Investors vexed by viatical settlements

Thousands of people thought they were investing in life insurance policies of terminally ill people. Now they wait to recover any money they can from two Florida companies.

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times, published May 14, 2000

When Charles Northrup talks about the disastrous investment he made last year, his voice gets louder and more emphatic with every detail.

"I should have had my money back without any question," he said. "If not, they should have been thrown in jail."

Northrup, a Palm Harbor engineer, is one of more than 5,000 investors taken in by what the federal government calls a massive fraud conducted by American Benefits Services of Lake Worth and a related company, Financial Federated Title & Trust of Lauderhill. Northrup, 59, put $50,000 into what he thought was a type of insurance investment known as a viatical settlement.

These days Northrup and other American Benefits investors are a very frustrated group. Most of their money is gone, and the wheels of justice are turning too slowly to suit them. They say their complaints and pleas for help get little response.

"I'm just running around in circles," said an exasperated Hank Kolosey, a retired musician who lives in St. Petersburg. At 71, he said he needs the $30,000 he invested -- along with more satisfactory answers to his questions. "The way the state of Florida allows these things to happen really bothers me," he said.

Both federal and state officials say they are doing the best they can for investors, but the bottom line is that most of the money is gone. More than 3,000 investors already have filed claims in the case. Others who want to share in any recovery must file by July 27 with U.S. Bankruptcy Court (51 SW First Ave., Room 1517, Miami, FL 33130). But bankruptcy trustee John W. Kozyak, a Miami lawyer, is warning them not to expect much.

"Each of you will suffer a very, very substantial loss, no matter how successful the government and I are," he wrote to investors in March. "I keep receiving calls and sad letters asking for your money back. It is never going to happen in my opinion."

Kozyak said he understands the frustration of the mostly elderly investors with the bankruptcy process, which covers American Benefits and Financial Federated.

"The majority of them put in at least half their savings, although some put in every penny they had," he said. "These are people who are desperate. These are people that it's the difference between having a modestly comfortable retirement and living in fear. I'm trying to give them information, but it is horribly, horribly frustrating for me, too. I get people calling and screaming, asking why i haven't indicted somebody."

Kozyak and federal prosecutors are working to confiscate and sell businesses, mansions, jets, helicopters, boats and cars that were purchased with investor money. But many of these items are worth far less than their purchase price. Kozyak says $2-million in investor money went into the Mad Dawg Hawg motorcycle business in Crystal River, but the company is out of business and its lawyer is holding less than $200,000. Another $300,000 in investor money bought four tickets for an around-the-world millennium celebration on the Concorde, which Kozyak sold for $68,000.

Recovering, insuring and selling assets involves extra costs that worry some investors.

"The way the expenses are being splashed around, there's not going to be much money left in the bucket," investor Kolosey said.

Four people with ties to Financial Federated have been indicted: Frederick C. Brandau, Mary Anne Billinghurst, Garland Hogan and Gary J. Pierce are awaiting trial in federal court in West Palm Beach. In addition, the Securities and Exchange Commission filed a civil complaint of securities fraud last week against Brandau; Raphael Levy, who ran American Benefits; and Jeffrey Paine, the West Palm Beach lawyer who served as the escrow agent for investors' money.

No charges have been filed against Levy's daughter, Ronalee Levy Orlick, who was the contact for most investors at American Benefits, or against the more than 600 independent insurance agents and financial planners who sold the bogus investments.

American Benefits and its network of agents marketed the investments as safe and fully secured. Investors thought they were getting an interest in death benefits that would be paid out on life insurance policies covering people who were terminally ill. Known as a viatical settlement, this type of investment allows people approaching death to get the value out of a life insurance policy while alive. Investors pay a discounted amount for the death benefit, then collect in full when the person dies.

American Benefits told investors they could choose a 42 percent total return within three years or a 9.86 percent annual income stream paid monthly.

Federal officials say American Benefits and Financial Federated took in between $80-million and $130-million but bought policies offering only about $6.5-million in death benefits. The rest of the money provided generous commissions for sales agents and supported a lavish lifestyle for principals of the two companies, according to the federal charges.

Investor Northrup says it irks him that no criminal charges have been filed against American Benefits officials or escrow agent Paine, who cashed his $50,000 check. He has been asking them for refunds since last summer when, he said, he discovered his sales contract had been altered and the certificates he received were not what he was promised.

"They put contractors in jail for fraud, why not these people?" he asked.

Paine, who is still a member in good standing of the Florida Bar, says he did nothing wrong. The SEC and Paine disagree over his obligations as escrow agent. The SEC says Paine was not supposed to disburse money until he confirmed the life insurance policies were in force.

"He feels as if he acted properly and has done everything he's supposed to and it's an unfortunate turn of events that occurred," said Paine's attorney, William Matthewman of Miami.

Levy and Orlick could not be reached for comment. The American Benefits case is not their only concern right now. They also are facing a state administrative complaint accusing them of violating securities laws in the sale of up to $50-million in corporate notes in a different company, U.S. Capital Funding Inc., which is now in default. The sales involved many of the same agents and the same investors as the American Benefits transactions.

Levy also is fighting Insurance Commissioner Bill Nelson's efforts to revoke his insurance license. A hearing is scheduled for November, and in the meantime Levy still has his license.

Northrup has taken his problem to anybody he thinks might be able to help, including the offices of Pinellas-Pasco State Attorney Bernie McCabe and Nelson.

"I can't get anywhere with anybody," he said.

Although they may not be making investors happy, state officials say they are investigating allegations of wrongdoing in the viatical industry, and local officials say they do not want to duplicate efforts.

"They had a statewide case going and many victims, and so we told victims that's where the case should properly be prosecuted," said Robert Somers, chief investigator in McCabe's office.

A statewide investigation that began last summer first focused on fraud against insurance companies by terminally ill people who concealed their medical conditions, sometimes with the knowledge of companies that sold viatical investments. Now investigators are delving into fraud in the sale of viatical settlements to investors, said Ron Poindexter, director of insurance fraud for the Florida Department of Insurance.

"We're making some significant headway," he said. "But it's a complex task. We're not just ignoring the investors. We're trying to work as quickly as we can."

The investigation contributed to a scathing report by a statewide grand jury citing rampant fraud and corruption in the viatical industry. The grand jury is continuing to meet, although it is not limited to considering viatical fraud.

The report, issued in February, recommended strengthening state law regulating viaticals. The Legislature took most of the advice this month, making changes that will take effect July 1 unless Gov. Jeb Bush exercises his veto power. The bill makes viatical fraud a felony and requires viatical companies to disclose far more information to investors and to open their records for state inspection. It also gives the insurance department four new positions for viatical regulation.

"There's a lot of good language in there that's going to make it much more difficult for fraud to occur," Poindexter said.

It just comes too late to help Northrup and Kolosey.

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