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SEC v. Mut. Benefits Corp. - No. 04-60573-CIV-MORE, 2004 U.S. Dist. LEXIS 23008 (S.D. Fla. Nov. 10, 2004)


Section 17(a) of the Securities Act of 1933 and § 10(b) of the Securities Exchange Act of 1934 prohibited the fraudulent offer, purchase or sale of securities and proscribe the employment of any device, scheme or artifice to defraud. The provisions also prohibited untrue statements of material fact or omission of a material fact in connection with the offering or sale of securities. The anti-fraud provisions are only violated, however, if the offeror/seller acted with scienter. In other words, the offeror/seller must have acted with the intent to deceive, manipulate or defraud. Scienter may be established not only by a showing of knowing or intentional misconduct, but also by a showing of severe recklessness. Proof of "severe recklessness" requires a showing that a defendant's conduct was an extreme departure of the standards of ordinary care which presents a danger of misleading buyers or sellers that is either known to a defendant or is so obvious that the actor must have been aware of it. Additionally, a fact is "material" if a reasonable person would attach importance to the fact misrepresented or omitted in determining his course of action. 


Defendants Mutual Benefits Corporation offered for sale viatical settlements, in which terminally-ill or chronically-ill insureds ("viators") sold the benefits of their life insurance policies for a lump-sum cash payment. The underwriter, as a viatical settlement provider, purchased the polices from the viators and then sold fractionalized interests in the policies to investors. The SEC sought preliminary injunctive to enjoin defendants from further violating § 5(a) and (c) of the Securities Act of 1933, 15 U.S.C.S. § 77e, and the antifraud provisions of federal securities laws alleging that the viatical settlements were securities covered under federal registration requirements.


Is a viatical settlement an investment contract that constitutes a "security" subject to federal securities regulation under the Securities Act of 1933?




The district court had previously rejected defendants' contention that the viatical instruments were not securities, and likewise the magistrate found that defendants' assertion that they relied on counsel's advice was irrelevant for purposes of 15 U.S.C.S. § 77e as this section imposed strict liability on offerors and sellers of unregistered securities regardless of fault, negligence, or scienter. The magistrate recommended that the SEC's motion for preliminary injunctive relief be granted as to the underwriter and two alter ego relief defendants, but that the SEC's motion for preliminary injunction as to all other relief defendants be denied.

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