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New York Court Affirms Fine Imposed on Agent/Broker Concerning Misleading Advertisements, Other Conduct in Viatical Sales

The Appellate Division of the New York Supreme Court affirmed a determination that a licensed agent/broker for a viatical company, Mutual Benefits Company, was to be fined for engaging in misleading life settlement sales practices.

In re Nichols, 523289, 2017 N.Y. App. Div. LEXIS 1869 (A.D. Mar. 16, 2017), is the opinion where the appellate court affirmed the hearing officer’s decision to fine agent/broker Richard Nichols.  The court focused a portion of its opinion on the basics of viatical transactions:

[A] viatical settlement agreement is one in which the original holder of a life insurance policy, i.e., the insured or, as relevant here, the viator, sells his or her interest in the policy to a settlement company for a discounted lump-sum payment.  The settlement company then becomes the beneficiary of the policy in question (and assumes responsibility for the premium payments due thereon) and either retains a whole interest in the policy or sells off percentages thereof to investors.  The benefit payout matures — and is dependent — upon the death of the viator, typically an elderly or terminally ill individual, and the investor realizes a profit only if the policy benefit paid is greater than the discounted purchase price plus any additional premiums that may become due.  The amount of the lump-sum payment made to the viator is based upon his or her anticipated life expectancy; hence, in the event that a particular viator exceeds his or her estimated life expectancy, additional premium payments on the policy would become due and could reduce — or even eliminate — the profit from the death benefit ultimately paid.

The viatical business, Mutual Benefits Company or MBC, provided the agent/broker with what the courts agreed were misleading “ad slicks”:

During the relevant time period, petitioner [Richard Nichols] sold approximately 400 interests in viatical settlements to roughly 200 clients, and each client signed a 23-page, largely single-spaced contract with [Mutual Benefits Company].  In conjunction therewith, MBC provided its agents with “ad slicks” or advertisements to assist in marketing the viatical settlements.  The advertisement selected by petitioner in 2001 . . . indicated that investors would ‘EARN 12- 72% DOUBLE-DIGIT FIXED RETURN’ and advised that ’12, 18, 24, 48, 60 or 72 Month Plans’ were available.  No mention of viatical settlements was made in the advertisement, and no disclaimers were contained therein.

The New York State Department of Financial Services “[i]n June 2011, . . . issued a citation charging petitioner with untrustworthiness within the meaning of Insurance Law § 2110 (a) (4) — alleging that petitioner, among other things, ‘used misleading newspaper advertisements’ to market the viatical settlements and ‘failed to inform clients of the risks of investing in viatical settlement purchases through MBC.'”

The hearing officer – after initially recommending a license suspension with a fine – subsequently recommend only a reduced fine, and the Superintendent of Financial Services affirmed the recommendation, which the agent/broker challenged via appeal.

The appeals court concluded that “there is ample support for respondent’s finding that petitioner ‘placed misleading advertisements’ and therefore there was a sufficient basis for imposing the fine.  “We reach a similar conclusion with respect to the finding that respondent failed to fully disclose the risks of viatical settlements to some of his clients,” said the court, determining that while the “record contains conflicting evidence as to what petitioner did or did not say to investors regarding the nature and risks of viatical settlements”, there was sufficient evidence for the hearing officer to reach the challenged conclusions.

The full opinion is available here.