ADMINISTRATIVE PROCEEDING BEFORE THE SECURITIES COMMISSIONER OF MARYLAND

Transcription

1 ADMINISTRATIVE PROCEEDING BEFORE THE SECURITIES COMMISSIONER OF MARYLAND IN THE MATTER OF: CASE NO VIATICAL CAPITAL, INC. and VIATICAL FUNDING, INC. and VIATICAL FUNDING, L.L.C.: ##01, 02, 03, 06, 07, 09, 12, 14, 19 #HY-20 ##GC-07, GC-09, GC-GC-16, GC-17 and C. DOUGLAS YORK, Individually and as Principal of Viatical Capital, Inc. and Viatical Funding, Inc. and ROBERT COYNE, Individually and as Principal of Viatical Funding, Inc. and LIFE INVESTMENT FUNDING ENTERPRISES, INC. and J. PATRICK BRYAN Respondents.

2 AMENDED FINAL ORDER TO CEASE AND DESIST AND ORDER OF BAR AS TO RESPONDENTS YORK AND COYNE WHEREAS, the Maryland Securities Commissioner (the Securities Commissioner ), pursuant to the authority granted in Section of the Maryland Securities Act, Md. Ann. Code, Corps. & Ass ns (1999 Repl. Vol. & Supp. 2004) (the Securities Act ), initiated an investigation into the activities of Viatical Capital, Inc. ( Viatical Capital ), Viatical Funding, Inc. ( Viatical Funding ), a series of limited liability companies known as the Viatical Funding L.L.C.s (numbered and set forth above), Life Investment Funding Enterprises, Inc. ( LIFE ), as well as the principals of those organizations, C. Douglas York, Robert Coyne (collectively, the Respondents ), and as to J. Patrick Bryan ( Bryan ); and WHEREAS, based on the information presented by the Maryland Division of Securities (the Securities Division ) at that time, the Securities Commissioner concluded that Respondents York and Coyne, and Bryan, engaged in acts or practices constituting violations of the Act; and WHEREAS, on or around September 11, 2003, the United States Securities and Exchange Commission filed a lawsuit in the United States District Court for the Middle District of Florida and obtained a temporary restraining order, asset freeze and other relief, including the appointment of a receiver, against various Defendants including Viatical Capital, York and Coyne; and WHEREAS, on September 23, 2003, the Securities Commissioner, pursuant to the authority granted by Section of the Securities Act, issued against Respondents a Summary Order To Cease And Desist/Order To Show Cause (the Summary Order ) why a final order should not - 2 -

3 be issued permanently barring Respondents and Bryan from the securities and investment advisory business in Maryland, assessing monetary penalties, and ordering Respondents and Bryan to cease and desist from further violation of Sections , , , and of the Securities Act; and WHEREAS, the Summary Order gave Respondents notice of the opportunity for a hearing in this matter, provided that Respondents submitted within fifteen (15) days of service of the Summary Order an answer, including any request for a hearing, and notice that their failure to do so would be deemed a waiver of the right to a hearing and result in the entry of a final order; and WHEREAS, a copy of the Summary Order was served upon Respondents and upon the Securities Commissioner in accordance with Section of the Act; and WHEREAS, the Securities Division received a letter from Viatical Capital s receiver, acknowledging receipt of the Summary Order; and WHEREAS, the copies of the Summary Order, as sent to Respondents York and Coyne, were returned unclaimed; and WHEREAS, Respondents York and Coyne failed to submit any answer to the Summary Order, nor did they make any written request for a hearing; and WHEREAS, on February 24, 2004, the Securities Commissioner issued a Final Order To Cease And Desist And Order Of Bar As To Respondents York, Coyne And Bryan (the Final Order ), see Ex. A; and WHEREAS, subsequently, the Securities Commissioner obtained a response to the Summary Order from Bryan; and WHEREAS, based on information provided by Bryan, on December 16, 2004, the Securities - 3 -

4 Commissioner issued a Consent Order as to Bryan (the Consent Order ), see Ex. B; and WHEREAS, by the terms of the Consent Order, the Securities Commissioner vacated -- as to Bryan only -- the Final Order that she issued against him on February 24, 2004; and WHEREAS, the Final Order contained certain non-substantive clerical errors that are corrected by this order; and WHEREAS, in light of those errors and Bryan s Consent Order, the Securities Commissioner has determined that it is in the public interest to enter this Amended Final Order To Cease And Desist And Order Of Bar As To Respondents York And Coyne. NOW, THEREFORE, IT IS HEREBY FOUND, CONCLUDED AND ORDERED, AS TO RESPONDENTS YORK AND COYNE ONLY, THAT: I. JURISDICTION 1. The Securities Commissioner has jurisdiction in this proceeding pursuant to Section of the Securities Act. II. RESPONDENTS 2. VCI is an active Florida corporation with a principal place of business located 1605 Main Street, Suite 1109, Sarasota, Florida Viatical Funding is an inactive Florida corporation with a principal place of business located at 677 N. Washington Boulevard, Suite C-2, Sarasota, Florida

5 4. The Viatical Funding L.L.C.s are Nevada limited liability companies, each with a principal place of business located at 310 Carson Street, Carson City, NV LIFE is a Nevada corporation with a principal place of business located in Sarasota, Florida. 6. York and Coyne are principals of Viatical Funding. 7. Viatical Capital is the managing member of each of the Viatical Funding L.L.C.s. 8. On information and belief, York and Coyne are residents of the State of Florida. 9. Respondents are not registered in Maryland as broker-dealers or broker-dealer agents or investment advisers or investment adviser representatives. III. STATEMENT OF FACTS 10. According to Viatical Funding s literature, the company was organized for the purpose of purchasing life insurance policies at various discounts, a process known in the securities and insurance industries as a viatical settlement. 11. Viatical Funding purported to specialize in viatical settlement investments by creating limited liabilities companies the Viatical Capital L.L.C.s that purchased life insurance policies of the terminally ill, and by selling interests in those companies to investors. 12. Each Viatical Capital L.L.C. was set up with approximately 200 voting membership interests and a maximum of around 22 non-voting memberships. Viatical Capital held a 10% nonvoting membership in each L.L.C. in exchange for services rendered. 13. Prospective investors were told that by investing in a Viatical Capital L.L.C., their - 5 -

6 principal and profits were guaranteed. Agents emphasized to investors that they would make abovemarket rates of returns. 14. Respondents required investors to sign an operating agreement to make an L.L.C. investment. The Operating Agreement provided that the L.L.C. shall be managed by its Members. However, it further called for the selection of two or more members to serve as Operating Managers to handle the L.L.C.s day to day administration. 15. While the Operating Agreement suggested that the L.L.C.s members at large were empowered to conduct business on behalf of the L.L.C.s, that did not occur. Prior experience in the viatical settlement business was not a pre-requisite to investing, and generally investors were not qualified to manage the business, nor did they have intentions of managing the business. Furthermore, the L.L.C.s primary offices were located in Nevada, making it difficult if not impossible for investors located in other states to participate in the L.L.C.s business activities. 16. Respondents claimed to require a minimum $200,000 net worth for investors to participate. That minimum did not qualify investors as accredited per the uniform definition of that term in the securities industry. Nor was there any genuine requirement that investors be sophisticated. 17. Many investors purchased Viatical Capital L.L.C.s for the purpose of funding their retirement accounts. Respondents, through their agents, directed investors to use Retirement Accounts, Inc., an unaffiliated custodial service located in Colorado, to set up their self-directed IRAs. 18. Neither Respondents nor their agents provided investors with full disclosure regarding vital information pertaining to Respondents. Investors did not receive financial information - 6 -

7 regarding the L.L.C.s, nor were they provided with Respondents disciplinary history, or with the disciplinary history of Respondents agents. Respondents Offered And Sold Securities In Maryland 19. Respondents employed more than five unregistered Maryland-based agents, including one with disciplinary history, Paul Hauf, to offer and sell Viatical Capital L.L.C.s to investors, including Maryland residents. 20. Between 1997 and 2001, Maryland investors purchased more than $400,000 in the Viatical Capital L.L.C.s. Investors were led to believe that the investments were safe and secure and that they would enjoy above-market rates of return on their investments. Certain Respondents Failed To Disclose Their Disciplinary History Or The Disciplinary History Of Their Agents 21. In 1999, the Washington Department of Financial Institutions, Securities Division, issued an Order To Cease And Desist against VCI. The company was ordered to cease and desist from acting as an unregistered broker-dealer or from offering unregistered securities, and from violating the antifraud provisions of the Securities Act of Washington. 22. In 2001, the Ohio Division of Securities issued a Consent Order against VCI for the sale of the unregistered L.L.C.s, which were sold through unregistered salespersons. VCI was ordered to cease and desist from further violations of Ohio securities laws, including making misrepresentations of material fact regarding the investments. 23. In 2002, the Minnesota Department of Commerce took action against VCI for engaging in unlicensed activity in the offer and sale of unregistered and non-exempt viatical settlement partnership interests in violation of Minnesota Securities laws. VCI agreed to a consent - 7 -

8 order and to cease and desist from further unregistered activities. 24. On December 23, 1996, the Securities Commissioner issued a Consent Order against Paul Hauf, one of VCI s agents, barring him from the securities and investment advisory business in Maryland in connection with alleged abusive sales practices in the securities business. Later, in late 1999, Hauf was the subject of a court-ordered permanent injunction and an administrative order, further barring him from the securities and investment advisory business in connection with the offer and sale of unregistered, non-exempt promissory note investments. LIFE and the Asset Purchase Proposal 25. In late 2002, Respondents began soliciting investors to vote for the approval of a plan for LIFE to purchase the Viatical Capital L.L.C.s assets. According to Respondents, if a majority of investors approved of the plan, it would provide a path to liquidity for all [Viatical Capital L.L.C.] members/managers. 26. According to Respondents, liquidity would ensue from LIFE s purchase of the Viatical Capital L.L.C.s assets in exchange for LIFE s preferred and common stock, which would be distributed to investors. The asset purchase plan was pending final approval by the Securities and Exchange Commission. 27. Respondents advised investors that if they approved of the asset purchase plan, it would provide the potential of increasing the value of your investment based on market multiples and the economies of scale available to a public company. According to Respondents, the value of your shares will be based on all of the assets, including the full face value of all policies in your L.L.C., with no reduction for any impaired policies To date, the SEC has not approved of the plan for LIFE to purchase the Viatical - 8 -

9 Capital L.L.C.s assets. No Securities Registration Or Exemption 29. The Securities Division has no record of an application for securities registration or claim of securities exemption or qualification as a federal covered security under the name Viatical Capital, Viatical Funding or any other variation beginning with Viatical. Nor does the Securities Division have any record of securities registration or claim of securities exemption or qualification as a federal covered security under the name: LIFE or Life Investment Funding Enterprises. Furthermore, in the Securities Division s view the foregoing offerings did not qualify for any securities exemptions under Maryland law. IV. FINDINGS OF FACT AND CONCLUSIONS OF LAW 30. Respondents York and Coyne, in connection with the offer and sale of securities, violated the Maryland Securities Act, Sections (1), (2) and (3) (fraud in the offer and sale of securities), (fraud in investment advisory activities), (unregistered broker-dealer agent and investment advisory activities), (employment of unregistered agents), and (offer and sale of unregistered, non-exempt securities that are not federal-covered securities). ORDER NOW, THEREFORE, IT IS HEREBY ORDERED that Respondents York and Coyne are permanently barred from the securities and investment advisory business in Maryland, in that those Respondents may not participate in securities or investment advisory business in Maryland, including - 9 -

10 but not limited to the offer, sale or issuance or the giving of advice regarding promissory notes, stocks, bonds, investment contracts and all other instruments that qualify as securities; and it is further ORDERED, that Respondents York and Coyne cease and desist from further violation of Sections (1), (2) and (3), , , and of the Securities Act; and it is further ORDERED, that each Respondents York and Coyne are assessed a monetary penalty of $25,000; and it is further ORDERED, that these penalties are effective as of February 24, 2004, the date of the Final Order To Cease And Desist And Order Of Bar As To Respondents York, Coyne and Bryan. SO ORDERED: DATED:, 2005 Melanie Senter Lubin Securities Commissioner G:\teweyj\WPDATA\LIFE\FINAL.ORDER.first.amended.wpd

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