Disucssion:
SECURITIES AND EXCHANGE COMMISSION v. MUTUAL BENEFITS CORP ELEVENTH CIRCUIT COURT
FACTS: From 1994 to 2004, about 30,000 investors invested more than $1 billion in viatical settlements the defendant corporation provided. A viatical settlement arises when an insured person who is terminally ill sells the benefi ts of her life insurance policy to a third party in exchange for a cash payment equaling part of the policy's CASE 23-1 value. This third party will make a profi t if, when the insured dies, the benefi ts of the policy are greater than the purchase price the third party paid. It is pivotal for the buyer to have an accurate determination of the expected date of the insured's death because if the insured lives longer than this expected date, the purchaser will make less
or even lose money. The defendant corporation purchased these policies and sold smaller interests to individual investors. The Securities and Exchange Commission (SEC) fi led an action against the defendant based on believed violations of securities laws. The plaintiff argued that the defendant lied about the life expectancy fi gures independent doctors were producing and that most of the life expectancy numbers were false. At an evidentiary hearing, the issue of whether a viatical settlement investment is an investment contract under securities laws arose. ISSUE: Is a viatical settlement investment an investment contract under securities laws? REASONING: If a viatical settlement investment offers investors an investment in a common enterprise in which the investors are promised profi ts that depend on the efforts of the promoters, the viatical settlement investment is an investment contract under securities law. In Securities & Exchange Commission v. W.J. Howey Co., the Supreme Court provided a fl exible test for determining whether a particular transaction qualifi ed as an investment contract. "[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profi ts solely from the efforts of the promoter or a third party." The Court stated that this approach "embodies a fl exible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promises of profi ts." In Securities & Exchange Commission v. Edwards, the Supreme Court reaffi rmed the defi nition enunciated in Howey. The Court reiterated that "Congress's purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called. To that end, it enacted a broad defi nition of ‘security,' suffi cient to encompass virtually any instrument that might be sold as an investment." In the case at hand, the defendant thus offered what amounts to a classic investment contract. The court found this to be true regardless of which specifi c defendant purchase agreement form is at issue. Whether the investors were offered a longer or shorter window in which to withdraw funds from escrow, whether the life-expectancy evaluation was actually performed before or after closing, and despite certain differences in how premiums were paid, all investors here relied on the pre- and post-purchase managerial efforts of the defendant to make a profi t on the investment in viatical settlement contracts. The investors here relied on the defendant to identify terminally ill insureds, negotiate purchase prices, pay premiums, and perform life expectancy evaluations critical to the success of the venture. The fl exible test we are instructed to apply by Howey and Edwards covers these activities, qualifying the defendant's viatical settlement contracts as investment contracts under the Securities Acts of 1933 and 1934. DECISION AND REMEDY: The court affi rmed the decision of the district court in favor of the plaintiff. SIGNIFICANCE OF THE CASE: This case demonstrates the criteria for investment settlements to qualify as investment contracts under securities law.
CRITICAL THINKING
Why might the ambiguities in the definition of a security be a problem in securities regulation?
ETHICAL DECISION MAKING
You probably have a good idea of the ethical theory you agree with most. Under that ethical theory, what is your opinion of the business of Mutual Benefi ts Corp (MBC)? Should the SEC protect investors from such a business framework?