Cash In, Check Out
A few short years ago Steve Simon was fretting over the sudden expansion of his new business venture. The Miami Beach entrepreneur had just launched a company specializing in a unique investment opportunity A buying life insurance policies at a discount from the terminally ill, then cashing in the policies for their full value when the victims die. The idea had seemed so obvious that Simon couldn't believe insurance companies weren't supplying customers A particularly AIDS patients A with the option. When the Associated Press ran a story about his company on the national news wire, Simon received a flood of phone calls, many from AIDS sufferers thankful for the opportunity to convert their life insurance into cash.
"Here we were with maybe two million dollars set aside to buy policies, and we're sending out more applications than we can count," recalls Simon, who had hit upon the notion after a friend with AIDS offered his insurance policy as collateral against a loan. "We envisioned our company as a way to help a few people in need, not as a big business."
Since 1990 the so-called viatical industry -- named from the Latin viaticum, meaning "provisions for a journey" -- has ballooned into just that, accounting for an estimated $300 million in purchased policies, according to Simon and other sources. Simon notes that his company, CAPX Corp. (which is really the parent of two viatical enterprises, American Life Resources and Living Benefits), owns more than $50 million worth of policies. The field, in contrast to the insurance industry, is virtually unregulated; only two states have passed legislation aimed at exerting statutory control. Despite that fact, and despite the morbid overtones of the transactions that take place, advocates and some gay-rights groups portray viatical settlement as a feel-good exchange in which the dying receive a chance to enhance their last months, while investors earn a well-deserved profit.
Given the steep growth curve, one might expect the pioneering Simon to be bullish on the viatical market. But the opposite is true. Simon says he is "exiting from the business domestically," a move that may signal a downturn in the controversial industry.
His primary concern, Simon says, is that AIDS patients are looking to surrender their policies too early, and thus at too great a discount, leaving themselves strapped for cash in the months before they die. "People are selling with 36 or 48 months' life expectancy," he notes. "We do not want to participate in that. It's an accident waiting to happen."
Further, as Simon readily admits, the business has become remarkably cluttered. Today nearly 60 companies nationwide have joined Simon in offering viatical settlements. Moreover, insurance companies have begun to respond by establishing their own accelerated benefit packages that allow clients to trade in policies for cash, eliminating the need for viatical middlemen.
Regulation, too, is on the horizon. New York and California, which rank one-two in AIDS-afflicted residents, have already enacted tough viatical laws. Insurance regulators in third-ranked Florida, home to some 37,000 AIDS patients and a handful of viatical businesses, are pushing legislators to follow suit.
"As it is this is a totally unregulated transaction, and in that situation, consumers are bound to get hurt," says Carol Ostapchuk, deputy director of the Florida Division of Insurer Services. A case in point: Credit Life Corp., a Clearwater-based company that allegedly delayed payment to dozens of terminally ill clients and failed to pay others altogether. Three months ago Florida Attorney General Bob Butterworth filed a civil complaint against Credit Life and a second affiliated company. A judge placed both companies under a temporary injunction and froze their assets. The case has yet to be scheduled for trial.
Spurred by the Credit Life suit, Ostapchuk and her staff set about drawing up legislation. Their proposed bill called for the state to license a viatical company only after a thorough investigation of that firm's principals. The bill also required that viaticals pay clients within three business days of a policy's sale, and allowed sellers to rescind a sale for any reason within fifteen days.
Amid the media-generated panic over crime bills, however, the viatical bill was overlooked. Late in the recently completed legislative session, it was attached to an omnibus insurance bill that never reached the floor in either the senate or the house.
Simon has long pushed for regulation, so much so that his outspoken stance has made him something of a black sheep among viatical providers who oppose government oversight. But although Simon has tended to portray himself as the industry's ethical standard-bearer, had legislation been in place when he opened for business in 1989, his own company might have caught the eye of regulators. On the payroll was a former stockbroker named Craig Silverman, who had pleaded guilty to federal charges of fraud and transporting securities taken by fraud across state lines. Silverman had served fourteen months in prison, and was barred by the Securities and Exchange Commission from associating with brokers or investment companies.
According to Simon, Silverman was hired to head up customer services. "Craig had previously handled public relations for one of my firms," Simon explains. "His problems with the law were in the early Eighties, way before I met him."
In fact, Silverman was convicted in November 1987 and was released from prison in April 1989. Several months afterward he went to work for Simon. "I was basically in charge of administration," reports Silverman, who says he met Simon before his incarceration. "I set up the company's computer system, selected our corporate counsel, and helped put together the paperwork and forms we sent to clients." While Silverman never invested in the company, Simon says Silverman introduced him to a number of investors who did help fund the venture.
Leaving CAPX after Simon decided to take the company public in 1992, Silverman has since launched his own viatical company, Findco Inc., based in North Miami Beach. While the proposed legislation in Florida does not bar a convicted felon from running a viatical company, it does allow regulators to suspend or revoke the license of any viatical provider who "has been found guilty of any felony or misdemeanor involving fraud or moral turpitude." The Division of Insurer Services's Carol Ostapchuk says such situations would have to be evaluated on a case-by-case basis.
CAPX was recently named in a federal suit filed in Philadelphia, accusing company officials of buying the $152,000 insurance policy of a man suffering from AIDS dementia. The suit, filed on behalf of the man's widow, alleges that the company "exerted undue influence" over her husband because it "had reason to know that [he] was suffering from HIV-related mental disorders" when it purchased the policy for $102,000.
Simon vehemently denies the allegation. He says the suit is a crass attempt to "go after us as a deep pocket. Every aspect of the settlement was handled responsibly and ethically. This suit is beyond frivolous."
He adds that while he intends to wind down operations domestically, "we are dramatically expanding our operations overseas." He says the company is looking to establish branch offices in Europe, Australia, and Asia.
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