Dead

When Getting a Return on Your Investment Requires Someone to Die

Dead

In our weekly perusal of press releases from the Securities and Exchange Commission (SEC), we came across this macabre story of a father and son team (both named Benjamin Staples) that used terminally ill people to defraud bond issuers to the tune of $6.5 million. Just how were they able to accomplish this? Unbeknownst to many people, corporate bonds issued by some of America’s largest companies include a proviso known as a survivor’s option which states that if one of the owners of the bond dies, the issuing company will redeem the bond at face value. Thus, the two Benjamins recruited terminally ill people with whom they opened joint brokerage accounts and bought these bonds on the open market at a discount. After the terminally ill people (who were not required to put up any capital and were promised to have their funeral expenses covered) kicked the bucket, the two Benjamins made a healthy profit and did not have to worry about the heirs of their deceased recruits since they (the terminally ill recruits) had to sign a release relinquishing any claims they might have had on the joint brokerage accounts.

Overall, they recruited 44 individuals and purchased $26.5 million in bonds from at least 35 different issuers. Kenneth Israel, Director of the SEC’s Salt Lake Regional Office that investigated the case, summarized it best when he said, “The Stapleses exploited the tragic circumstances surrounding a terminally ill diagnosis and turned the misfortune of others into a profit-making enterprise for themselves. The Stapleses deceived brokerage firms and bond issuers by casting themselves as survivors of a joint ownership situation when the deceased had no legal ties to the bonds at all.” Apparently, the Stapleses forgot to inform the brokerage firms or bond issuers that the deceased owners had signed documents relinquishing all ownership interest in the bonds. Silly them.

The SEC is seeking the usual disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions (by that, we assume that the Benjamins will be barred from opening joint accounts and entering hospitals to talk to terminally ill people). One cannot help but wonder if the two Benjamins did anything to hasten the demise of their terminally ill recruits. They certainly had quite the incentive to do so.

This scheme is very reminiscent of the viatical settlement business where terminally ill people sell their life insurance policies for an amount greater than the cash value but less than the death benefit. The buyer continues to pay the premium and collects the death benefit when the insured passes away. One infamous case is the Mutual Benefits Company that, in the face of scientific advances that prolonged the lives of AIDs patients, devolved into a $1 billion Ponzi scheme involving 28,000 investors before it was shut down by the SEC in 2003. Before Madoff was uncovered in 2008, this was considered the largest known Ponzi scheme. Peter Lombardi, the company president, is currently serving a 20-year prison sentence.  

IFA advises investors to stay away from investments whose return depends on someone else’s death. The capital markets are a far more reliable source of returns.