U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18698 / May 6, 2004
Securities and Exchange Commission v. Mutual Benefits Corp., et al., Case No. 04-60573-CIV-MORENO (S.D. Fla.) (May 4, 2004)
SEC OBTAINS EMERGENCY ORDERS SHUTTING DOWN MUTUAL BENEFITS CORP., ALLEGES FRAUD AND CONTEMPT OF PRIOR INJUNCTION IN CONNECTION WITH SALE OF VIATICAL SECURITIES
STATE OF FLORIDA OFFICE OF INSURANCE REGULATION AND OFFICE OF STATEWIDE PROSECUTION FILE SIMULTANEOUS ACTIONS
The Securities and Exchange Commission ("SEC") announced that on May 3, 2004, it filed an emergency federal civil action seeking to halt an alleged billion dollar fraudulent securities offering affecting 29,000 investors worldwide. This action was filed against defendants Mutual Benefits Corp. ("MBC"), Joel Steinger, his brother, Leslie Steinger, and Peter Lombardi (collectively the "defendants"). MBC is headquartered in Ft. Lauderdale, Florida. The SEC's action includes a civil complaint and also a contempt motion against the Steingers. In 1998, the Steingers were enjoined from violating the federal securities laws in connection with their activities at MBC.
On May 4, 2004, the Honorable Federico A. Moreno, United States District Judge for the Southern District of Florida, entered, among other things, a temporary restraining order, a freeze of the defendants' assets and an order appointing a receiver over MBC.
The SEC's complaint alleges that the defendants raised over $1 billion from more than 29,000 investors through a fraudulent, unregistered offering of securities in the form fractionalized interests in viatical and life settlements. A viatical or life settlement is the sale of a life insurance policy by a terminally-ill person or senior citizen (the viator) at a price discounted from the face value of the policy. Investors pay the premiums and receive the face value of the life insurance policy when the insured, or viator, dies. In turn, the viator receives a portion of the proceeds of his life insurance policy as a lump sum.
According to the SEC's complaint, MBC promised investors fixed returns ranging from 12% to 72%, depending upon the term of investment chosen by the investor. The life expectancy figure determined for each viator was a key factor in determining the maturity date of the investment, the rates of return to investors and the amount of funds needed to be escrowed for payment of future premiums on the policies.
In its complaint, the SEC alleges that in raising money for its enterprise, MBC falsely represented to numerous investors that its life expectancy figures were the product of a review by an independent physician. The SEC further alleges that MBC failed to disclose that about 65% of its outstanding life insurance policies were sold to investors using fraudulent life expectancy figures generated by MBC. Moreover, the SEC alleges that MBC omitted to tell investors that more than 90% of its policies have already surpassed their assigned life expectancy. According to the SEC's complaint, as a result of the failure of these older policies to mature, shortfalls in escrowed premium funds have forced MBC to effectuate a premium payment scheme similar to traditional "Ponzi" schemes, whereby the company is paying premium obligations of specific investors with monies escrowed for future obligations of other investors.
The SEC's complaint also contends that the defendants failed to disclose to investors that Joel Steinger and Leslie Steinger both played key roles in the management of MBC's operations and its securities offering. Furthermore, the complaint alleges that investors were not being told that at least $26 million in funds collected in MBC's offering was paid to the Steingers and their relatives in the form of "consulting fees."
The SEC's complaint charges the defendants with violating the anti-fraud and registration provisions of the federal securities laws. Specifically, the Commission alleges that defendants MBC, Joel Steinger, Leslie Steinger and Peter Lombardi violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, thereunder. The Commission also alleges that defendants Joel Steinger and Leslie Steinger, as control persons of MBC, violated Section 10(b) of the Exchange Act and Rule 10b-5, thereunder. In addition to the emergency relief described above, the complaint seeks permanent injunctions prohibiting future violations of the securities laws, disgorgement, and civil penalties.
Also named in the SEC's action as relief defendants are Viatical Benefactors, LLC, Viatical Services, Inc., Kensington Management, Inc., Rainy Consulting Corp., Twin Groves Investments, Inc., P.J.L. Consulting, Inc, SKS Consulting, Inc. and Camden Consulting, Inc.
In addition to its civil complaint, the SEC filed an emergency contempt action against defendants Joel Steinger and Leslie Steinger for disobeying a prior final judgment of permanent injunction entered against them on May 6, 1998 in SEC v. Joel Steinger and Leslie Steinger, Civil Action 98-6442-CIV-MIDDLEBROOKS (S.D.Fla. 1998). In that previous action, the SEC charged defendants Joel Steinger and Leslie Steinger with fraud and securities violations arising out of their roles in MBC's offering as it stood at that time. In that case, the Steingers were permanently enjoined from violating the registration and anti-fraud provisions of the federal securities laws and paid $850,000 in disgorgement, plus prejudgment interest, and $50,000 each in civil money penalties.
In simultaneous filings, the State of Florida's Department of Financial Services-Office of Insurance Regulation filed an emergency cease-and-desist order against MBC suspending MBC's license to operate as a viatical settlement provider in and from the state of Florida, and the State of Florida's Office of Statewide Prosecution issued a 16 count criminal information against MBC.
The SEC acknowledges the assistance of the following federal and state agencies: the State of Florida's Department of Financial Services-Office of Insurance Regulation, the U.S. Department of Homeland Security's Bureau of Immigration and Customs Enforcement, the State of Florida's Office of Statewide Prosecution, the North American Securities Administrators Association (NASAA), and the state securities regulatory agencies for Alabama, Alaska, Arizona, Colorado, Indiana, Iowa, Kansas, Ohio, Pennsylvania, Vermont and Virginia.