would be paid his pro-rata share of the policy’s face amount equaling the investor’s original investment plus the promised return. The sales agent would falsely claim to the investor that the insured on the policy, because of his/her age and health status, was expected to die within three to six years, and the investment would pay off. Investors were also provided with “certified" life expectancy documents purportedly signed by a convicted felon posing as a doctor. Moreover, the supposed bonding companies were not licensed to conduct business in California.
The SEC complaint charges the father-daughter team violating the antifraud and registration provisions of the federal securities laws. Accordingly, by filing this action, the SEC seeks to 1) temporally, preliminarily, and permanently enjoin the father-daughter team and their agents from further violations, 2) require the father-daughter team to account for and disgorge all ill-gotten gains, 3) require the father-daughter team to pay a civil penalty, 4) appoint a receiver for the corporation, and 5) freeze the assets of the father-daughter team and corporation.
According to Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, "moving to shut down this Ponzi scheme reaffirms the Commission's overall commitment to aggressively investigating and stopping those who prey upon the retirment funds of older Americans."