The Texas State Securities Commissioner today entered Disciplinary Orders that suspended and fined two Corpus Christi investment adviser representatives for their unauthorized sale of life settlement notes.
Jimmy Wayne Freeman Jr. was ordered to pay $453,186 to reimburse investors who bought "life settlement" notes he wasn't authorized to sell. Freeman's registration with the state was also suspended for one year.
In a separate Disciplinary Order entered Feb. 23, Kris Bradford Rhoden had his registration suspended for five years. Rhoden must also pay $25,000 to partially reimburse investors to whom he sold life settlement notes.
Freeman and Rhoden, agents for Planmember Securities Corp., sold notes that were supposedly backed by the proceeds from life insurance policies. The Houston-based company that issued the notes, National Life Settlements LLC (NLS), was shut down and forced into receivership in 2009 by the State Securities Board and Office of the Attorney General. National Life Settlements' founders have been indicted in Harris County state district court.
Freeman and Rhoden were not properly registered to sell the life settlement notes, and both agents failed to tell their employer, Planmember, about the sales. Freeman has already paid $55,000 to one of his investors, and the Disciplinary Order requires him to pay an additional $453,185 to the receiver in charge of finding and distributing funds to investors.
National Life Settlements raised about $28 million from more than 300 investors, including retired teachers and state employees. So far, these investors have had about 70% of their money returned through the court-ordered receivership.
The State Securities Board thanks the Financial Industry Regulatory Authority for its assistance in these cases.
An investment in a life settlement typically involves a third party's sale of interests in all or a portion of the proceeds of a life insurance policy. Investors receive a return payable from the proceeds when the insured dies.
Securities Commissioner John Morgan said the orders highlight the danger posed by life settlements, which have become a magnet for fraudulent operators and an area of concern for the state securities regulators. Life settlement contracts and transactions are on the current list of top investor traps from the State Securities Board and the National Association of Securities Administrators Association (NASAA), the association of all state regulators.
In 2009, then-NASAA President Fred Joseph of Colorado told a U.S. Senate panel that life settlements "pose significant risks to policyholders and to investors." He said "thousands of investors, many of them senior citizens, have been victimized through fraud and abuse" in the sale of life settlement products.
Joseph said that while some industry participants have enacted higher standards, and state regulators have had "substantial success" in enforcement actions, "abuses continue and diligent oversight of these products remains necessary."
The State Securities Board in recent years has shut down or filed actions against seven life settlement companies based or operating in Texas.
"Investors, often enticed by promises of unrealistic annual returns of 20% or more, have put hundreds of millions of dollars into life settlements just in Texas in the past few years," Morgan said. "Some investors may be attracted to life settlements because they are promoted as an alternative to the volatile stock market. But these investments are inherently risky under the best of circumstances, and investors should approach them with extreme caution."
Morgan warned prospective investors to consider all the risks posed by life settlements:
- A life settlement is not a liquid investment. You will not have access to your invested principal or earned gains until after the insured person dies.
- A broker cannot guarantee a certain return because there's no way to reliably predict an individual's actual life span. Improved medical treatments further increase the difficulty of making an accurate prediction.
- Policy premiums must be paid on the policy until the insured individual dies. Before you invest, determine who will be responsible for paying premiums, what guarantees are in place and who will be responsible for making the payments if the insured person lives beyond his or her life expectancy.