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An investment contract is a security subject to the Securities Act of 1933, 15 U.S.C.S. § 77a et seq., if investors purchase with (1) an expectation of profits arising from (2) a common enterprise that (3) depends upon the efforts of others.
A viatical settlement is an investment contract pursuant to which an investor acquires an interest in the life insurance policy of a terminally ill person--typically an AIDS victim--at a discount of 20 to 40 percent, depending upon the insured's life expectancy. When the insured dies, the investor receives the benefit of the insurance. The investor's profit is the difference between the discounted purchase price paid to the insured and the death benefit collected from the insurer, less transaction costs, premiums paid, and other administrative expenses. Life Partners, Inc., under the direction of its former president and current chairman Brian Pardo, arranges these transactions and performs certain post-transaction administrative services. The SEC contends that the fractional interests marketed by LPI are securities, and that LPI violated the Securities Act of 1933 and the Securities Exchange Act of 1934 by selling them without first complying with the registration and other requirements of those Acts. The district court agreed and preliminarily enjoined LPI from making further sales. LPI argues that (1) viatical settlements are exempt from the securities laws because they are insurance contracts within the meaning of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), and § 3(a)(8) of the 1933 Act, 15 U.S.C. § 77c(a)(8), and (2) the fractional interests sold by LPI are not in any event securities within the meaning of the 1933 and 1934 Acts. LPI asserts alternatively that it could modify its program so as to come within a safe harbor exemption for private offerings under SEC Rule 506, 17 C.F.R. § 230.506.
Were the viatical settlements securities?
The court vacated three injunctions that enjoined LPI from selling unregistered fractional interests in viatical settlements on the grounds that the sales violated federal securities laws. The court rejected LPI’s argument that its contracts were exempt as insurance contracts because the viatical settlements were not insurance policies and LPI was not in the business of selling insurance. The court held that the contracts sold by LPI satisfied the first two parts of the test for determining if an investment contract is a security because investors purchased the contracts with an expectation of profits and their funds were pooled. However, under the third part of the test, the court held that the pre- and post-purchase services provided by LPI or its agent did not have a predominant influence upon investors' profits. The court therefore held that the viatical settlements marketed by LPI were not securities and it vacated the injunctions.