Markets in everything, adverse selection edition

The story opens with this:

Terminal Illness? $2,000 in CASH, Immediately Available."

That was the promise of an advertisement that appeared regularly in 2007 and 2008 in the Rhode Island Catholic, the official newspaper of the local diocese. The money, the ad said, was coming from a "compassionate organization" that wanted to provide "financial assistance" for those near death.

The reality was different:

In reality, the ad was a recruiting pitch for a plan hatched by a prominent Rhode Island estate-planning lawyer, who believed he had discovered a way to use an investment product sold by insurance companies to make no-risk bets on the stock market. He recruited dozens of terminally ill people to, in effect, serve as paid fronts for purchases of the product, variable annuities. The lawyer and other investors put tens of millions of dollars into the policies, hoping to reap a profit when the recruits died.

There is more detail at the link.


This story is available for free, as is still the case with WSJ, if one enters via a google search.
Tyler: Would be great service to your readers to use the google link.

This is the google link for non-subscribers to get the article.

"Hmm...I strangely feel glad that the first guy was profiting from the insurance companies. Insurance companies are evil, and it seems like it was a good deal for the terminally ill people."

Awesome, so when you get old and go to legitimately purchase a variable annuity so you can count on some income in your old age, this kind of fraud will be priced into your purchase. Hooray for you! Hope you can still afford your perscriptions and groceries.

If you consider this "fraud" or that the lawyer was using the individuals as a "front" for anything, the insurance companies have won the media battle.

@wlu2009: Yeah, and if I am ever terminally ill I'll negotiate a hella good deal with the investors so I can offer some more cashola to friends&family.

You see, it's only a scam because the terminal patients were buying life insurance. If they had been buying health insurance instead, it would be called "guaranteed coverage".

I'm confused about what legislation can do that a simple line in the contract cannot. "This benefit can only be accrued to an immediate family member." Maybe that is too restrictive for every purpose (leaving money for a foundation or charity), but would go a long way.


Keep in mind that if there is a clear line in the contract, the case won't get to a jury. It'll lose on summary judgment or a motion to dismiss - the same place it would lose if there was a law in place. A clearly written statute would certainly be stronger, but it would also prevent any beneficial uses of these arrangements. (i.e., maybe an insurer is willing to take the extra business and just do due diligence on the patient, and the investor is willing to round up healthy people who need money).

FWIW, one of my first major litigations in my career as a lawyer involved just this kind of transaction, with one twist: the terminally ill people and the financial products were very elaborately fleshed out fictions (redacted very realistic forged documents were provided in quantity, but health insurance privacy laws were used as a reason for refusing to allow comprehensive audits and complete due diligence that could have determined if all of the deals involved distinct real human beings).

The folks at the top of the pyramid disappeared with most of the cash, leading to litigation between only moderately culpable intermediate brokers of the deals and the victims of the fraud.

Unbelievable! The investors'thoughts are wrong. How can they use this to earn their money?

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