Chapter 2 - § 2.6 • VIATICAL SETTLEMENTS

• Jurisdiction: Colorado

§ 2.6 • VIATICAL SETTLEMENTS

"Viatical" settlements involve the sale of life insurance policies from AIDS victims and other terminally ill patients to investors at a discount. In most jurisdictions, this constitutes the sale of investment contracts and, hence, they are considered securities in many jurisdictions. In fact, many viatical settlements are marketed as "investments." The term "viatical settlement" is derived from the ecclesiastical term "viaticum," which is the communion given to a dying person.

In one SEC enforcement case, SEC v. Life Partners, Inc.,⁵⁷ however, the D.C. Circuit reached a contrary decision. Life Partners, Inc. arranged for AIDS victims who had life insurance policies to sell the death benefits to investors at a discount based on actuarial tables. The investors paid the terminally ill AIDS victims cash during a period when they needed the cash and were likely unable to maintain employment. In response to arguments, the District Court for the District of Columbia found that the original activities, as well as a revised proposal with "new procedures," continued to violate the securities laws. However, in July 1996, an appeals panel of the D.C. Circuit ruled that the settlements were not securities because the profits from their purchase did not primarily depend on the efforts of a party other than the investor. According to the court, all of the promoter's efforts (viatical selection and pricing, for example) were completed before the investment transaction took place; the court held that "pre-purchase activities" could not form the basis for a conclusion that the anticipated profits met the Howey test of "solely from the efforts of others." "Post-purchase" ministerial and administrative services are not sufficient to change this determination. In the case of a viatical settlement, profits merely depended on the death of the insured.

Recent cases have moved away from the D.C. Circuit's 1996 Life Partners analysis. In SEC v. Mut. Benefits Corp.,⁵⁸ the court held that viatical settlements were investment contracts and, therefore, securities. The Eleventh Circuit agreed with the district court, holding that the promoters' "[s]ignificant pre-purchase managerial activities undertaken to insure the success of the investment may also satisfy Howey. . . . [I]nvestment 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...