A federal appeals court just put life insurance policies on notice, ruling they’re securities – raising the compliance stakes for wealth managers and investment advisors nationwide.
Pacific West Capital Group, a California company, made its mark selling fractional interests in life insurance policies. Investors bought a share of a policy, paid the premiums, and collected a portion of the payout when the insured died. PWCG promoted its expertise in selecting policies and promised investors they would double their money. The company also touted a three-tiered reserve system to cover premium payments.
But the business model faltered. Many insureds lived longer than projected, draining reserves and forcing PWCG to ask investors for more money. Those who didn’t pay lost their investments. A court-appointed receiver eventually took over, citing mismanagement and poor actuarial judgment.
The Securities and Exchange Commission (SEC) sued PWCG, its founder Andrew B. Calhoun IV, and several sales agents, including Brenda Christine Barry, Eric Christopher Cannon, and Caleb Austin Moody. Most parties settled or were dismissed, with Calhoun and the company agreeing to millions in penalties. Barry, Cannon, and Moody contested the charges, arguing the products weren’t securities.
The Ninth Circuit Court of Appeals disagreed. The court found that fractional interests in life settlements are investment contracts under federal law. The judges said investors’ profits depended on PWCG’s efforts in selecting and managing the policies, not just on the timing of payouts. The court also noted that both pre-sale and post-sale activities by PWCG were relevant.
The court further ruled that the offerings weren’t exempt from federal registration, since there was at least one out-of-state investor and the sales were part of a single, integrated plan.
The result: the court upheld orders for the agents to give up a third of their commissions, pay $15,000 in penalties each, and, for Cannon, face an injunction against future violations. The court recognized that investors lost not only potential profits but also the use of their money while it was tied up.
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