STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
DEPARTMENT OF FINANCIAL )
SERVICES, )
)
Petitioner, )
)
vs. )
)
DAVID H. KLIGFELD; DHALCO ) FINANCIAL SERVICES, INC.; DAVID ) KLIGFLED; AND RHONDA WRIGHT, )
)
Respondents. )
Case No. 02-2668
)
RECOMMENDED ORDER
This case came before Administrative Law Judge John G. Van Laningham for final hearing by video teleconference on November 12-13, 2002, at sites in Tallahassee and Fort Lauderdale, Florida.
APPEARANCES
For Petitioner: Frederick H. Wilsen, Esquire
Office of Financial Institutions and Securities Regulation
400 West Robinson Street Suite S-225
Orlando, Florida 32801-1799
For Respondents: Barry S. Mittelberg, Esquire
Mittelberg & Nicosia, P.A. 8100 North University Drive Suite 102
Fort Lauderdale, Florida 33321
STATEMENT OF THE ISSUE
This issue in this case is whether Petitioner has jurisdiction to prosecute a viatical settlement sales agent for conduct relating to transactions involving viatical settlement purchase agreements, which Petitioner contends were “investment contracts”——and hence securities——subject to regulation under the Florida Securities and Investor Protection Act.
PRELIMINARY STATEMENT
On March 15, 2002, Petitioner Department of Financial Services, Office of Financial Institutions and Securities Regulation, which at the time was known as the Department of Banking and Finance, Division of Securities and Investor Protection (the “Division”), issued a two-count Amended Administrative Complaint in which Respondents were charged with having violated Section 517.07(1), Florida Statutes (prohibiting the sale of unregistered securities), and Section 517.12(1), Florida Statutes (prohibiting the sale of securities by unregistered persons). The Division alleged that Respondents had arranged for persons to invest in instruments known in Florida as “viatical settlement purchase agreements,” and that these agreements constituted “investment contracts”——and hence securities——subject to regulation under the Florida Securities and Investor Protection Act.
Respondents denied that they had offered and sold securities and requested a hearing. On July 1, 2002, the Division referred the matter to the Division of Administrative Hearings for further proceedings.
The final hearing took place on November 12 and 13, 2002, as scheduled, with all parties present and represented by counsel. At the outset, the parties stipulated to the dismissal of all charges against Respondent Rhonda Wright, who took no further part in the hearing.
The Division called eight witnesses. These were: Sam and Teri Banks, Hyman Sperling, Donald Kohl, Jo Anne Conley, and Edward Kligfeld, each of whom had invested in at least one viatical settlement purchase agreement; Roger Handley, an investigator for the Division; and Joseph C. Long, professor emeritus at the University of Oklahoma College of Law, who testified as an expert in securities law. In addition, the Division introduced 17 exhibits, numbered 1-2, 4-5, and 12-23 (two exhibits were inadvertently marked and received as Petitioner’s Exhibit 23), each of which was admitted into in evidence. At the Division’s request, the undersigned took official recognition of six exhibits marked for identification as Petitioner’s Exhibits 6-11.
Respondents presented the testimony of Respondent David Kligfeld and also that of Donald J. Denton. Respondents adduced no documentary evidence.
The final hearing transcript was filed on December 9, 2002.
Each side timely filed a proposed recommended order, and these papers were carefully considered.
FINDINGS OF FACT
Petitioner Department of Financial Services, Office of Financial Institutions and Securities Regulation (the “Office”), as successor to the Division, is the state agency charged with administering and enforcing the Florida Securities and Investor Protection Act, Chapter 517, Sections 517.011-517.32, Florida Statutes.
Respondent David H. Kligfeld (“Kligfeld”) was, at all relevant times, a Florida-licensed life and health agent subject to the regulatory jurisdiction of the Department of Insurance.
Respondent Dhalco Financial Services, Inc. (“Dhalco”) was, at all relevant times, a Florida corporation of which Kligfeld was a director. The evidence does not establish that Dhalco engaged in any conduct distinct from Kligfeld’s in connection with the transactions at issue. Therefore, Respondents will be referred to collectively as “Kligfeld.”
During a period of about one year, from early 1998 through early 1999, Kligfeld arranged for some of his clients to
purchase equitable interests in life insurance policies that had been the subject of viatical settlement contracts. The following explanation of the viatical settlement business will put these deals in proper context.
A traditional viatical settlement occurs when a person who is terminally ill, known as a “viator,” sells to an investor the right to receive death benefits under his life insurance policy. The investor pays a discount off the face value of the policy that reflects the viator’s life expectancy. For example, if the viator were expected to live for three more years, the investor might pay $.40 on the dollar (e.g. $40,000 for a
$100,000 policy), whereas he might pay $.60 on the dollar for a policy insuring a person whose life expectancy is one year.1 Typically, the investor is responsible for paying any premiums that come due under the policy, which is known as a “viaticated policy” after the sale. His return——the death benefits less the total amount invested in the policy——is realized when the viator dies, the sooner the better.
Under Florida law, a person who invests in a viatical settlement as just described is called a “viatical settlement provider.” In the instant case, one party to the subject transactions was a viatical settlement provider called American Benefits Services, Inc. (“ABS”).
As a viatical settlement provider, ABS acquired——or purported to acquire——an inventory of viaticated policies. ABS in turn sold “interests” in these viaticated policies to other investors. The evidence shows that these investors——who are known under Florida law as “viatical settlement purchasers”—— bought death benefit dollars at a discounted price reflecting the viator’s life expectancy.
Before going into greater detail about the viatical settlement purchase transactions that are at the heart of this case, it is important to note that viatical settlement purchasers do not enter into a traditional viatical settlement because they do not deal directly, or even indirectly, with the viator. In effect, viatical settlement purchasers buy at “retail” a product (death benefit dollars) that the viatical settlement provider has acquired in the “wholesale” market. To make money, the viatical settlement provider, like any retailer, must charge more per dollar of coverage (its product) than it paid for that dollar.
In the instant case, the Office established that Kligfeld arranged for ten investors (hereafter, the “Investors”) to purchase death benefit dollars from ABS in 18 separate transactions.2 What follows is a general description of these transactions.
ABS offered viatical settlement purchasers the option of investing in either a “growth” plan or an “income” plan. Because all but one of the 18 transactions at issue involved the growth plan, it will be discussed first.
The growth plan offered an investor a choice between three levels of risk based on life expectancy. These were:
Life Expectancy 2 years or less (28%) Life Expectancy 2½ years or less (35%) Life Expectancy 3 years or less (42%)
The percentages in the parentheses reflect the discounted price per dollar of death benefit in each category of risk. To explain, for the “three-year” growth plan, an investor would pay
$1.00 for $1.42 worth of death benefits, or a bit more than $.70 on the dollar——roughly a 30% discount.3 Thus, an investment of
$100,000 would purchase $142,000 in death benefits, resulting in a net return to the investor, when the underlying policy matured, of $42,000 ($142,000 - $100,000)——a 42% increase in his money. The actual yield upon such an investment naturally would depend on the viator’s lifespan. For example, if the viator lived for 10 more years instead of three, thereby deferring the
$142,000 payoff for 10 years, the net return of $42,000 would be worth far less, due to the time-value of money, than if the viator passed away within a year.
The income plan, in contrast, offered only one level of risk, namely, the “three years or less” life expectancy. As
well, the price per benefit dollar under the income plan was much higher than under the corresponding “three-year” growth plan: approximately $.77 per dollar for “income” versus about
$.70 per dollar for “growth.” The income investor, however, was entitled to receive from ABS up to (but no more than) 36 monthly payments, calculated to return 9.86% simple interest annually on his investment, making a net return, at the end of three years, equal to 29.58% of the amount invested. At that point, he would receive no further payments until the viator’s death caused the underlying policy to mature, triggering a distribution of the death benefits. (As with the growth plan, the actual yield upon the income investor’s investment would not be known until the underlying policy matured and his equity was returned. Also, keep in mind that an investor would not “make money” unless and until he got back all of this original capital, which would not happen until the policy matured.) If the policy in which the income investor held an interest happened to mature before the end of three years, then he would be paid the amount of death benefits he had purchased, less the monthly distributions already paid.
Thus, for example, an investment of $100,000 in the income plan would purchase $129,580 worth of death benefits. The investor would be entitled to receive up to 36 monthly payments of $821.66. If he received all 36 payments, then at
the time the policy matured he would receive a final payment of
$100,000 (returning his equity), producing a yield upon investment that would depend on the length of time he had waited for the payoff. If, on the other hand, the policy matured after, say, only two years, he would receive a final payment of
$109,860——which, together with the previous distributions totaling $19,720, would make a net return on his investment of
$29,580, producing a relatively high yield.
Although not described as such in any of the documents or testimony in evidence, the income plan, in economic substance, called for ABS to lend money to the investor as an advance against the anticipated payout under the viaticated policy. This meant that ABS retained some of the risk that the policy would mature outside the projected timeframe4——a risk that, in contrast, ABS passed along in full to the growth investors.5 The element of risk to ABS coupled with the concomitantly reduced risk to the investor explains why the income plan was quite a bit more expensive.
Whether the Investor chose the growth plan or the investment plan, the deal was structured the same way, using the same basic transaction documents. The core instrument was the Participation Agreement, to which the parties were ABS and the individual Investor.6 The Participation Agreement provided in pertinent part:
Whereas, AMERICAN BENEFITS SERVICES, INC.
(hereinafter ABS) is in the business, on behalf of other individuals, of finding and securing Viaticated Insurance Benefits (hereinafter VI Benefits); and,
Whereas, PARTICIPANT [i.e. the investor] wants to have ABS make available VI Benefits that have been assigned to an independent third-party escrow company. All VI Benefits must meet the criteria set forth herein.
Now then, in consideration of the foregoing, it is agreed by the parties:
TERMS OF PARTICIPATION
PARTICIPANT and ABS agree to the terms of this PARTICIPATION AGREEMENT, as expressed herein.
This agreement incorporates by reference, as if set forth fully herein, pages 10 and 11, of the VIATICATED INSURANCE BENEFITS PARTICIPATION DISCLOSURE, entitled DESCRIPTION OF THE PARTICIPATION.[7]
* * *
ACKNOWLEDGMENTS, REPRESENTATIONS AND WARRANTIES
PARTICIPANT warrants and represents that PARTICIPANT has read this agreement and understands it, along with the 13 page VIATICATED INSURANCE BENEFITS PARTICIPATION DISCLOSURE, and, specifically, the DESCRIPTION OF THE PARTICIPATION.
PARTICIPANT warrants and represents that PARTICIPANT understands that PARTICIPANT will not receive his or her principal and interest until the maturity of the policy (which occurs at the death of the insured) and, therefore, the PARTICIPANT may not receive his or her VI Benefits
within the 36 month life expectancy.
For this reason, PARTICIPANT will not be able to liquidate this participation except as set forth in the PARTICIPATION DISCLOSURE under DESCRIPTION OF THE PARTICIPATION.[8]
PARTICIPANT warrants and represents that, in reaching his or her decision regarding this participation, PARTICIPANT has not relied on any statement of AMERICAN BENEFITS SERVICES, INC. or its agents, except for those statements which are made in this Participation Agreement or in the VIATICATED INSURANCE BENEFITS PARTICIPATION DISCLOSURE.
GENERAL PARTICIPATION PROVISIONS
A. ENTIRE UNDERSTANDING OF PARTICIPATION: This Agreement constitutes the entire understanding of the parties and there are no representations, warranties, covenants, or undertakings other than those expressly set forth herein.
In addition to the Participation Agreement, each Investor also executed a Disbursement Letter of Instruction and a Letter of Instruction to Trust. The former directed the escrow agent, to whom the Investor’s funds were remitted, to disburse the invested funds to Financial Federated Title & Trust, Inc. (“FinFed”) upon his receipt of certain documents (e.g. proof that the viaticated policy was in full force and effect). The latter instructed FinFed——which evidently held legal title to the viaticated policy, in the capacity of trustee——to establish a trust, or “fractionalized interest” in a
trust, for the benefit of the Investor.9 The Participation Agreement, Disbursement Letter of Instruction, and Letter of Instruction to Trust will hereafter be referred to collectively as the “Contract.”
It is undisputed that the Investors lost all or most of the money they had invested under the Contracts. They did not lose their money as a direct and proximate result of anything that Kligfeld had done or failed to do, however, but rather because, as it turned out, ABS was perpetrating a massive fraud on its victims, including the Investors and Kligfeld, who had also purchased death benefits from ABS.10
It should be stressed, too, that the Office did not charge Kligfeld with fraud of any kind. Despite this, the Office has argued, or at least insinuated, in its Proposed Recommended Order that Kligfeld misrepresented the nature of the transaction, or the terms of the deal, when soliciting the Investors. Given the specific violations alleged, however, no findings in this regard are required.
Along the same line, some of the Investors who testified at the final hearing described representations and promises that they believed were part of the deal, but which are not contained in, and indeed contradict the unambiguous provisions of, the Contract. It is difficult to tell whether such representations were really made——or whether the testimony
simply reflects fading memories, a lack of understanding on a given Investor’s part regarding the actual details of the deal, or some combination thereof. Since fraud was not charged, however, and because each Contract speaks for itself as to the terms and conditions of the deal, it is not necessary to make any findings of fact concerning whether extra-contractual promises were made.11
CONCLUSIONS OF LAW
The Division of Administrative Hearings has personal and subject matter jurisdiction in this proceeding pursuant to Sections 120.569 and 120.57(1), Florida Statutes.
The Office seeks to impose an administrative fine on Kligfeld and therefore bears the burden of proving the allegations of its Amended Administrative Complaint by clear and convincing evidence. Department of Banking and Finance, Div. of Securities and Investor Protection v. Osborne Stern and Co., 670 So. 2d 932, 935 (Fla. 1996); see also Section 120.57(1)(j), Florida Statutes (“Findings of fact shall be based on a preponderance of the evidence, except in penal or licensure disciplinary proceedings[.]”).
Kligfeld asserts, in conclusory fashion, that the Office is without authority to prosecute him under Chapter 517, Florida Statutes, because, he contends, the legislature has vested in the Department of Insurance (“Department”)12 the
exclusive jurisdiction to regulate transactions such as the ones at issue, pursuant to the Viatical Settlement Act, which comprises Chapter 626, Part X, Sections 626.991-626.99295, Florida Statutes.
In response to Kligfeld’s assertion, the Office argues:13
The Department of Insurance does not regulate the secondary market for resale of interests in a trust that represents that it holds an interest in a viatical. The [Viatical Settlement Act] pertains to an economic benefit being realized when a viaticated life insurance policy matures and the insurance company pays the face value of the life insurance policy pursuant to a claim being filed. The Viatical Settlement Act does not provide for the payment of funds to an investor prior to a life insurance policy maturing nor at all times material herein did the Viatical Settlement Act provide for and regulate the secondary market.
Pet. Prop. Rec. Order at 25-26. The Office’s contentions about the Viatical Settlement Act do not bear up under scrutiny.14
To appreciate the scope of the Viatical Settlement Act requires a familiarity with, and understanding of, the terms used therein. Accordingly, the entire definitions section is reproduced below:
As used in this act, the term:
"Department" means the Department of Insurance.
"Independent third-party trustee or escrow agent" means an attorney, certified public accountant, financial institution, or
other person providing escrow services under the authority of a regulatory body. The term does not include any person associated, affiliated, or under common control with a viatical settlement provider or viatical settlement broker.
"Person" has the meaning specified in s. 1.01.
"Viatical settlement broker" means a person who, on behalf of a viator and for a fee, commission, or other valuable consideration, offers or attempts to negotiate viatical settlement contracts between a viator resident in this state and one or more viatical settlement providers. Notwithstanding the manner in which the viatical settlement broker is compensated, a viatical settlement broker is deemed to represent only the viator and owes a fiduciary duty to the viator to act according to the viator's instructions and in the best interest of the viator. The term does not include an attorney, licensed Certified Public Accountant, or investment adviser lawfully registered with the Department of Banking and Finance under chapter 517, who is retained to represent the viator and whose compensation is paid directly by or at the direction and on behalf of the viator.
"Viatical settlement contract" means a written agreement entered into between a viatical settlement provider, or its related provider trust, and a viator. The viatical settlement contract includes an agreement to transfer ownership or change the beneficiary designation of a life insurance policy at a later date, regardless of the date that compensation is paid to the viator. The agreement must establish the terms under which the viatical settlement provider will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy or certificate, in return for the viator's assignment, transfer, sale, devise, or bequest of the death benefit or ownership
of all or a portion of the insurance policy or certificate of insurance to the viatical settlement provider. A viatical settlement contract also includes a contract for a loan or other financial transaction secured primarily by an individual or group life insurance policy, other than a loan by a life insurance company pursuant to the terms of the life insurance contract, or a loan secured by the cash value of a policy.
"Viatical settlement provider" means a person who, in this state, from this state, or with a resident of this state, effectuates a viatical settlement contract. The term does not include:
Any bank, savings bank, savings and loan association, credit union, or other licensed lending institution that takes an assignment of a life insurance policy as collateral for a loan;
A life and health insurer that has lawfully issued a life insurance policy that provides accelerated benefits to terminally ill policyholders or certificateholders; or
Any natural person who enters into no more than one viatical settlement contract with a viator in 1 calendar year, unless such natural person has previously been licensed under this act or is currently licensed under this act.
A trust that meets the definition of a "related provider trust."
A viator in this state.
A viatical settlement purchaser.
A financing entity.
"Viator" means the owner of a life insurance policy or a certificateholder under a group policy who enters or seeks to enter into a viatical settlement contract. This term does not include a viatical settlement purchaser or a viatical settlement provider or any person acquiring a policy or interest in a policy from a viatical settlement provider, nor does it include an independent third-party trustee or escrow agent.
"Related provider trust" means a titling trust or other trust established by a licensed viatical settlement provider or financing entity for the sole purpose of holding the ownership or beneficial interest in purchased policies in connection with a financing transaction. The trust must have a written agreement with a licensed viatical settlement provider or financing entity under which the licensed viatical settlement provider or financing entity is responsible for insuring compliance with all statutory and regulatory requirements and under which the trust agrees to make all records and files relating to viatical settlement transactions available to the department as if those records and files were maintained directly by the licensed viatical settlement provider. This term does not include an independent third-party trustee or escrow agent or a trust that does not enter into agreements with a viator. A related provider trust shall be subject to all provisions of this act that apply to the viatical settlement provider who established the related provider trust, except s. 626.9912, which shall not be applicable. A viatical settlement provider may establish no more than one related provider trust, and the sole trustee of such related provider trust shall be the viatical settlement provider licensed under s. 626.9912. The name of the licensed viatical settlement provider shall be included within the name of the related provider trust.
"Viatical settlement purchase agreement" means a contract or agreement, entered into by a viatical settlement purchaser, to which the viator is not a party, to purchase a life insurance policy or an interest in a life insurance policy, which is entered into for the purpose of deriving an economic benefit. The term also includes purchases made by viatical settlement purchasers from any person other than the provider who effectuated the viatical settlement contract.
"Viatical settlement purchaser" means a person who gives a sum of money as consideration for a life insurance policy or an equitable or legal interest in the death benefits of a life insurance policy that has been or will be the subject of a viatical settlement contract, for the purpose of deriving an economic benefit, including purchases made from any person other than the provider who effectuated the viatical settlement contract or an entity affiliated with the provider. The term does not include a licensee under this part, an accredited investor as defined in Rule 501, Regulation D of the Securities Act Rules, or a qualified institutional buyer as defined by Rule 144(a) of the Federal Securities Act, a special purpose entity, a financing entity, or a contingency insurer. The above references to Rule 501, Regulation D and Rule 144(a) of the Federal Securities Act are used strictly for defining purposes and shall not be interpreted in any other manner. Any person who claims to be an accredited investor shall sign an affidavit stating that he or she is an accredited investor, the basis of that claim, and that he or she understands that as an accredited investor he or she will not be entitled to certain protections of the Viatical Settlement Act. This affidavit must be kept with other documents required to be maintained by this act.
"Viatical settlement sales agent" means a person other than a licensed viatical settlement provider who arranges the purchase through a viatical settlement purchase agreement of a life insurance policy or an interest in a life insurance policy.
"Viaticated policy" means a life insurance policy, or a certificate under a group policy, which is the subject of a viatical settlement contract.
"Related form" means any form, created by or on behalf of a licensee, which a viator or viatical settlement purchaser is
required to sign or initial. The forms include, but are not limited to, a power of attorney, a release of medical information form, a suitability questionnaire, a disclosure document, or any addendum, schedule, or amendment to a viatical settlement contract or viatical settlement purchase agreement considered necessary by a provider to effectuate a viatical settlement transaction.
"Special purpose entity" means an entity established by a licensed viatical settlement provider or by a financing entity, which may be a corporation, partnership, trust, limited liability company, or other similar entity formed solely to provide, either directly or indirectly, access to institutional capital markets to a viatical settlement provider or financing entity. A special purpose entity shall not enter into a viatical settlement contract or a viatical settlement purchase agreement.
"Financing entity" means an underwriter, placement agent, lender, purchaser of securities, or purchaser of a policy or certificate from a viatical settlement provider, credit enhancer, or any entity that has direct ownership in a policy or certificate that is the subject of a viatical settlement contract, but whose principal activity related to the transaction is providing funds or credit enhancement to effect the viatical settlement or the purchase of one or more viatical policies and who has an agreement in writing with one or more licensed viatical settlement providers to finance the acquisition of viatical settlement contracts. The term does not include a nonaccredited investor, a viatical settlement purchaser, or other natural person. A financing entity may not enter into a viatical settlement contract.
Section 626.9911, Florida Statutes.
It is clear from the plain language of the statute that the definitions of “viatical settlement purchase agreement” and “viatical settlement purchaser” cover the Contracts and Investors, respectively, at issue here. Each of the Contracts was an agreement between a “viatical settlement provider” and a person other than the “viator” who gave a sum of money as consideration for an equitable interest15 in the death benefits of a life insurance policy that was the subject of “viatical settlement contract,” for the purpose of “deriving an economic benefit.”16
It is also clear from the plain language of the statute that Kligfeld was performing the functions of a “viatical settlement sales agent” in connection with the subject transactions.
There is thus no doubt that the transactions at issue are within the field of operation of the Viatical Settlement Act, which regulates such transactions——and those who participate in them——by imposing licensing and disclosure requirements, prohibiting fraudulent and unfair practices, and empowering the Department to prosecute and punish violators.
The more difficult question is whether the Department’s regulatory jurisdiction under the Viatical Settlement Act is exclusive, as Kligfeld posits, or merely concurrent with the Office’s to the extent that a viatical
settlement purchase agreement (“VSPA”) qualifies as an “investment contract” and hence constitutes a security.
In sorting out this jurisdictional issue, a key provision of the Viatical Settlement Act is Section 626.99245, Florida Statutes. This section, which is titled, “Conflict of regulation of viaticals,” provides as follows:
A viatical settlement provider who from this state enters into a viatical settlement purchase agreement with a purchaser who is a resident of another state that has enacted statutes or adopted regulations governing viatical settlement purchase agreements, shall be governed in the effectuation of that viatical settlement purchase agreement by the statutes and regulations of the purchaser's state of residence. If the state in which the purchaser is a resident has not enacted statutes or regulations governing viatical settlement purchase agreements, the provider shall give the purchaser notice that neither Florida nor his or her state regulates the transaction upon which he or she is entering. For transactions in these states, however, the viatical settlement provider is to maintain all records required as if the transactions were executed in Florida. However, the forms used in those states need not be approved by the department.
A viatical settlement provider who from this state enters into a viatical settlement contract with a viator who is a resident of another state that has enacted statutes or adopted regulations governing viatical settlement contracts shall be governed in the effectuation of that viatical settlement contract by the statutes and regulations of the viator's state of residence. If the state in which the viator is a resident has not enacted statutes or regulations governing viatical settlement agreements,
the provider shall give the viator notice that neither Florida nor his or her state regulates the transaction upon which he or she is entering. For transactions in those states, however, the viatical settlement provider is to maintain all records required as if the transactions were executed in Florida. The forms used in those states need not be approved by the department.
This section does not affect the requirement of ss. 626.9911(6) and 626.9912(1) that a viatical settlement provider doing business from this state must obtain a viatical settlement license from the department. As used in this subsection, the term "doing business from this state" includes effectuating viatical settlement contracts and effectuating viatical settlement purchase agreements from offices in this state, regardless of the state of residence of the viator or the viatical settlement purchaser.
A careful reading of subsection (1) compels the ultimate conclusion that Florida does not regulate, in any substantive way,17 transactions in which an in-state viatical settlement provider enters into a VSPA with an out-of-state purchaser.18 Because this conclusion, which is crucial, might not be immediately apparent, the following analysis is offered.
To begin, the statute clearly demands that, when the purchaser of a VSPA is a nonresident, the provider must determine whether the purchaser’s state of residence has enacted statutes or regulations “governing” VSPAs. This is the provider’s burden because, as the second sentence of subsection
(1) makes clear, it is the provider who must act if the foreign
state has no such laws. The provider’s task is more difficult than it might appear at first blush, for, as written, the statute admits the possibility that the foreign state’s law governing VSPAs might be, for example, its Blue Sky Law——and, as this case demonstrates, significant disagreement or uncertainty could easily exist concerning whether, under the foreign state’s law, a VSPA constitutes a security.19
If the provider concludes that the foreign state does regulate VSPAs, then the provider need take no further action at the time of the transaction in regard to the choice-of-laws issue. Rather, in that event, the provider must submit itself to the foreign state’s law as necessary to “effectuate” the transaction.
If, on the other hand, the provider believes that the foreign state does not have statutes or regulations governing VSPAs, then the provider must give the purchaser a particular notice. This compulsory notice must inform the purchaser that “neither Florida nor his or her state regulates the transaction.” Section 626.99245(1), Florida Statutes.
At this point, the rather extraordinary nature of the provider’s burden becomes apparent. In effect, the statute requires the provider to opine as to a foreign state’s law, which might be unclear or unsettled. Indeed, a provider who wants to avoid the legal consequences that might arise if its
notice concerning a foreign state’s law were to prove incorrect presumably will err on the side of concluding that the foreign state has a statute or regulation governing VSPAs and hence remain silent on the matter.
Here, however, it is the prescribed content of the required notice, and not whether such notice is frequently given, that is of importance. When the provider is confident that it can truthfully tell the out-of-state purchaser that his state has no law governing VSPAs, the provider must also tell the purchaser that Florida does not regulate the transaction either. This latter statement is pregnant indeed.
Notice, initially, that the second sentence of subsection (1), which requires the notice under discussion, contains no language describing the capacity or capacities in which a VSPA might be regulated, or not regulated, under Florida law. With that in mind, consider that an unqualified notice that “Florida does not regulate this transaction” (which the statute unambiguously requires the provider to give an out-of- state purchaser if the latter’s state has no law governing VSPAs) plainly means that this state as a sovereign entity, and not merely one of its agencies, does not regulate the transaction in any character, e.g. as a transaction involving a VSPA, insurance policy, security, or other investment.
To underscore this point, imagine, by way of contrast, how the statute probably would read if, in Section 626.99245(1), Florida Statutes, the legislature had intended to require (in the particular circumstance contemplated) a narrower notice,
e.g. that the Florida Department of Insurance does not regulate this transaction as a transaction involving insurance (or: as a
transaction involving a viatical settlement purchase agreement, or: as a transaction subject to Part X of Chapter 626, Florida Statutes). Had the legislature intended a more specific, less inclusive notice, then it surely would have used words to the effect of the ones underlined in the preceding sentence.20 That it did not evinces a contrary intent.
The significance of this becomes apparent when one considers the capacities in which a VSPA might possibly be regulated under Florida law. One way, of course, is as a VSPA, which instrument is deemed to be an insurance policy for purposes of the Viatical Settlement Act, see Section 626.9927(1), Florida Statutes, and accordingly is regulated thereunder, as provided therein.
A VSPA might also be regulated as a “security” under Chapter 517, Florida Statutes, provided it falls within the definition of that term as set forth in Section 517.021(19), Florida Statutes. Indeed, the Office’s case rests on the contention that a VSPA is an “investment contract” and, as such,
an instrument embraced by the statutory definition of “security.”
Finally, a VSPA might be regulated under Chapter 517 as an “investment.” The term “investment” is defined in Section 517.301(2), Florida Statutes, to mean,21
[f]or purposes of ss. 517.311 and 517.312 and this section, . . . any commitment of money or property principally induced by a representation that an economic benefit may be derived from such commitment[.]
Under this definition, it appears that a VSPA could constitute an “investment” for some purposes of Chapter 517, even if it is not a “security” for other purposes of that chapter.
Having looked at the various capacities in which a VSPA might be regulated, it will next be seen that an unqualified notice to an out-of-state viatical settlement purchaser that “Florida does not regulate this transaction” (which the statute unambiguously requires be given in a particular circumstance) would be untrue if Florida regulated the transaction under any regimen, whether such regulatory scheme be laid out in the Viatical Settlement Act or in the Florida Securities and Investor Protection Act. That is to say, if a VSPA were, for example, a “security” subject to regulation under Chapter 517, then a statement that Florida does not regulate a transaction involving the sale of a VSPA from this state would be false, for Florida certainly does regulate such
securities transactions, even where the purchaser is a nonresident. See, e.g., Section 571.312(1)(a), Florida Statutes (unlawful to offer or sell, in or from this state, any security or investment through false representations or fraudulent means); Section 517.12(1), Florida Statutes (unlawful for unregistered person to offer or sell securities in or from offices in this state, unless a specific exception applies); State v. Hayes, 305 So. 2d 819, 821 (Fla. 1st DCA 1975)(fact that unregistered dealer offered and sold securities to out-of- state investors would not deprive state of authority to punish dealer for failure to register).
It must, of course, be assumed that the legislature would never direct a provider to make a false statement to an out-of-state purchaser regarding Florida law. Therefore, it can only be concluded——indeed no one could reasonably dispute——that the legislature intended to exclude from coverage of the Viatical Settlement Act all transactions between an in-state provider and an out-of-state viatical settlement purchaser whose own state has no laws governing VSPAs.
For the same reason, i.e. that the legislature would not prescribe a false notice, it must be concluded as well that the legislature intended that transactions between an in-state provider and an out-of-state viatical settlement purchaser whose own state has no laws governing VSPAs not be considered subject
to regulation under Chapter 517, Florida Statutes. From this conclusion follows the corollary that a VSPA cannot be deemed either a “security” or an “investment” for purposes of Chapter 517, at least when purchased by a nonresident whose own state has no laws governing VSPAs.
Shifting gears, the second sentence of subsection (1), which is the foundation of the immediately foregoing conclusions, also drives home a point the first sentence strongly implies, namely, that when the law of a nonresident purchaser’s state governs VSPAs, such foreign law controls the transaction to the exclusion of any otherwise applicable Florida law. Plainly, it would be absurd (and thus could not reasonably have been the legislature’s intent) to require that when the relevant foreign state has no governing law, Florida law shall not control either, thereby ensuring that the transaction goes unregulated, while simultaneously directing that when the relevant foreign state does have governing law, Florida law shall apply too, thereby subjecting the transaction to potentially conflicting regulations.
Consequently, as with regard to transactions between an in-state provider and an out-of-state viatical settlement purchaser whose own state has no laws governing VSPAs, it must be concluded that transactions involving an in-state provider and an out-of-state viatical settlement purchaser whose own
state does have laws governing VSPAs are not subject to regulation under either the Viatical Settlement Act or Chapter 517, Florida Statutes. Thus, to the point, a VSPA cannot be deemed either a “security” or an “investment” for purposes of Chapter 517 when purchased by a nonresident whose own state has laws governing VSPAs.
The upshot is, as stated at the outset of the present discussion, Florida has chosen not to regulate transactions between viatical settlement providers operating in this state and out-of-state viatical settlement purchasers——not as transactions involving insurance, not as transactions involving viaticals, and not as transactions involving securities.
Once it is concluded, as it has been, that the legislature did not intend to subject VSPAs to regulation under Chapter 517 when purchased by out-of-state investors, the question that next arises is whether Chapter 517 applies to VSPAs purchased by Florida residents, which are regulated under the Viatical Settlement Act. This issue is complicated by the unfortunate fact that Section 626.99245, Florida Statutes, does not speak directly to the regulatory conflicts that might affect transactions involving resident purchasers. For the reasons that follow, the undersigned concludes that, in consequence of the Viatical Settlement Act, Chapter 517 cannot be applied to
VSPAs, even when such instruments are acquired by Florida residents.
As a starting point, it is useful to observe that the universe of relevant investors is composed of three non- overlapping subsets: (1) in-state (or resident) investors, (2) protected nonresidents (whose states regulate VSPAs), and (3) unprotected nonresidents (whose states do not regulate VSPAs).
That said, it will be seen that in-state investors and protected nonresidents have an important characteristic in common: their transactions are subject to regulation, either under the Viatical Settlement Act, in the former’s case, or the law of a foreign state, in the latter’s. Neither group, therefore, needs to be protected under Chapter 517 to have some protection in connection with investments in VSPAs. Since the purpose of Section 626.99245, Florida Statutes, is to avoid burdening transactions involving VSPAs with duplicative and potentially conflicting regulations, it is both logical and reasonable to conclude that, just as the legislature intended for foreign states’ laws exclusively to govern transactions involving protected nonresidents as a means of avoiding needless inter-state regulatory conflict, so too the legislature intended the Viatical Settlement Act to be the sole governing law with regard to in-state investors, who are otherwise protected under
the Viatical Settlement Act, as a means of avoiding needless intra-state regulatory conflict.
This conclusion can be arrived at independently by examining the statute’s treatment of unprotected nonresidents. They, of course, are unlike in-state investors and protected nonresidents because their viatical settlement purchase transactions are not regulated by any state. For that reason, if any group could be said to need the protection of Chapter 517, it is the unprotected nonresidents. If we assume, for the moment, that the legislature, in adopting the Viatical Settlement Act, intended that Chapter 517 would protect in-state residents to the same extent as if the Viatical Settlement Act had not been enacted, then this question jumps out: What useful purpose(s) would be served by depriving the unprotected nonresidents——who are not covered under the Viatical Settlement Act——of the protections afforded under Chapter 517?
The answer, as far as the undersigned can tell, is “none.” After all, if Florida were to regulate the investments of unprotected nonresidents as transactions involving securities, such investments, being otherwise unregulated, would not be subject to competing regulations, which is the problem that Section 626.99245, Florida Statutes, was designed to solve. Further, if, as we are momentarily assuming, the transactions of resident viatical settlement purchasers were subject to Chapter
517, then regulating the VSPAs purchased by unprotected nonresidents as securities under Florida law would impose at most a marginal additional cost on providers, because they would be required to comply with Chapter 517 anyway (assuming, as seems reasonable, that all or most providers operating in Florida plan to sell VSPAs to Florida residents). There would be, in short, a clear benefit (protecting otherwise unprotected nonresidents) for which the additional regulatory burden would be negligible.
The legislature, which is presumed not to act arbitrarily or capriciously, would probably not intentionally have deprived a group so obviously needful of the protections that Chapter 517 affords, to the extent such protections would otherwise be available, unless it had some minimally reasonable basis in logic or fact for doing so. Because there seemingly would not be even a plausible reason for doing so if Chapter 517 were applicable to in-state investors’ transactions notwithstanding the enactment of the Viatical Settlement Act, the undersigned considers it highly unlikely that the legislature would have directed that unprotected nonresidents be notified that “Florida does not regulate this transaction” (which is undeniably a telling statement about Florida law) if it had, in fact, intended for Chapter 517 to apply to Florida residents’ purchases of VSPAs. Because, as it happens, the
legislature intended that unprotected nonresidents not be safeguarded under Chapter 517, as unambiguously manifested by the required notice of non-regulation, the undersigned concludes that the legislature most likely intended that Chapter 517 should not be held applicable to resident viatical settlement purchasers either. Such an intention, while admittedly expressed implicitly, is more consistent with the statute’s explicit treatment of unprotected nonresidents than any other which might be inferred.
Having found that the legislature’s intent was that Chapter 517 should not apply to in-state investors who are adequately protected under the Viatical Settlement Act, as it does not apply to protected nonresidents whose transactions are regulated under their respective states’ laws, the reasons for depriving unprotected nonresidents of Chapter 517’s protections come into view. For one, it would be patently anomalous (and probably unworkable) to extend Chapter 517 to one narrow group of out-of-state investors, the unprotected nonresidents, even while denying such protection to Florida residents. Therefore, the decision regarding Florida residents, which was probably foremost in the legislature’s mind, would largely have settled the issue with respect to the unprotected nonresidents. But more important, by removing all VSPA transactions from the ambit of Chapter 517, the legislature assured the supremacy of the
Viatical Settlement Act within its field of operation. By giving the Viatical Settlement Act a powerful “all or nothing at all” effect, the legislature not only avoided creating duplicative and potentially conflicting regulatory regimes, but also it created certainty and predictability, which are desirable conditions for providers and investors alike. The beneficial result is that anyone who wants to know how Florida regulates VSPAs need only consult the Viatical Settlement Act, which comprehensively and exclusively governs them in this state.22
Further supporting the undersigned’s conclusion that the Viatical Settlement Act regulates VSPAs to the exclusion of Chapter 517 are several provisions of Chapter 626, Part X, that have not yet been discussed. While none, standing alone, would be dispositive, these provisions amplify the legislative intent already identified through examining Section 626.99245, Florida Statutes.
“Financing entity.” The Viatical Settlement Act employs the term “financing entity,” which is defined in Section 626.9911(15), Florida Statutes. The definition is interesting for present purposes because it uses the phrases “purchaser of securities” and “viatical settlement purchaser” in back-to-back sentences, which means that the legislature had reason to consider whether a viatical settlement purchaser is a purchaser
of securities. Unfortunately, however, the first sentence of Section 626.9911(15), Florida Statutes, practically defies the rules of grammar. What follows is the definition, arranged in an outline form that reflects the undersigned’s best understanding of the intended organization and meaning of the first sentence, with emphasis, numbers, and the letters “(a)” and “(b)” added for clarity’s sake:
“Financing entity” means an
underwriter,
placement agent,
lender,
purchaser of securities, or
purchaser of a policy or certificate
from a viatical settlement provider, credit enhancer, or any entity that has
direct ownership in a policy or certificate that is the subject of a viatical settlement contract,
but
whose principal activity related to the transaction is providing funds or credit enhancement to effect the viatical settlement or the purchase of one or more viatical policies
and
who has an agreement in writing with one or more licensed viatical settlement providers to finance the acquisition of viatical settlement contracts.
The term does not include a nonaccredited investor, a viatical settlement purchaser, or other natural person. A financing entity
may not enter into a viatical settlement contract.
Section 626.9911(15), Florida Statutes (reproduced as described supra).
Notice that the legislature did not exclude viatical settlement purchasers from the definition of “financing entity,” as it might have done if it considered them to be within the included category of “purchasers of securities,” but rather declared viatical settlement purchasers to be “not include[d],” which connotes that VSPAs are not securities.23 While the wording of this definition is not by any measure a decisive indication of legislative intent, it does suggest, albeit subtly, that the legislature did not understand VSPAs to be securities.24
“Viatical settlement purchaser.” The definition of “viatical settlement purchaser” also contains a list of persons not included therein. In pertinent part, it says:
The term does not include a licensee under this part, an accredited investor as defined in Rule 501, Regulation D of the Securities Act Rules, or a qualified institutional buyer as defined by Rule 144(a) of the Federal Securities Act, a special purpose entity, a financing entity, or a contingency insurer. The above references to Rule 501, Regulation D and Rule 144(a) of the Federal Securities Act are used strictly for defining purposes and shall not be interpreted in any other manner. Any person who claims to be an accredited investor shall sign an affidavit stating that he or
she is an accredited investor, the basis of that claim, and that he or she understands that as an accredited investor he or she will not be entitled to certain protections of the Viatical Settlement Act. This affidavit must be kept with other documents required to be maintained by this act.
Section 626.9911(10), Florida Statutes (emphasis added). What is revealing here is that the legislature felt the need to add the caveat that its references to federal securities law were “strictly for defining purposes and [not to be] interpreted in any other manner.” Clearly, the legislature wanted to ensure that its references to the Federal Securities Act would be given no meaning beyond that literally expressed——but what exactly was the legislature worried about? One possibility——maybe not the only one, but a realistic one——is that the legislature feared the references to federal securities law, if not explicitly limited, might be misunderstood to imply that VSPAs should be deemed securities under Florida law.25 Of course, the legislature would not have had such a concern if it intended that VSPAs be considered securities.
Legislative history. Originally adopted in 1996, the Viatical Settlement Act has been revised many times over the ensuing years. In 1998, the legislature created Section 626.99235, Florida Statutes, which prohibits certain misrepresentations from being made to viatical settlement purchasers and requires that specific facts be disclosed to such
purchasers. Another clue to the legislative intent with regard to the question whether a VSPA constitutes a security may be found in the history of this provision.
In its first appearance, Section 626.99235 did not use the terms “viatical settlement purchaser” or “viatical settlement purchase agreement.” See Ch. 98-164, Laws of Florida. (These particular terms would not be coined until 1999. See Ch. 99-212, Laws of Florida.) As originally written, Section 626.99235 referred variously to the instrument now known as a VSPA as “any investment related to one or more viatical settlements sold by a viatical settlement provider or related provider trust,” “viatical investment,” and, significantly, “investment contract.” See Section 626.99235(1), (2)(a), (2)(c) (1998). The person now called a “viatical settlement purchaser” was then referred to simply as the “investor.” See Section 626.99235(2)(c), Florida Statutes (1998). Thus, the statute required the following written disclosure, among others, to be provided:
If required by the terms of the investment contract, that the investor may be responsible for the payment of insurance premiums on the life of the viator or late or surrender fees or other costs related to the life insurance policy on the life of the viator or viators which may reduce the return.
Id. (emphasis added).
The very next year, the legislature created and defined the terms “viatical settlement purchaser,” “viatical settlement purchase agreement,” and “viatical settlement sales agent.” See Ch. 99-212, Laws of Florida. At the same time, it revised Section 626.99235(2)(c) as follows:
If required by the terms of the viatical settlement purchase agreement investment contract, that the viatical settlement purchaser shall investor may be responsible for the payment of insurance premiums on the life of the insured, viator or late or surrender fees, or other costs related to the life insurance policy on the life of the insured or insureds viator or viators which may reduce the return.
Id., section 6. The language adopted in 1999 remains in effect at the time of this writing. See Section 626.99235(2)(c), Florida Statutes (2002).
Because the term “investment contract” is a legal term of art well known, and long used, to describe a discrete category of investments that falls within the definition of the term “security” for purposes of Chapter 517, see Section 517.021(19)(q), Florida Statutes, it would be reasonable to suppose that, when the legislature used the terms “viatical investment” and “investment contract” interchangeably in 1998, it could well have thought and intended that a “viatical investment” should be viewed as a security. But if that were the legislature’s intent in 1998, the fact that the legislature
removed the loaded term “investment contract” from Section 626.99235(2)(c) at its earliest opportunity, and replaced that highly specialized term with a brand new one that carries no similar baggage, suggests that the legislature had reconsidered the matter and desired a different result.26
Section 626.99285, Florida Statutes. In Section 626.99285, Florida Statutes, which was enacted in 2000, see Ch. 2000-344, Laws of Florida, and is entitled “Applicability of insurance code,” the legislature delegated to the Department of Insurance——or, more likely, confirmed that the Department had—— the following powers:
In addition to other applicable provisions cited in the insurance code, the department has the authority granted under ss.
624.310,[27] 626.901[28], and 626.989[29] to
regulate viatical settlement providers, viatical settlement brokers, viatical settlement sales agents, viatical settlement contracts, viatical settlement purchase agreements, and viatical settlement transactions.
(Emphasis added). While this provision does not explicitly grant the Department exclusive jurisdiction over the enumerated subjects, it nevertheless shows clearly that the legislature envisioned the Department having significant regulatory jurisdiction over the business of viaticals.30 Considering that none of the provisions of the Viatical Settlement Act even hints that the Department shares regulatory jurisdiction in this field
with any other agency, it is reasonable to infer, as the undersigned has, that the legislature intended the Department to have exclusive jurisdiction over transactions involving viaticals.
“Viatical Settlement Sales Agent.” Because, in connection with the transactions at issue, Kligfeld was performing the functions of a “viatical sales agent,” as that term is defined in Section 626.9911(11), Florida Statutes, it is noteworthy that Viatical Settlement Act specifically prescribes the type of license that one must hold in order lawfully to engage in the business of a viatical sales agent.31 Section 626.992(4), Florida Statutes, provides:
A person may not perform the functions of a viatical settlement sales agent unless licensed as a life agent as defined in s.
626.051 and as provided in this chapter.
It is revealing that the legislature did not, in Section 626.992(4), mention a need to be registered with the Department of Banking and Finance. In this connection, it should be added that nowhere in Chapter 517 does the word “viatical” appear. Thus, if the Office’s position that VSPAs are securities were correct, Section 626.992(4) would be misleadingly incomplete. Indeed, a person who wanted to act as a viatical sales agent, while having good reason to believe that a life agent’s license is the only warrant needed, would have no
way of knowing that registration under Chapter 517 is also required, unless he or she happened to be an expert in securities law or were perceptive enough to retain one.32
The undersigned concludes that if the legislature had intended to require viatical settlement sales agents to register with the Department of Banking and Finance pursuant to Chapter 517, it would have said so in Section 626.992(4), Florida Statutes. The fact that the legislature said nothing about such registration in a provision that unambiguously requires a person to have a specific license, no more and no less, to operate as a viatical settlement sales agent tells the undersigned that the legislature neither contemplated nor intended that viatical settlement sales agents be registered pursuant to the provisions of Section 517.12, Florida Statutes.
Having determined that the Viatical Settlement Act comprehensively and exclusively governs VSPAs, the undersigned further concludes that Chapter 626, Part X, Florida Statutes, has impliedly superseded Chapter 517, at least to the extent the latter would regulate VSPAs as either “securities” or “investments.” In other words, the Viatical Settlement Act has effected an implied partial repeal of Chapter 517.
Undergirding the foregoing conclusion is the following rule of statutory construction:
Although repeal by implication is not favored, a general law may be impliedly repealed, in part or in whole, by a subsequently enacted general law, where it appears that there is an irreconcilable conflict between the two or that the later enactment was clearly intended to prescribe the only rule that should govern the area to which it is applicable or that the later act revises the subject matter of the former.
Alvarez v. Board of Trustees of the City Pension Fund for
Firefighters and Police Officers in the City of Tampa, 580 So. 2d 151, 153 (Fla. 1991)(citation omitted)(emphasis added); see also, e.g., Flo-Sun, Inc. v. Kirk, 783 So. 2d 1029, 1035-36 (Fla. 2001); Berkley v. State Dept. of Environmental Regulation,
358 So. 2d 552, 554 (Fla. 1st DCA 1977). For reasons discussed at length herein, the undersigned is convinced that the Viatical Settlement Act was clearly intended to prescribe the only governing rules within its field of operation, which unambiguously includes transactions involving VSPAs and the regulation of viatical settlement sales agents.
This partial repeal operated, among other ways, to divest the Office of jurisdiction to enter a final order punishing a viatical settlement sales agent for conduct relating to transactions involving VSPAs, and this is true even if key provisions of the Viatical Settlement Act were adopted after the alleged offenses giving rise to such disciplinary proceeding were committed.33 See Gewant v. Florida Real Estate Commission,
166 So. 2d 230, 232-33 (Fla. 3d DCA 1964)(repealed statute is completely obliterated and has no effect in quasi-penal proceedings not yet finally concluded); see also K.M.T. v. Department of Health and Rehabilitative Services, 608 So. 2d 865, 871-72 (Fla. 1st DCA 1992); Navarro v. Barnett Bank of West Florida, 543 So. 2d 304, 306 (Fla. 1st DCA 1989); cf. Board of
Trustees of the Internal Imp. Trust Fund v. Barnett, 533 So. 2d 1202, 1206 (Fla. 3d DCA 1988)(“An administrative agency may not revoke a license or a permit for some cause not clearly within the ambit of its statutory authority.”).
Because the Office does not have subject matter jurisdiction in this matter, the Amended Administrative Complaint against Kligfeld must be dismissed. This conclusion renders moot the question whether the VSPAs at issue in this case fall within the meaning of the term “investment contract”—— and hence constitute securities——for purposes of Chapter 517, Florida Statutes.
Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Office enter a final order dismissing all charges against Respondents.
DONE AND ENTERED this 25th day of March, 2003, in Tallahassee, Leon County, Florida.
JOHN G. VAN LANINGHAM
Administrative Law Judge
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-3060
(850) 488-9675 SUNCOM 278-9675
Fax Filing (850) 921-6847 www.doah.state.fl.us
Filed with the Clerk of the Division of Administrative Hearings this 25th day of March, 2003.
ENDNOTES
1/ These numbers, though reality-based, are hypothetical; the example is designed merely to make the point that as the policy nears maturity, the investment becomes less risky, and the policy, correspondingly, more expensive.
2/ The names of the 10 Investors, the dates of their respective transactions, the type of plan he or she selected (growth or income, see text at pp. 7-9, infra), and the amounts invested (each person’s total investment is in bold) are set forth in the following chart:
Jo | Anne | Conley | Feb. | 17, | 1998 | Growth | $30,000 |
Corinne Weiss | April | 9, | 1998 | Growth | $2,000 |
April | 9, | 1998 | Growth | $3,000 | |
$5,000 | |||||
Stephen | Weiss | April | 8, | 1998 | Growth | $7,139.45 |
Edward Kligfeld | April 20, 1998 | Growth | $75,000 |
July 28, 1998 | Growth | $150,000 | |
$225,000 | |||
Donald Kohl | May 22, 1998 | Growth | $100,000 |
July 29, 1998 | Growth | $50,000 | |
Nov. 9, 1998 | Growth | $75,000 | |
Dec. 4, 1998 | Growth | $50,000 | |
$275,000 | |||
Donald Courtney | Nov. | 10, | 1998 | Growth | $50,000 |
March | 5, | 1999 | Growth | $50,000 | |
$100,000 | |||||
George | Ramani | August | 20, | 1998 | Growth | $15,000 |
James Tracton | June 17, 1998 | Growth | $75,000 |
August 18, 1998 | Growth | $100,000 | |
$175,000 | |||
Sam | Banks | Jan. | 15, | 1999 | Income | $65,000 |
Terry Banks | Feb. | 18, | 1999 | Growth | $15,761.37 |
Feb. | 18, | 1999 | Growth | $9,929.02 | |
$25,690.39 | |||||
3/ The shorter life expectancies, being less risky, were more expensive. For the “two-and-a-half-year” plan, the investor would pay about $.74 per dollar; hence, a $100,000 investment would purchase $135,000 in death benefits. For the “two-year” plan, the investor would pay just over $.78 on the dollar.
4/ The risk was that ABS might have to wait some period of time to be repaid the money it had advanced, thereby reducing the yield it would realize on its investment. See also endnote 5.
5/ In the growth plan, ABS completely divested itself of risk with respect to each death benefit dollar sold. To see this, suppose that ABS’s average internal cost per death benefit dollar (including purchase amounts paid to viators, premiums, commissions, administrative expenses, and overhead) spread over
its entire inventory of viaticated policies was $.50. (There is no evidence in the record as to what this number actually was;
$.50 is merely an educated guess made simply to illustrate the point.) When a “three-year” growth investor invested $100,000, what he received was $142,000 worth of death benefits for which ABS had paid on average (we are assuming) $71,000. At that point, ABS realized a profit of $29,000——and had no further risk on those $142,000 death benefit dollars sold.
In contrast, when an income investor invested $100,000, he received $129,580 worth of death benefits, for which ABS had paid $64,790 (we are assuming). At that point, ABS had a gain of $35,210, but it was committed to lending the investor as much as $29,580 over three years if the policy did not sooner mature, so ABS could not immediately realize $35,210 of profit.
Instead, ABS’s own ultimate yield under the investment plan depended upon, and hence remained tied to, the viator’s lifespan in a way that was not true with regard to growth investors.
6/ One Investor, Jo Anne Conley, made her agreement with an entity called “Asset Based Management,” which appears to have been a predecessor in interest to ABS. This distinguishing fact, to which neither party has called attention, does not make a difference in the disposition of this case, and so it will be disregarded in the discussion that follows.
7/ The Office failed to offer into evidence a single copy of the DESCRIPTION OF THE PARTICIPATION that was part of the Participation Agreement. Thus, none of the Participation Agreements in evidence is actually complete, which adversely affects the Office’s case. See endnote 8 and accompanying text.
8/ The Office has argued that ABS guaranteed it would repurchase the investor’s interest for 115% of the amount paid if the viator did not die within three years. There is no competent, non-hearsay evidence of this so-called guarantee in the record, however, and the undersigned is not convinced (being mindful that the Office must prove its allegations by clear and convincing evidence), based on the persuasive proof in the record, that such a guarantee was in fact made. If such a promise had been made, it presumably would have been contained in the DESCRIPTION OF THE PARTICIPATION that the Office failed to put into evidence. See endnote 7 and accompanying text.
9/ Presumably the Investor received a trust document or other instrument establishing that he had been assigned an equitable
interest, as beneficiary, in a trust holding the viaticated policy. The Office did not offer such a document into evidence, however.
10/ A number of principals of ABS and others who participated in the fraud have been prosecuted and convicted as criminals in federal court.
11/ Just as a piece of glass remains a piece of glass even if an unscrupulous seller fraudulently describes it as diamond for the purpose of selling it to an unsuspecting buyer, so too the deal here was (the undersigned finds as a matter of fact) what the Contract said it was, regardless whether Kligfeld or someone else misrepresented the terms and conditions thereof to one or more of the Investors——an offense, to repeat, Kligfeld has not been accused of committing.
12/ As a result of the recent governmental reorganization brought about by Chapter 2002-404, Laws of Florida, the Department of Insurance, as such, no longer exists. The former Department’s regulatory jurisdiction over viatical settlements has been transferred to the newly created Office of Insurance Regulation of the Financial Services Commission within the Department of Financial Services. See 20.121(3)(a)1., Florida Statutes (2002). Although the Office appearing as Petitioner in this case and the Office of Insurance Regulation are now both structural units within the newly created Financial Services Commission which exists within the newly created Department of Financial Services, each office has its own separate sphere of regulatory authority. To avoid unnecessary confusion, the Office of Insurance Regulation is referred to herein under its old familiar name as the “Department.”
13/ Neither party thoroughly briefed this serious and significant issue, which appears to be a question of first impression.
14/ Because the Office does not have substantive jurisdiction over the Viatical Settlement Act, which is part of the Insurance Code administered by the Department, its interpretation of the Viatical Settlement Act is entitled to no deference in this proceeding. See, e.g., Section 120.57(1)(l), Florida Statutes. The parties (and the undersigned) are without the benefit of the Department’s interpretations of the Viatical Settlement Act because it has promulgated no rules which construe that law.
15/ The term “equitable interest” plainly refers to the property interest of a beneficiary under a trust. Thus, the legislature clearly intended to include within the definition of “viatical settlement purchaser” any person, such as each of the Investors, who receives, for his money, an assignment of a beneficial interest in a trust, the corpus of which consists of a “viaticated policy” or policies. The Office’s contrary assertion is simply incorrect. Indeed, moreover, not only does the Viatical Settlement Act “regulate the secondary market,” but also it reaches the “tertiary market” and beyond, because it specifically embraces viatical settlement purchase agreements between viatical settlement purchasers and persons other than the original viatical settlement provider.
16/ Because the statutory definitions of “viatical purchase agreement” and “viatical settlement purchaser” are silent as to the timing of the economic benefit, they must be understood to refer to any “economic benefit”——not merely a benefit that is realized when the viaticated policy matures, as the Office argues. Moreover, since the definition of “viatical settlement contract” specifically includes a “loan or other financial transaction secured primarily by” a viaticated
policy——pursuant to which a viator might conceivably agree to repay the viatical settlement provider during the viator’s lifetime, creating an income stream that could be repackaged and sold pursuant to a “viatical settlement purchase agreement”——it cannot be said that the legislature implicitly excluded deals providing for an economic benefit to be derived prior to the viator’s death. Such an implication is also contraindicated by the presence in the definition of “viatical settlement purchaser” of a list of things “not included” therein——one of which, pointedly, is not a person whose economic benefit is realized prior to the time the viaticated policy matures.
Finally, in specific reference to the facts of this case, it is debatable whether an income investor received a true economic benefit prior to the time the viaticated policy matured, as the Office would argue, because unless and until his capital was returned, such investor remained “upside down” in the investment——and at risk of losing money, as indeed Sam Banks did, despite having received a monthly payment or two.
17/ Section 626.99245(3), Florida Statutes, specifies that a viatical settlement provider operating in Florida must obtain a license from the Department even if it only sells VSPAs to out- of-state investors, so such transactions are, to that extent, indirectly regulated. Also, the provider must maintain certain
records relating to sales of VSPAs to nonresident purchasers, see Section 626.99245(1), Florida Statutes, and provide some of them with a notice of non-regulation; these are, arguably at least, procedural regulations. Such transactions themselves, however, including the object thereof——i.e. the VSPA——are not directly regulated.
18/ Subsection (2) leads to the same conclusion with regard to any transaction wherein a viatical settlement contract is made between a provider operating in this state and an out-of-state viator.
19/ In fact, at least 13 states specifically regulate VSPAs (or the same instrument by another name, such as “viatical settlement interest” or “viatical settlement investment contract”) as a security. Among the states that define the term “security” for purposes of their respective Blue Sky Laws specifically to include the investment known in Florida as a VSPA are: Alaska: Alaska Stat. § 45.55.990(32), (37), (38)
(2002); Arizona: Ariz. Rev. Stat. Ann. § 44-1801(26), (29)
(2002); California: Cal. Corp. Code Ann. § 25019 (2003); Georgia: Ga. Code § 10-5-2(a)(32),(33) (2002); Indiana: Ind.
Code § 23-2-1-1(k), (t) (2002); Iowa: Iowa Code § 502.102(19), (21) (2002); Maine: Me. Rev. Stat. Ann. tit. 32, § 10501(18),
(22) (2002); Mississippi: Miss. Code Ann. § 75-71-105(n), (p) (2002); Nebraska: Neb. Rev. Stat. § 8-1101(15), (17) (2002); North Carolina: N.C. Gen. Stat. § 78A-2(11), (13) (2002); North Dakota: N.D. Cent. Code § 10-04-02(15), (16) 2001); South Dakota: S.D. Codified Laws § 47-31A-401(m) (2002); West Virginia: W. Va. Code § 32-4-401(n) (2002).
20/ Presumably, too, if the legislature had intended that the notice of non-regulation be limited to a specific regulatory sphere (such as insurance), it would have wanted the prescribed notice to inform affected purchasers that other laws, e.g. those regulating securities, might apply.
21/ Omitted from the quotation are exceptions not relevant to the present discussion.
22/ While it is true that the legislature could have accomplished its apparent purpose without denying unprotected nonresidents the benefits of the Viatical Settlement Act, this observation does not undermine the above analysis. Most likely, having resolved that protected nonresidents’ transactions would not be subject to the Viatical Settlement Act, the legislature
decided that it was preferable to treat all nonresidents alike in this regard, rather than have the applicability of Florida law turn on the enactments, or lack thereof, of another state.
23/ By the same token, the legislature did not exclude “other natural person[s],” no doubt because it understood and intended the word “entity” to refer, as it commonly does, to nonliving beings such as corporations, partnerships, and trusts. It is more difficult, however, to explain the statement that “nonaccredited investor[s]” (which is an undefined term) are not reached by, as opposed to excluded from, the definition of “financing entity”——at least if one assumes that an entity can be a “nonaccredited” purchaser of securities. Given the use of the phrase “or other natural person” at the end of the list of persons not included in the “financing entity” definition, it seems that the legislature regarded “nonaccredited investors” as a set composed of natural persons (who would not be included in the term “financing entity” because they are not entities), but this cannot be said with complete confidence.
24/ Imagine what the statutory definition would have communicated if the fourth-listed type of “financing entity” had been described as: “purchaser of securities except a viatical settlement purchaser.” Unlike the actual statutory text, which is nearly a converse formulation, such language would have conveyed the impression that VSPAs are securities.
25/ Without the caveat, it would not have been a stretch to argue that the legislature’s citations to the Federal Securities Act as a means of describing certain persons “not include[d]” in the definition of “viatical settlement purchaser” were a reflection of its understanding the VSPAs are securities. This is especially true because, although a statement of things a term “does not include” is not necessarily or ordinarily equivalent to a list of exclusions (since things not included need not be excluded), see endnote 23 and accompanying text, the list of persons “not include[d]” in the definition of “viatical settlement purchaser” is functionally an exclusion. (This can be seen clearly in the “non-inclusion” of persons meeting the federal requirements for “accredited investor” status. These persons plainly fall within the definition of “viatical settlement purchaser” when they invest in VSPAs, yet they are unambiguously excluded from “certain protections of the Viatical Settlement Act” to which they would otherwise be entitled as a
“viatical settlement purchaser,” at least when they sign an affidavit electing to claim “accredited investor” status.) Absent the caveat, the exclusion of some special types of securities buyers from the definition of “viatical settlement purchaser” would have tended to suggest that these excluded persons are buying securities when they invest in VSPAs—— particularly in the case of “accredited investors,” who are defined in federal law as persons who meet various conditions “at the time of the sale of the securities to” them. See 17
C.F.R. § 230.501(a)(emphasis added).
26/ Of course, if in 1999 when it created the term “viatical settlement purchase agreement” the legislature had intended that the instrument be considered a security, it could easily have preserved the implication that arises under the 1998 legislation by defining “viatical settlement purchase agreement” to “mean[] an investment contract” having certain attributes, instead of beginning the definition by saying that the term “means a contract or agreement.” See Section 626.9911(9), Florida Statutes.
27/ Section 624.310, Florida Statutes, describes the authority of the Department to enforce the provisions of the Insurance Code.
28/ Section 626.901, Florida Statutes, prohibits the representation of an insurer not authorized to transact the business of insurance in this state, subject to certain exceptions.
29/ Section 626.989, Florida Statutes, addresses the power of the Department to investigate fraudulent insurance acts and unfair trade practices.
30/ In contrast, the Office can point to nothing even remotely similar in Chapter 517 that specifically confers on the Office the power to regulate VSPAs; rather, the Office must rely on the catch-all term “investment contract” as the basis for its jurisdictional claim.
31/ Kligfeld was licensed as a life agent at all times material to this case. Thus, he was fully authorized, pursuant to the Viatical Settlement Act, to engage in the business of a viatical sales agent.
32/ The undersigned is not being facetious. It was after all the Office which, despite its own presumed expertise in the specialized field within its regulatory jurisdiction, nonetheless felt compelled to retain a retired professor of law from out of state to testify at the final hearing in this case, as an expert in Florida securities law, that, in his opinion, the VSPAs at issue come within the highly technical, multi- faceted, judicially created test for determining whether an investment is an “investment contract.”
33/ This rule is not applicable in criminal proceedings, as a result of article X, section 9, of the Florida Constitution, which provides: “Repeal or amendment of a criminal statute shall not affect prosecution or punishment for any crime previously committed.” Administrative proceedings, however, are clearly not within this constitutional “savings” clause. In fact, “[t]here is no constitutional provision . . . saving penal or regulatory enforcement proceedings for violations occurring before a repeal of the regulatory authority[.]” Sun Harbor Homeowners Ass’n, Inc. v. Broward County Dept. of Natural Resource Protection, 700 So. 2d 178, 180 (Fla. 4th DCA 1997).
The repeal of a regulatory statute, it should also be said, must be distinguished from an enactment amending such statute, as well as from the adoption of new statutory grounds for imposing administrative fines or other discipline. These latter situations raise the problem of retroactivity and trigger the general rule that the “version of a statute in effect at the time grounds for disciplinary action arise controls.” Childers v. Department of Environmental Protection, 696 So. 2d 962, 964 (Fla. 1st DCA 1997). Because this case involves the repeal of the regulatory authority, retroactivity is not an issue and hence need not be considered. Nor is it necessary, in disposing of this case, to render an opinion as to whether the Department could prosecute Kligfeld under the Viatical Settlement Act. Cf. Gewant, 166 So. 2d at 233 (violation charged may have been at all times forbidden, even though prosecuting agency no longer had jurisdiction to punish for such violation).
COPIES FURNISHED:
Frederick H. Wilsen, Esquire Office of Financial Institutions
and Securities Regulation
400 West Robinson Street Suite S-225
Orlando, Florida 32801-1799
Barry S. Mittelberg, Esquire Mittelberg & Nicosia, P.A.
8100 North University Drive Suite 102
Fort Lauderdale, Florida 33321
Mark Casteel, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
Honorable Tom Gallagher Chief Financial Officer
Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
NOTICE OF RIGHT TO SUBMIT EXCEPTIONS
All parties have the right to submit written exceptions within
15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the Final Order in this case.
| Issue Date | Document | Summary |
|---|---|---|
| Jun. 02, 2004 | Opinion | |
| Jun. 19, 2003 | Agency Final Order | |
| Mar. 25, 2003 | Recommended Order | Viatical Settlement Act comprehensively and exclusively governs viatical settlement purchase agreements; Petitioner does not have jurisdiction to prosecute/punish a viatical sales agent for conduct relating to viatical settlement purchase agreements. |
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