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SEC v. Mut. Bens. Corp - 408 F.3d 737 (11th Cir. 2005)


The Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 both define the term "security" as including the catch-all term "investment contracts." 15 U.S.C.S. §§ 77b(a)(1), 78c(a)(10). The phrase "investment contract" is not defined in either statute. The United States Supreme Court provided a flexible test for determining whether a particular transaction qualifies as an "investment contract." An 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 profits solely from the efforts of the promoter or a third party. This approach embodies a flexible rather than a static principle, one that is capable of adaption to meet the countless and variable schemes devised by those who seek the use of the money of others on the promises of profits.


The Securities and Exchange Commission (SEC) filed this action seeking injunctive and other relief, alleging violations of various federal securities laws by Defendants, Mutual Benefits Corp. (MBC) and other named defendants, which are either principals of MBC or "Relief Defendants," which the SEC alleged are shell corporations controlled by MBC or its principals. MBC is a viatical settlement provider, which is a transaction in which a terminally ill insured sells the benefits of his life insurance policy to a third party in return for a lump-sum cash payment equal to a percentage of the policy's face value. In its complaint, the SEC alleges that in raising money for its viatical settlement enterprise, defendant MBC falsely represented to investors that its life expectancy figures had been produced by independent physicians, that 65% of its outstanding life insurance policies were sold to investors using fraudulent life expectancy figures, and that approximately 90% of its policies had already passed their assigned life expectancy. The district court held that investments in viatical settlement contracts were "investment contracts" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Defendants appealed.


Does the viatical settlement enterprise fall within the definition of investment contracts under the SEC rules and regulations?




The United States Court of Appeals for the Eleventh Circuit affirmed, noting that under this enterprise, investors were offered and sold an investment in a common enterprise in which they were promised profits that were dependent on the efforts of the promoters. This was true regardless of which specific company purchase agreement form was 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 relied on the pre-and post-purchase managerial efforts of the company to make a profit on the investment in viatical settlement contracts.

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