The Issue Whether Petitioner is entitled to the amounts claimed in the challenges to the IRR determinations as set forth in the cost settlement documents.
Findings Of Fact Petitioner, Sunrise Community, Inc., is a non-profit organization that offers assistance and support to people with developmental disabilities. It specializes in residential services but also provides day programs, supported living services, and other programs to assist people in the lower functioning ranges of mental retardation. Respondent, Agency for Health Care Administration, is the state agency charged with the responsibility of administering and supervising Medicaid reimbursements. At all times material to this cause, Petitioner was an authorized Medicaid provider. The quality of care provided by Petitioner and its facilities has never been disputed in this cause. The disputes in this matter arose due to challenges to the rates of reimbursement to Petitioner and its facilities. In Florida, Medicaid providers such as Petitioner are reimbursed on a prospective basis. Each provider gets a rate for reimbursement that is established based upon the actual allowable costs from a prior, fixed period of time which is then utilized to pay for a subsequent time period. For convenience of review this rate is sometimes thought of as the "budgeted rate" in this record. It assumes costs from past experience will be incurred in the future and provides for a known, fixed amount of compensation to hopefully cover such expenses. All Medicaid providers are required to disclose their actual costs for an entire reporting period. A cost report must be prepared using the accrual basis of accounting in accordance with generally accepted accounting principles as set forth in the rules governing Medicare reimbursement. After the fact, providers then "settle up" with the Agency by comparing the actual allowable costs incurred in the rate period with the rate. Providers cannot make a profit or excess revenue on the rate. Where a rate for a given period proves to be too low or inadequate, the cost settlement procedure is designed to adjust the amounts owed to cover the deficit funding. Thus each Medicaid facility receives a rate which must be "cost settled" separately based upon its actual allowable expenses. Petitioner and its related facilities are entitled to rates that will cover the actual allowable costs of doing business. Petitioner is not entitled to a profit nor is it required to operate at a loss. Should a provider be overpaid, that is, if it is established during cost settlement that the rate received by the provider was more than the actual allowable costs incurred for the rate period, then the provider "repays" the overage to the Agency. Otherwise, the rate is fixed for the time period it relates to unless an IRR is approved to increase the rate. IRRs are submitted to the Agency when a provider’s rate does not provide adequate compensation. An approved interim rate is to give assurance that the original rate can be adjusted to accommodate the new costs incurred by the provider. Approved interim rates are also cost settled after the rate period as with budgeted rates. In 1995 Petitioner sought approval of interim rate increases from the Agency. Such requests were denied by the Agency but successfully appealed by Petitioner. Thereafter, because the period governed by the rates had passed, the Agency sought to cost settle the amounts owed to Petitioner. When the Agency refused to remit the court-ordered interim rate Petitioner lost the amount of the rate increase as well as an opportunity for use of those funds during the pending cases. The parties attempted to resolve the amounts claimed by Petitioner through the cost settlement process. As to each denied claim, Petitioner sought an administrative review and the matter was forwarded to the Division of Administrative Hearings. IRRs are designed to give providers relief so that unanticipated costs can be reimbursed. This is important since laws may change which require providers to offer additional programs or services the costs of which are not encompassed in the budgeted rate in effect at the time of the change in law. At the time of settlement, if there is an overpayment of the difference between the approved interim rate and the actual allowable costs, the provider refunds the overpayment. Similarly, if there is an underpayment as a result of the actual allowable cost being greater than the interim rate, the provider is entitled to receive additional payment. Petitioner is entitled to additional payments. The amount of the payments is the center of the disputes in this cause. First, the Agency has refused to remit monies associated with interest payments on a bond issue. The Agency refused to include payment for the bond interest because it maintains that, while bond interest expense is an actual allowable cost incurred by Petitioner, it was reported twice in the cost reports. The bond interest disallowed is itemized in Petitioner's Exhibit 17. Such exhibit accurately lists the amounts that the Agency should have approved for the IRR cost settlements for the facilities listed. The bond interest is appropriately allocated to the facilities listed and was not claimed or duplicated by another entity for the periods noted. Thus each of the listed facilities should have received an adjusted rate with the bond interest cost included in the calculation. Secondly, Petitioner claims that had the Agency timely remitted the funds associated with the IRR, it would have had the benefit of those monies for the interim period of time. As such, it maintains it should be paid interest on the monies not paid. The basis for the lost interest claim arguably stems from the Medicare rule that allows interest in some situations. Florida historically has not remitted interest on underpayment amounts. In calculating the amounts owed to Petitioner, interest lost on the IRR was therefore disallowed. There is no provision governing the Florida Medicaid plan that specifies the payment of interest on a rate. A provider’s rate can be broken down into four cost components: operating, resident care, property, and return on equity. Had Petitioner received the full IRR it might have been given a "return of equity" or "use allowance." It might have resulted in a positive average equity. Petitioner has not established through credible evidence that factually this "return of equity" would have been applicable to the situations of the facilities affected by the IRRs. Speculation as to the financial posture of the facilities has not been deemed persuasive. The third dispute in this cause relates to the computation of the amounts owed for the Pablo facility. The Pablo facility incurred expenses over a 140-day period which were annualized over a 366-day period to compute the interim rate amount. In so doing, the Agency abandoned the methodology previously utilized to compute the rate owed and determined that the actual allowable costs in the subsequent period (which were known) had to be considered. Had the Agency used the established methodology it claims it would have overpaid the provider in the subsequent period. While mathematically accurate in this single example, such methodology has not been used except in this instance (when it benefited the Agency). The abandonment of the methodology also ignores the cost settlement process that is designed to reconcile amounts after the fact. The plan used by these parties recognizes the settlement process as the procedure by which all actual allowable costs are reconciled. If after having received an inflated rate the Pablo facility had owed monies back, such funds would have been remitted through the cost settlement process. Of course in this case, the Agency did not remit an increased rate so the crux of the problem is to resolve the dispute artificially as if from one point in time to another the rate had been appropriately increased. The settlement should have utilized the 140-day period to calculate the rate. That is, the per diem should have used the expense amount divided by 140 not 366 to compute the daily expense. The fourth disputed amount is the IRR for Country Meadows. The Agency has conceded that this IRR could have been granted with an accounting clarification. The final disputed amount relates to attorney's fees. Petitioner maintains it is entitled to include an amount of attorney's fees that is based upon a contingency fee agreement. Although the Agency does not dispute that providers may include attorney's fees as an allowable cost, it argues that such costs are not reported until incurred. Moreover, such costs must be what a prudent buyer would pay and relate to the IRR. In this instance the plan provides that: Implicit in any definition of allowable costs is that those costs do not exceed what a prudent and cost-conscious buyer pays for a given service or item. If costs are determined by AHCA, utilizing the Title XVIII principles of reimbursement, HCFA PUB 15-1 (1993), and this plan to exceed what a prudent buyer would pay, then the excess costs shall not be reimbursable under this plan. Attorney's fees are considered part of the operating component of the rate calculation. It is an administrative cost and is reported on a provider’s cost report as such. In selecting the attorneys to represent it, Petitioner did not interview applicants, solicit proposals, or inquire of other attorneys as to a reasonable fee for this type of representation. Petitioner presented no credible evidence of the reasonable fee for representation in this type of proceeding. Petitioner’s lead counsel served on its Board of Directors at the time the contingency fee agreement was entered into. The contingency fee agreement provided for an alternative method of payment in the amount of $250.00 per hour. The attorney's fee agreement provided, in pertinent part: The attorney’s fee shall be 40% of the total of all funds received as a result of the reversal of the wrongful denial of the interim rate request covering the period from the date of filing the interim rate request through the date of final settlement. The lawyer shall have no claim on the future value of the interim rate request past the date of settlement. If an appeal is required the fee shall be 50% instead of 40%. If, due to circumstances beyond the control of the parties to this fee agreement, such as changes in law, or constructions of law inconsistent with this agreement, including constructions of law that would not permit the reimbursement of attorney's fees to Sunrise Community, Inc., the parties agree that in no event shall the fee be less than a reasonable fee based on the hours of work multiplied by the rate of $250.00 per hour. The attorney's fee agreement was executed on October 25, 1995 on behalf of Sunrise Community, Inc. Such agreement did not name the facilities whose IRRs were governed by the agreement. The agreement did not specify how the attorney fee would be allocated among the providers who would be affected by the successful challenge to the IRR denials. The opinion of the First District Court of Appeal that upheld the IRRs and directed the Agency to grant them was entered on January 27, 1998.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Agency for Health Care Administration enter a Final Order that grants the bond interest as claimed by Petitioner; denies the interest on unpaid IRR amounts; grants the amounts claimed by Petitioner for Pablo; grants the Country Meadows IRR; and denies the attorney's fees. DONE AND ENTERED this 30th day of December, 1999, in Tallahassee, Leon County, Florida. J. D. PARRISH 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 30th day of December, 1999. COPIES FURNISHED: Steven M. Weinger, Esquire Kurzban, Kurzban, Weinger & Tetzeli, P.A. 2650 Southwest 27th Avenue Second Floor Miami, Florida 33133 Steven A. Grigas, Esquire Agency for Health Care Administration Fort Knox Building 3 2727 Mahan Drive, Suite 3431 Tallahassee, Florida 32308-5403 Ruben J. King-Shaw, Director Agency for Health Care Administration 2727 Mahan Drive, Suite 3116 Tallahassee, Florida 32308 Julie Gallagher, General Counsel Agency for Health Care Administration Fort Knox Building 3 2727 Mahan Drive, Suite 3431 Tallahassee, Florida 32308
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.
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
Recommendation 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.
The Issue Whether Neuma, Inc. (Petitioner), should be granted licensure as a "viatical settlement provider" as defined by Section 626.9911(6), Florida Statutes.
Findings Of Fact Petitioner applied to Respondent for licensure as a viatical settlement provider on or about August 20, 2001. After denial of the first application, Petitioner submitted a second application on February 4, 2002, for licensure as a viatical settlement provider. On March 28, 2002, Respondent denied that application. At all times relevant to these proceedings, David Irwin Binter was the sole owner and President of Petitioner. Further, Binter was also the sole owner and President of AMG, Inc. (AMG), incorporated by Binter in the State of Delaware in December of 1996. In other states the direct affiliation of the two corporations has led to the acquisition by Petitioner of viatical settlements directly from insured individuals for Petitioner's own account with money raised by AMG from investors. Consequently, purchase of a viatical settlement from Petitioner by AMG cannot be considered an "arms length transaction" in view of the close relationship and common ownership of the two corporations. Petitioner not only has previously purchased interests in certain viators life insurance policies using investor monies solicited by AMG, but if licensed in Florida, Petitioner would raise investor money through AMG. Petitioner's representations in its "Viatical Settlement Disclosure Document," given to each AMG investor, and Petitioner's Florida application correspondence stating that if granted a Florida viatical settlement provider license, Petitioner intended to use AMG to solicit investors monies, also corroborate the finding that Petitioner would raise investor money through AMG, if licensed in Florida. In his initial application on behalf of Petitioner for licensure as a viatical settlement provider, Binter did not reveal his involvement with AMG. In response to Question 8 of the Biographical Statement and Affidavit portion of the application, requesting the listing of all current business activity, Binter responded with the notation "N/A." Binter did this although he was the owner of AMG, the entity otherwise represented in Petitioner's application correspondence as the affiliate through which Petitioner intends to sell to investors interests in life insurance policies purchased by Petitioner. Binter's answer to Question 8 of the Biographical Statement and Affidavit portion of the first application was false. Binter's answer to Question 20(b)9 of the Biographical Statement and Affidavit required that he reveal any entity with which he was associated, or had been associated within the previous 12 months, that had been enjoined temporarily or permanently by any judicial, administrative, regulatory or disciplinary action from violating any federal or state law regulating the business of insurance, securities, or banking. Binter answered "No" to the question despite the existence of such actions against AMG by the states of Kansas, Illinois, and Alabama within the stated time frame. Petitioner's website, open to the general public, made material misrepresentations relative to the existence of a contingency insurance program between AMG and Lloyd’s of London, stating that the program was in existence and would insure investors against the contingency of viators living past the death dates projected by physicians designated by Lloyds to render those projections. Those representations are untrue because Lloyds actually provided no such coverage at the time the website was open to the public, and has not actually provided any to this date. Petitioner's website contained terminology that was specifically prohibited by Florida law. An examination of the website shows that it uses the words, "A no-risk investment," and "insured safe shelter," both of which are prohibited by Section 626.99277(6), Florida Statutes, which specifically bans the use of the words "no-risk" and "safe" relative to investments in viatical settlement purchase agreements. Petitioner’s Admission 11 confirms the usage of those terms. Petitioner, at the time of its first application, had no viatical settlement provider application on file with the State of Connecticut, although Petitioner's application represented that it did. Petitioner's employee at the time, Denise Randall, testified that while she thought that she had filed such an application with Connecticut on behalf of Petitioner, she may have inadvertently mailed the Connecticut application to Mississippi and that when informed by Respondent's personnel that no Petitioner application was on file with Connecticut, she did not bother to check with Connecticut but merely sent Respondent's office a copy of the application she thought she had mailed to Connecticut and continued to represent that the same was on file with Connecticut. Petitioner/AMG made demands on their investors for monies in addition to the stated purchase price of their viatical interests in violation of express representations in the contracts between Petitioner/AMG and those investors that additional premiums, due to an underestimation of life span, would be paid out of the share of Petitioner/AMG. An examination of the contracts at issue fails to reveal any provision authorizing demands on investors. Despite Respondent's repeated requests for the same, Petitioner never produced a trust or escrow agreement between Petitioner and its purported trustee, Larry Silver. The presence and use of an independent third party trustee or escrow agent is expressly required for the completion of any viatical settlement transaction in the State of Florida. Section 626.9924(3), Florida Statutes. All that was done in response to Respondent's repeated requests was to re-submit the same unsigned, three-party contract form. No document establishing the actual existence of an independent third-party trustee or escrow agent required by Florida law for any viatical settlement transaction was ever produced by Petitioner. Randall exclusively prepared the first application submitted on Petitioner's behalf. Binter signed the application without reading any of it, even though his signature verified under oath and penalty of perjury that the had carefully examined each question in the biographical statement and affidavit and answered each truthfully. Randall’s prior employment was in office administration in banks and mortgage companies. She had never worked in the viatical industry before, had never worked for Binter before, and had no independent knowledge of his business affairs. Her primary job function with Petitioner was completing and filing viatical settlement provider applications with state regulators. Binter provided no advice, assistance, or guidance. All that Randall had for guidance was a 1996 biographical statement that she found among other office files. Binter did not provide her with any information updating that statement and he specifically did not tell her about the securities actions in Alabama, Kansas, and Illinois. Binter did not have the first application reviewed by his attorney, who had actual knowledge of the securities actions. The attorney, however, did review the second application submitted after the securities actions omissions were discovered and the first application withdrawn. Binter had actual knowledge of all three securities actions at the time of the first application. He did not share that knowledge with Randall nor did he seek his attorney's review of the application.
Recommendation In view of the foregoing, it is RECOMMENDED that a final order be entered by the Florida Department of Insurance denying Petitioner's application for licensure as a viatical settlement provider. DONE AND ENTERED this 13th day of November, 2002, in Tallahassee, Leon County, Florida. DON W. DAVIS 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 13th day of November, 2002. COPIES FURNISHED: Michael H. Davidson, Esquire Department of Insurance 200 East Gaines Street 612 Larson Building Tallahassee, Florida 32399-0333 Jeffrey L. Frehn, Esquire Katz, Kutter, Haigler, Alderman, Bryant & Yon, P.A. 106 East College Avenue, Suite 1200 Post Office Box 1877 Tallahassee, Florida 32302-1877 Honorable Tom Gallagher State Treasurer/Insurance Commissioner Department of Insurance The Capitol, Plaza Level 02 Tallahassee, Florida 32399-0300 Mark Casteel, General Counsel Department of Insurance The Capitol, Lower Level 26 Tallahassee, Florida 32399-0307
The Issue Should discipline be imposed by Petitioner against Respondent's license as a life including variable annuity agent (2-14), life agent (2-16), and health agent (2-40), held pursuant to Chapter 626, Florida Statutes?
Findings Of Fact Respondent's Licenses and Background Pursuant to Chapter 626, Florida Statutes, Respondent is currently licensed in this states as a resident life including variable annuity agent (2-14), life agent (2-16), and health agent (2-40). At all times pertinent to the dates and occurrences referred to herein, Respondent was licensed in this state as a resident life including variable annuity agent (2-14), life agent (2-16) and health agent (2-40). Pursuant to Chapter 626, Florida Statutes, the Florida Department of Financial Services has jurisdiction over Respondent's insurance licenses and appointments. Respondent's formal education includes a bachelors in business management and a masters in science and health service administration. Over time Respondent has worked in the financial services industry. At present Respondent is a supervisor or principal of Capitol City Bank Investments. Securities Registration Respondent also has registration by the Office of Financial Regulation pursuant to Chapter 517, Florida Statutes, the "Florida Securities and Investor Protection Act." His registration is CRD No. 2016997, current as of January 9, 2008. He served as an "associated person" of a "dealer" as early as November 14, 2002. He acted in that capacity for Now Trade, Corp., from the date in November through March 22, 2004. Mutual Benefits Corporation (MBC) The State of Florida, the Department of Insurance (now the Office of Insurance Regulation of the Financial Services Commission, "the Office") licensed MBC as a viatical settlement provider on May 13, 1997, in accordance with Chapter 626, Part X, Florida Statutes, the "Viatical Settlement Act." The Office took action against MBC in Case No. 77358- 04-CO, in accordance with Chapter 626, Part X, Florida Statutes. On March 29, 2005, a Consent Order was entered by the Office. In an agreement between the Office and MBC by and through a court appointed receiver for MBC, the Office revoked MBC's license as a "viatical settlement provider" pursuant to the terms and conditions within the Consent Order. The Consent Order in Case No: 77358-04-CO, before the State of Florida, Department of Financial Services, Office of Insurance Regulation, in the matter of: Mutual Benefits Corporation in pertinent part stated: THIS CAUSE came on for consideration as the result of an agreement between MUTUAL BENEFITS CORPORATION (hereinafter referred to as 'MBC'), by and through its duly court- appointed Receiver, Roberto Martinez ('Receiver'), and the OFFICE OF INSURANCE REGULATION (hereinafter referred as the ('OFFICE'). . . . the OFFICE hereby finds as follows: The OFFICE has jurisdiction over the subject matter of, and parties to, this proceeding. MBC was granted a license by the Department of Insurance (now the Office of Insurance Regulation) on May 13, 1997, to act as a viatical settlement provider pursuant to the provisions of Chapter 626, Part X, Florida Statutes. The OFFICE conducted an examination of the business and affairs of MBC and thereafter issued, on May 3, 2004, an Emergency Cease and Desist Order suspending the license of MBC, effective immediately upon service of the order upon MBC. The Securities Exchange Commission of the United States has instituted an action in United States District Court for the Southern District of Florida, City Action Number 04-60573 (hereinafter 'the SEC Action'), and secured, on an ex parte basis, an Order Appointing Receiver dated May 4, 2004, which order granted the Receiver full and exclusive power, duty, and authority to administer and manage the business affairs, funds, assets, choses in action and any other property of MBC and several entities alleged to be related to it and to take whatever actions are necessary for the protection of investors. The United States District Court for the Southern District of Florida (hereinafter 'the Court'), has held further hearings, including an evidentiary hearing on the application of the SEC to enter a preliminary injunction against MBC. On November 10, 2004, Magistrate Garber recommended that the Motion for Preliminary Injunction be granted. On February 14, 2005, the Court adopted that recommendation. Therefore, the OFFICE and MBC hereby agree and consent to the following terms and conditions: * * * (b) MBC and the OFFICE agree that MBC's viatical provider license shall be revoked by issuance of this Consent Order. * * * (d) In the event that the Receivership in the SEC Action is dissolved and any restraining order issued by the U.S. District Court of the Southern District of Florida is modified to allow MBC to conduct its viatical settlement business or upon the Court issuing any other order allowing MBC to conduct its viatical settlement business, MBC would be free to apply for a license from the state of Florida. * * * The receiver is now responsible for activities involving viatical settlement purchase agreements or contracts, to include those associated with the viatical settlement purchasers in this case, not concluded by the agreement(s) to return on the investment(s) described in the viatical settlement purchase agreements or contract(s). MBC and Respondent Prior to the entry of the Consent Order involving MBC, Respondent, as an employee of First Liberty Group LLC (First Liberty), had sold interests in life insurance policies offered by viators, under terms set forth in a "viatical settlement purchase agreement" offered by MBC as the viatical settlement provider, all within the purview of Chapter 626, Part X, Florida Statutes, the "Viatical Settlement Act." (In addition, Respondent as an employee of First Liberty offered for sell financial products, e.g. annuities and certificates of deposit (CDs).) The relevant time period in relation to employment with First Liberty was the years 2002 and 2003, as more specifically explained in findings of fact that follow. Viatical Settlement Purchase Agreement and Other Information Pertinent features within all viatical settlement purchase agreements entered into between purchasers in this case and MBC, as presented by Respondent in his capacity as agent are as follows: VIATICAL SETTLEMENT PURCHASE AGREEMENT No modifications to this Contract may be made without the written consent of Mutual Benefits Corp. . . . the Viatical Settlement Purchaser (is), hereinafter referred to as 'Purchaser', upon the following terms and conditions. This Agreement covers the purchase of an interest in the death benefit of a life insurance policy or policies insuring the life of persons who are either terminally ill or have an estimated life expectancy of 72 months or less. * * * . . . the Purchaser acknowledges that the economic benefit derived from the transaction(s) contemplated by this Agreement will result solely from the maturity of the life insurance policy(ies) upon the death of the insured(s), and will not be derived from the efforts of any person or entity employed by or associated with Mutual Benefits Corp. , * * * The Purchaser hereby agrees to deposit the sum of $ with American Express Tax and Business Services, Inc., the Escrow Agent, for the purpose of acquiring the death benefit of a life insurance policy(ies) which will be allocated as set forth herein. The only benefit the Purchaser will receive pursuant to this Agreement will be payment of the agreed portion of the death benefit upon the maturity of the life insurance policy(ies). Policies are priced at a discount of the death benefit which depends on the projected life expectancy of each insured. Mutual Benefits Corp. makes no representation or warranty as to the specific date when a policy will mature. The return realized by the Purchaser does not represent an annual return. An annual return cannot be determined until the policy(ies) in which the Purchaser obtains an interest matures. Mutual Benefits Corp. shall assist Purchaser in the purchase of the death benefit of life insurance policies of individuals which comply with the following criteria: * * * All life expectancies of insureds will be determined by either an independent reviewing physician or a medical review company taking into account the insured's age, current medical history, and, where applicable, insurance industry actuarial guidelines. Prior to closing, Purchases will receive from Mutual Benefits Corp. information regarding specific policy(ies) that may be purchased in accordance with the terms of this Agreement to assist the Purchaser in evaluating whether the policy satisfies his/her requirements. * * * 9) . . . and also acknowledges that once the policy closes the funds committed are not liquid and the funds are not available until the policy matures. Purchaser hereby also acknowledges that the life expectancy(ies) provided by the reviewing physicians are only estimates. Mutual Benefits Corp. does not make any warranties regarding the accuracy of these estimates. Purchaser further acknowledges that the policy may mature before or after the projected life expectancy. Purchaser also represents that he/she is able to bear the risk of the purchase of a policy(ies) for an indeterminate period and will only commit himself/herself to a purchase which bears a reasonable relationship to his/her net worth. * * * . . . Viatical Services, Inc.'s agreement to pay any unpaid premiums limited to the exhaustion of the funds in its premium reserve account. * * * f) This Agreement is voidable by the Purchaser at any time within (3) days after the disclosers mandated by Florida Statutes § 626.99236 are received by the Purchaser. * * * 25) Type of Death Benefit(s) to be Purchased Life Estimated Life Dollar Amount Fixed Return on Dollar Expectancy of Purchase Amount of Purchase 12 Months 12% fixed return on purchase price 18 Months 21% fixed return on purchase price 24 Months 28% fixed return on purchase price 36 Months 42% fixed return on purchase price 48 Months 50% fixed return on purchase price 60 Months 72 Months Other Total amount $ 60% fixed return on purchase price 72% fixed return on purchase price 60% fixed return on purchase price to be allocated amongst the above estimated expectancies. * * * X. DISCLOSURE TO VIATICAL SETTLEMENT PURCHASERS Any person considering purchasing any portion of the death benefit of one or more insurance policies should be aware of the following: The returns available on viatical settlement contracts facilitated by Mutual Benefits Corp. directly tied to the projected life expectancy of the insured. The fixed return that a Purchaser may receive under the Viatical Settlement depends upon the price paid for the policy as a discount from its death benefits fixed return is determined by the projected life expectancy of the insured as set forth below. Projected Life Fixed Return on Dollar Expectancy Amount of Purchase 12 Months 12% fixed return on purchase price 18 Months 21% fixed return on purchase price 24 Months 28% fixed return on purchase price 36 Months 42% fixed return on purchase price 48 Months 50% fixed return on purchase price 60 Months 60% fixed return on purchase price 72 Months 72% fixed return on purchase price The above returns are fixed and not annualized returns. * * * . . . Viatical Services, Inc.'s agreement to pay any unpaid premiums limited to the exhaustion of the funds in its premium reserve account. In the event the trust and Viatical Services, Inc.'s respective premium reserve accounts are exhausted, the Purchaser may be responsible for a payment of his/her pro rata share of any unpaid premium. In the event the Purchaser is required to pay premiums, such payments will reduce the fixed refund referenced above. * * * The life expectancy on any particular insured and the rate of return on a viatical settlement contract are only estimates and cannot be guaranteed. The purchase of the death benefit of one or more life insurance policies should not be considered a liquid purchase. While every attempt is made to determine the insured's life expectancy at the time of purchase, it is impossible to predict the exact time of the insured's demise. As a result, the Purchaser's funds will not be available until after the death of the insured. It is entirely possible that the insured could outlive his/her life expectancy, which would delay payment of the death benefits under the Viatical Settlement Purchase Agreement. In the transactions in dispute, in the time MBC received funds from the purchaser for purposes of acquiring the death benefit of the life insurance policy or policies, it would acknowledge receipt of those funds. In writings MBC would send information to the purchaser, described as the client, concerning a specific life insurance policy matching the request made in the purchase agreement. The viator was identified by a number. The estimated life expectancy of the viator was identified. The amount of funds provided toward the purchase was identified. The amount to be paid in relation to the death benefits was identified. Other information was included referred to as "policy detail." That policy detail provided investor information such as the original policy face value, number of investors involved with the policy, the policy number of the insurance policy, the insurance company name, the nature of the plan of the insurance and whether there was a current premium payment obligation, together with an estimated date upon which the investor premium payment obligation, referring to the purchaser's obligation to meet the payments would begin. Some information about the insured was provided concerning HIV status and the last date of contact with the viator/insured. The contact letter concerning the commitment to purchase the interest in a life settlement or viatical settlement, so described by MBC, also set out a opportunity to decline to participate in the purchase where it said: The policy described in the attached disclosure form satisfies the selection criteria that you provided to us. We will deem you to accept this placement UNLESS we receive signed, written notice of your disapproval within five (5) business days after you receive this letter. Beyond the date upon which the purchaser received an MBC letter reference "commitment to purchase an interest in a life settlement or viatical settlement," MBC would send the purchaser additional correspondence referring to the viator number as an insured case file restating the amount of purchase, and enclosing an executed assignment of ownership from the life insurance company over to a new owner and designating a beneficiary in accordance with the purchase agreement. This letter would enclose a certificate of insurance and the review medical and physician's report related to the policy with specific information about the insured being redacted as to patient name, date of birth and social security number. Petitioner's Exhibit numbered 20 is an example of a receipt for funds. Petitioner's Exhibit numbered 24 includes a letter of "commitment to purchase an interest in a Life settlement or viatical settlement," together with a policy detail sheet and the follow-up letter, indicating assignment of ownership of the insurance policy, a certificate of insurance and the review medical and physician's report, among other matters. During 2002 and 2003 none of the MBC viatical settlement purchase agreements (contracts) or agreements in this case were registered as securities in accordance with Chapter 517, Florida Statutes. Respondent's Sales Practices First Liberty was an entity separate and apart from MBC. First Liberty employed Respondent at its offices in Summerfield, Florida. In promoting its investment products, First Liberty advertised CDs; it did not advertise viatical sales products. The sale of viatical settlement purchase agreements constituted roughly 30 percent of the business conducted by Respondent as a First Liberty employee. Annuities were sold at First Liberty as an additional investment product. Contract documents associated with MBC viatical sale purchase agreements were prepared by MBC to be utilized by Respondent. When meeting with the customers, Respondent utilized a graph that was designed to portray the experience in investment returns from the MBC viaticals based upon First Liberty's experience with the product. First Liberty had an in-house attorney whom Respondent relied upon in conducting business. That individual did not indicate that MBC viaticals should not be sold or that the viaticals were securities requiring registration. Respondent's impression of MBC was that MBC provided good service and acted promptly in dealing with its purchasers. Respondent proceeded with a personal belief that the viaticals were insurance products to be regulated as insurance products with the "Florida Department of Insurance." In his belief, this was borne out by an approval affixed from the Florida Department of Insurance to a viatical settlement purchase agreement that Respondent entered into with MBC in the amount of $9,707.00. Respondent's Exhibit numbered 6. Respondent also sold an MBC viatical settlement purchase agreement to his father Fredrick M. Smith in the amount of $20,000.00. Respondent's Exhibit numbered 7. The purchases made by Respondent and his father are now controlled in the receivership associated with MBC. Concerning the MBC contracts entered into by Respondent and his father controlled by the MBC receiver, the receiver is responsible for paying premiums for the viator over a finite period during the viator's life expectancy established by the contract. At the expiration of that period, Respondent and his father would be responsible for paying premiums. This is a similar process when compared to other MBC viatical contracts subject to the receiver's control. The Murrays Douglas B. Murray was born on March 28, 1934. He retired from work in 1994 from a position as a heating and plumbing sales representative for Sears. He became acquainted with Respondent in late summer or early fall 2002. On August 29, 2002, in response to Mr. Murray's inquiry, Respondent wrote him to invite his business with First Liberty. Subsequently Mr. Murray went to Respondent's office in Summerfield with his wife, Veronica Murray. Ms. Murray was in her early 60s at the time. In 2002 she had retired from her job as a secretary. Mr. Murray had lost money in the stock market. With the money he had left from that venture, he decided to reinvest to supplement his income with interest that might be available from $100,000 he held. At the time CDs were returning a low percentage, 2 1/2 to 3 percent. This amount of return was not satisfactory to Mr. Murray. In their discussions, Respondent mentioned other possible investments but explained that the return on the investments for other opportunities would not bring about 5 to 7 percent that Mr. Murray was accustomed to. Ultimately, this led to the viatical settlement purchases with returns in excess of 7 percent. After discussing other possibilities for investment, Respondent had mentioned viaticals as a possible investment. The investment strategy under consideration was the purchase of a short term annuity for a period of three years amounting to $30,000, with an additional $70,000 being placed in viaticals. The arrangement made by Respondent with the Murrays was to purchase the annuity which paid an income for its period pending the maturity of the viaticals, which was dependent upon the viator's demise. The period contemplated for return on the viaticals purchased by Mr. Murray was three years. Respondent explained to the Murrays that the viaticals were in association with people who were very ill and who had to sell their rights to insurance policies to provide income to the insured to pay for medical expenses or to meet other needs. On September 17, 2002, Mr. Murray made application for an annuity through the Lafayette Life Insurance Company, paying $29,550 toward that purchase. In addition Mr. Murray through the Murray Family Trust entered into a viatical settlement purchase agreement. On September 17, 2002, the amount of the viatical purchase was $70,450 paid by check into an escrow account on September 19, 2002. This supported the purchase of five separate viatical transactions. One of the viaticals has paid off in the manner contemplated by the agreement. Four others have not paid. Mr. Murray is paying premiums on those policies. Mr. Murray will continue to meet the premium payments on the four viaticals until he exhausts approximately $19,000 available to meet those premium payments. The viatical that did pay returned approximately $19,750, which he is applying to meet the premium obligations for the four remaining viaticals. Mr. Murray did not expect to have to pay premiums. On this subject, Respondent provided examples where people had received the return on their investment in the viaticals. Mr. Murray acknowledges that the agreement contemplated that in the event that the viatical settlement purchase agreement premium reserve accounts were exhausted, that the Murrays might be responsible for meeting the costs of premiums. Mr. Murray did not read the viatical settlement purchase agreement entered into carefully, even though he was not familiar with this form of investment. He relied upon Respondent and trusted his judgment. The respective pages within the viatical settlement purchase agreement for the Murray Family Trust were initialed by the Murrays, husband and wife, and signed by those purchasers. As the pages were being initialed by the Murrays, Respondent made explanations of the points set forth on those pages. In the discussion Respondent mentioned that the Murrays could receive copies of physicians' reports concerning the health circumstance for the insured persons, the viators. Respondent told the Murrays that none of the policies under consideration related to HIV patients. The explanation was that the persons were elderly, approaching the end of life. Mr. Murray understood that he could rescind his choice to proceed with the viatical purchases but chose not to having confidence that the investment was sound. The Andrades George F. Andrade was born on June 21, 1940. His wife Elizabeth A. Andrade was born on July 8, 1942. Mr. Andrade had been employed as a commercial fisherman and commercial truck driver. He retired in 2002. Mr. Andrade purchased viatical settlements in his own name and a viatical settlement in both his name and his wife's name. Mrs. Andrade also purchased a viatical settlement. All purchases were from MBC with Respondent acting as agent. The Andrades were interested in supplementing their income. They saw an advertisement in the newspaper for CDs offered by First Liberty. They went to the office where Respondent was employed. The Andrades discussed the possible purchase of CDs with Respondent. Among other investment prospects discussed was a viatical settlement agreement. The Andrades had prior experience with viatical agreements but had declined to complete the transaction from another provider whom they dealt with before the meeting with Respondent. Notwithstanding their impression concerning the earlier viatical agreement, Respondent persuaded the Andrades that the viatical agreements he offered were a good investment. In this discussion, he told the Andrades that he had invested in viatical agreements. When Respondent mentioned that he had entered into a viatical settlement purchase agreement, he also mentioned that in his experience the viatical agreements paid off on time and indicated that the frequency of times in which the viatical agreements met the expected timeline for maturity was "pretty high." During their discussions Respondent suggested that the Andrades might wish to contact the Better Business Bureau concerning the practices of MBC. They did and found no cause for alarm. Ultimately, the Andrades purchased eight viatical agreements from Respondent offered by MBC. On March 18, 2003, George and Elizabeth Andrade entered into a viatical settlement purchase agreement for which they paid $33,500. On that date there were two separate viatical settlement purchase agreements entered into by Mr. Andrade alone in an amount of $21,214.66 and $15,696.11 respectively. On April 7, 2003, Mrs. Andrade entered into a viatical settlement purchase agreement in the amount of $21,172.87. Of the eight viatical agreements received pursuant to their purchases, none have provided a return on the investments. In response to six of those viatical agreements, the Andrades have forfeited their rights and lost the investment because they did not feel that they could afford to meet the premium payments due. When executing the viatical settlement purchase agreements, the Andrades did not read those documents. They simply initialed the pages placing their trust in Respondent's explanations concerning the agreements. In his discussion, Respondent reminded the Andrades that if the insured lived longer than the maturity date on the viatical agreement, that the Andrades would be responsible for paying the premiums. The Andrades also purchased an annuity from Respondent as a supplement to their monthly income needs. The annuity that was purchased was for $30,000. The Andrades staggered the due dates for the viatical agreement purchases over two years, three years and four years. The expectation in the investment planning was that the annuity and the viatical agreements be assembled in a manner that the Andrades would receive income over a period of time. They intended to travel with the money derived from the viatical purchase agreements. Respondent told the Andrades that they could accept or decline the viatical agreements based upon the medical history provided related to the insured. The Andrades did not review any of the medical information related to the insureds. They were aware that there was a rescission period associated with the viatical agreements that was supported by the medical information. The Andrades understood that the estimates on life expectancy for the insureds were not guarantees. The Colozzos Daniel Colozzo and Wanda Colozzo are husband and wife. Mr. Colozzo was born on August 11, 1940. Mrs. Colozzo was born on March 2, 1942. Mr. Colozzo had been a construction worker for about 38 years. Mr. Colozzo has been retired since 1996. Mrs. Colozzo had a retail fabric business before selling the business in 2003. Mr. Colozzo saw a written advertisement related to CDs associated with First Liberty. Based upon that information he went to Respondent's office to discuss investments. Once there he noticed an item, which Mr. Colozzo describes as a flag, explaining viaticals with a percentage return based upon the year that the viatical matured. Wanda Colozzo, Mr. Colozzo's wife was with him at the time. The Colozzos discussed the purchase of CDs. They did not find this desirable. Respondent mentioned the prospect of purchasing annuities. The annuities were also discussed. Mrs. Colozzo was interested in a return on investments of approximately $2,000 a month and the annuities did not fit their needs. As an alternative, in discussing viaticals, Respondent explained that they were life insurance policies that people had and the Colozzos would be buying a portion of the policy. In the beginning Mr. Colozzo was not interested because he did not wish to wait for someone to die to get a return on his investment. Respondent replied that the Colozzos would be helping someone because the persons who were insured could use the money to survive, to live on. At this meeting no decision was made to purchase viaticals. The Colozzos met several times with Respondent before deciding to buy viaticals. On June 9, 2003, Daniel and Wanda Colozzo entered into a viatical settlement purchase agreement with MBC in the amount of $60,000, with Respondent acting as the sales agent. The amount was paid by check written by Mrs. Colozzo to an escrow agent and a receipt was provided for the funds. When Mr. Colozzo asked Respondent whether the viatical purchase was a matter about which tax would be owed on the return of investment, Respondent replied that it could be or could not be. Respondent stated that it was not a security, so it was not registered. The nature of the viatical settlement purchase agreement included one viatical agreement for 36 months at $15,000; one viatical agreement for 48 months for $15,000; one viatical agreement at 60 months for $15,000 and one viatical agreement for 72 months at $15,000. On June 9, 2003, a fifth viatical was purchased in the amount of $10,000, as evidenced by a check written by Mrs. Colozzo to the escrow agent. The details of that viatical agreement are not known. On June 27, 2003, the Colozzos purchased a viatical for $15,000, terms unknown. Commencing on July 15, 2003, the Colozzos were provided assignment of ownership in the viaticals purchased on June 9, 2003, with medical information related to the life insurance policy holder, information concerning the estimated life-expectancy, the amount of funds made on the purchase and the statement of payment under the death benefit related to the viatical agreement. On September 9, 2003, the Colozzos returned to Respondent's office and purchased two three-year viaticals from Respondent at $75,000 each. Separate checks were written to the escrow agent for each of the $75,000 purchases made on September 9, 2003. As before, MBC made assignment of ownership in the life insurance policies related to the viatical agreements entered into on September 9, 2003. That notification included assignment, statement of amount to be paid upon under the death benefits, and medical information and was provided commencing with notification on November 6, 2003. All together the Colozzos purchased eight viaticals worth $235,000. On the occasions when the Colozzos met with Respondent and entered into the viatical settlement purchase agreements, the Colozzos looked them over and Respondent explained what was contained page-by-page. Each page was initialed by the Colozzos. The Colozzos did not carefully read those pages. When MBC provided information to the Colozzos concerning the viatical agreements, they were aware of their right to rescind the purchases and declined. Under the terms of the viatical settlement purchase agreements initially entered into, there was a clause allowing rescission. When Respondent explained the nature of the viatical settlement purchase agreements, he told the Colozzos that if the expected life expectancy was exceeded that MBC normally granted another year, which would have been a grace period, after which the Colozzos would be responsible for paying premiums. When describing the life insurance policies pertaining to viators, Respondent told the Colozzos that the life insurance policies were from major companies and were safe because they were life insurance policies. Mr. Colozzo had his accountant in New York review the viatical agreements. That individual indicated that he did not know much about viaticals but did not find anything wrong with them. The accountant in New York told the Colozzos that he had checked the MBC website and did not find anything of concern. Of the eight viaticals purchased two have matured and returned money on the investment. The ones that matured were $15,000 viatical agreements. The Colozzos have forfeited their rights in three viaticals totaling $165,000 and continue to hold the remaining viaticals. In their discussions Respondent told the Colozzos that he himself owned viaticals.
Recommendation Upon consideration of the findings of fact and the conclusions of law, it is RECOMMENDED: That a final order be entered finding Respondent in violation of Subsections 626.611(6) and 626.621(2), Florida Statutes (2002 and 2003), in Counts I through III, dismissing other alleged statutory violations within the Administrative Complaint, as amended, and suspending Respondent's insurance license for a period of six months. DONE AND ENTERED this 8th day of May, 2008, in Tallahassee, Leon County, Florida. S CHARLES C. ADAMS 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 8th day of May, 2008. COPIES FURNISHED: Robert Allen Fox, Esquire Department of Financial Services Division of Legal Services 612 Larson Building 200 East Gaines Street Tallahassee, Florida 32399-0333 Richard Bisbee, Esquire H. Richard Bisbee, P.A. 1882 Capital Circle, Northeast, Suite 206 Tallahassee, Florida 32308 Honorable Alex Sink Chief Financial Officer Department of Financial Services The Capitol, Level 11 Tallahassee, Florida 32399-0300 Daniel Sumner, General Counsel Department of Financial Services The Capitol, Level 11 Tallahassee, Florida 32399-0307
The Issue The issue for determination is whether Proposed Rule 69O-204.101 is an invalid exercise of delegated legislative authority.
Findings Of Fact Respondent, Office of Insurance Regulation (hereinafter referred to as "OIR"), is an agency of the State of Florida, created within the Financial Services Commission (hereinafter referred to as "Commission"). § 20.121(3)(a)1., Fla. Stat. (2007).2 Pursuant to Subsection 21.121(3)(a), the OIR is responsible for all activities concerning insurers and other risk-bearing entities, including licensing, rates, policy forms, market conduct, claims, issuance of certificates of authority, solvency, viatical settlements, premium financing, and administrative supervision, as provided under the Florida Insurance Code or Chapter 636. The Florida Insurance Code includes Chapters 624 through 632. The Commissioner of Insurance Regulation is the agency head of the OIR. However, the Commission is the agency head for purposes of rulemaking. § 20.121(3)(c). The matter at issue in this proceeding is Respondent's Proposed Rule 69O-204.101 entitled, "Disclosures to Viator of Disbursement" (the "Proposed Rule"). The Commission advertised the text of the Proposed Rule on November 30, 2007, in Volume 33, Number 48, of the Florida Administrative Weekly, and, subsequently, filed a Notice of Change to the Proposed Rule on February 15, 2008, and, again, on February 22, 2008. A final public hearing regarding the Proposed Rule was conducted by the Commission on March 25, 2008, at which time the Commission approved the Proposed Rule for final adoption. According to the published notice, the purpose and effect of Proposed Rule 69O-204.101 is "to establish disclosures to viators of reconciliation of funds." The text of the Proposed Rule, as noticed for final adoption, reads as follows: 69O-204.101 Disclosures to Viator of Disbursement. Prior to or concurrently with a viator's execution of a viatical settlement contract, the viatical settlement provider shall provide to the viator, in duplicate, a disclosure statement in legible written form disclosing: The name of each viatical settlement broker who receives or is to receive compensation and the amount of each broker's compensation related to that transaction. For the purpose of this rule, compensation includes anything of value paid or given by or at the direction of a viatical settlement provider or person acquiring an interest in one or more life insurance policies to a viatical settlement broker in connection with the viatical settlement contract; and A complete reconciliation of the gross offer or bid by the viatical settlement provider to the net amount of proceeds or value to be received by the viator related to that transaction. For the purpose of this rule, gross offer or bid shall mean the total amount or value offered by the viatical settlement provider for the purchase of an interest in one or more life insurance policies, inclusive of commissions, compensation, or other proceeds or value being deducted from the gross offer or bid. The disclosure statement shall be signed and dated by the viator prior to or concurrently with the viator's execution of a viatical settlement contract with the duplicate copy of the disclosure statement to be retained by the viator. If a viatical settlement contract has been entered into and the contract is subsequently amended or if there is any change in the viatical settlement provider's gross offer or bid amount or change in the net amount of proceeds or value to be received by the viator or change in the information provided in the disclosure statement to the viator the viatical settlement provider shall provide, in duplicate, an amended disclosure statement to the viator, containing the information in paragraphs (1)(a) and (b). The amended disclosure statement shall be signed and dated by the viator with the duplicate copy of the amended disclosure statement to be retained by the viator. The viatical settlement provider shall obtain the signed and dated amended disclosure statement. Prior to a viatical settlement provider's execution of a viatical settlement contract, the viatical settlement provider must have obtained the signed and dated disclosure statement and any amended disclosure statement required by this rule. In transactions where no broker is used the viatical settlement provider must have obtained the signed and dated disclosure statement from the viator. The documentation required in this rule shall be maintained by the viatical settlement provider pursuant to the provisions set forth in Subsection 626.9922(2), Florida Statutes, and shall be available to the office at any time for copying and inspection upon reasonable notice to the viatical settlement provider. The Proposed Rule cites Subsection 624.308(1) and Section 626.9925 as specific authority for the Proposed Rule. The Proposed Rule cites Sections 626.9923, 626.9924, and 626.9925 as the law implemented by the Proposed Rule. The Proposed Rule involves regulation of viatical settlement providers pursuant to Florida's Viatical Settlement Act, Part X, Chapter 626 (hereinafter referred to as the "Act"). The Act regulates both viatical settlements and life settlements. The Act does not define "viatical settlement" or "life settlement." However, both types of transactions involve the sale of the ownership interest in life insurance policies. A "viatical settlement" involves the sale of an ownership interest in a life insurance policy by a person who is expected to live for less than two years. A "life settlement" involves the sale of the ownership interest in a life insurance policy by a person who is expected to live longer than two years after the date of the sale. Viatical settlements and life settlements are regulated in essentially the same manner and each of the foregoing transactions are included in the definition of "viatical settlement contract" as defined in the Act. Therefore, references to "viatical settlements" under Florida law refer to both life settlements and viatical settlements. Subsection 626.9911(10) defines "viatical settlement contract" as follows: (10) "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. In a viatical settlement transaction, the "viatical settlement provider" is the purchaser of the ownership interest in a life insurance policy, including the right to receive the policy proceeds upon the death of the insured. Also see § 626.9911(12).3 The "viator" is the owner of an insurance policy who sells the ownership interest in the policy. Also see § 626.9911(14).4 The term "viatical settlement broker" is defined in Subsection 626.9911(9), as follows: (9) "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 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. Pursuant to Subsection 626.9911(9), the "viatical settlement broker" is an agent of the viator and, as such, owes a fiduciary duty to the viator to obtain the best price for the insurance policy. Thus, typically, the viatical settlement broker solicits bids from multiple viatical settlement providers on behalf of the viator. The Proposed Rule requires viatical settlement providers to furnish viators with a detailed accounting of all funds involved in viatical settlement transactions and to ensure that viators are aware of the accounting. The issues of disclosures required for viatical settlement contracts and transactions are addressed in two provisions of the Act, Sections 626.99181 and 626.9923. Section 626.99181, Florida Statutes, requires a viatical settlement broker to disclose its compensation and states, "[a] viatical settlement broker shall disclose to a prospective viator the amount and method of calculating the broker's compensation." That provision states the "compensation" includes "anything of value paid or given to a viatical settlement broker for the placement of a policy." Section 626.9923 addresses viatical settlement contracts and required disclosures to viators and states that: Viatical settlement contracts; required disclosures.--The viatical settlement broker, or the viatical settlement provider in transactions in which no broker is used, must inform the viator by the date of application for a viatical settlement contract: That there are possible alternatives to viatical settlement contracts for persons who have a catastrophic or life-threatening illness, including, but not limited to, accelerated benefits offered by the issuer of a life insurance policy. That proceeds of the viatical settlement could be taxable, and assistance should be sought from a personal tax advisor. That viatical settlement proceeds could be subject to the claims of creditors. That receipt of viatical settlement proceeds could adversely affect the recipient's eligibility for Medicaid or other government benefits or entitlements, and advice should be obtained from the appropriate agencies. That all viatical settlement contracts entered into in this state must contain an unconditional rescission provision which allows the viator to rescind the contract within 15 days after the viator receives the viatical settlement proceeds, conditioned on the return of such proceeds. The name, business address, and telephone number of the independent third- party escrow agent, and the fact that the viator may inspect or receive copies of the relevant escrow or trust agreements or documents. Petitioner is an established trade association in the life settlement industry and is comprised of over 175 member companies, some of which include Florida-licensed viatical settlement providers who would be subject to the Proposed Rule. Petitioner's members would be substantially affected by the Proposed Rule because it would require them to make disclosures to viators in addition to the disclosures required by the Act.
