Class Action Recovery effort Suit in Fort Lauderdale says Mutual Benefits Corp. defrauded investors of $1.5 billion before receivership

By: Peter Zalewski

May 21, 2004

Plaintiff attorney Darren Blum

Tampa investor filed a lawsuit Thursday seeking more than $1.5 billion from a Fort Lauderdale-based insurance investment firm that the Securities and Exchange Commission shut down.

Investor Doris Barrilleaux, 72, is seeking class action status for the lawsuit filed in Broward Circuit Court against Mutual Benefits Corp., its sister companies and organizers. The viatical settlement company claimed to buy and sell life insurance policies for a profit using money from investors.

But the SEC and the investor suit contend the company was a Ponzi scheme and that the company and its executives stole money invested by 29,000 people totaling about $1.1 billion over 10 years.

The investors may find themselves in competition with another investor class action filed in federal court.

Barrilleaux's attorney, Darren Blum of Plantation, filed the suit against parent company Mutual Benefits and affiliates Viatical Benefactors of Atlanta and Viatical Services of Fort Lauderdale. The suit also names brothers Joel and Leslie Steinger and business partner Peter Lombardi, all of Fort Lauderdale, as defendants, claiming the three managed and personally profited from the companies.

Mutual bought life insurance policies of terminally ill and elderly people in need of cash at steep discounts using investor funds. A viatical settlement company buys such policies and holds on to them until the person dies. It makes a profit on the spread between what it paid for the policy and what the policy was worth.

Barrilleaux's suit alleges the defendants committed breach of fiduciary duty, breach of contract and negligence. The suit alleges that Mutual worked like a Ponzi scheme, where new investment dollars were used to meet expected payments to existing investors.

The suit requests compensatory damages of at least $1.5 billion plus interest, punitive damages, legal costs and other relief.

"This lawsuit relies upon what the SEC alleges," said Lombardi's attorney Jon Sale of Sale & Kuehne in Miami. "The SEC relies on what we view as a botched state investigation that lasted over five years and went nowhere. The SEC did not conduct an independent investigation. This is not a Ponzi scheme."

Federal regulators deny that.

"We did conduct our own investigation before bringing this case," said Glenn Gordon, the associate regional director of the SEC's Miami office. "We are confident in the accuracy of our allegations."

Barrilleaux's lawsuit comes three days after a federal court learned that Mutual Benefits has only about $220 million in assets based on an estimate by court-appointed receiver Bob Martinez.

Martinez was appointed May 4 by U.S. District Judge Federico Moreno shortly after the SEC obtained an emergency injunction to freeze the assets and seize control of Mutual Benefits and its sister companies.

Blum said he filed the lawsuit, instead of relying on the receivership to collect money to repay investors, because his firm intends to aggressively pursue compensation from any companies involved in the alleged fraud, including, security brokers, law firms, accounting firms and banks.

"We plan on working with the receiver and trying to assist him," said Blum, a partner in Blum Law Group. "At the end of the day, we both have the same goal: to get the most money humanly possible for the investors."

Blum's incentive is a bit greater. His firm could receive one-third of what it collects, whereas receivers are paid court-approved fees for services.

According to the suit, Mutual Benefits' materials told potential investors, "You are providing a humanitarian service while securing a superior fixed return on all funds used to purchase life policies."

Barrilleaux bought the sales pitch six years ago following the death of her son due to complications of AIDS, Blum said. He said Mutual Benefits specifically targeted relatives of victims who had died of AIDS.

"The investors feel as if they were actually doing something good for someone who was sick and dying," Blum said. "They were going to give them money now to pay their medical bills or enjoy the rest of their lives."

Senior citizens were another targeted investor group lured with "guaranteed" returns of as much as 72 percent, Blum said.

About 90 percent of the policies purchased by Mutual remain in use beyond the life expectancy estimate provided by the company. The industry average is 30 percent, Blum said. The longer the policyholder lives, the lower the returns.

The longer life expectancy of the people from whom Mutual purchased policies from reduced the "guaranteed" returns of its investors and forced some to pay additional money to maintain their investments, according to Blum's suit.

In September 2003, Mutual's operations began to fall apart, according to the suit. At that time, 74 percent of Mutual's policies were troubled, according to the lawsuit.

Defense attorney Sale said Lombardi and the other defendants previously offered to the Florida Department of Financial Services - which regulates the insurance industry - to put up a "substantial" amount of money to ensure no policy premiums were missed.

Peter Zalewski can be reached at pzalewski@floridabiz.com or at (305) 347-6645.

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