Alleged life insurance scheme targeted deaf investors
The U.S. Securities and Exchange Commission is suing a Texas man for his role in an allegedly fraudulent investment scheme that took in more than $7 million, largely from deaf investors in the United States, without paying any of the promised returns.
Jody Dunn, who lives in the Dallas suburb of Corinth, allegedly collected $3.45 million over a three-year span from 7,133 Americans — all of them deaf — to invest in life insurance settlement securities. Dunn used about $350,000 to make his mortgage and car payments, pay car insurance premiums and pay restaurant and grocery bills and other personal expenses, authorities say. Investigators say none of the money ever was invested.
|A Texas man raked in more than $3 million by luring deaf investors into a life insurance settlement scam.|
Attempts to reach Dunn for comment were unsuccessful.
Dunn, who is deaf, was the largest aggregator of funds for Imperia, an offshore investment company that trolled for investors over the Internet, according to Kenneth Israel, director of the SEC’s Salt Lake City office, which led the Dunn investigation. “It spread like wildfire, by all accounts, through the deaf community,” Israel says.
The SEC took the unusual step of posting on its website a warning about Imperia in the form of a videotaped presentation in American Sign Language. The warning was reposted on various websites serving the deaf community. “The fact that we put out an ASL version, I think, helped a lot,” Israel says.
Dunn and Imperia still continued soliciting for investors online, even after government lawyers got a permanent injunction against the company in 2010, according to the SEC’s complaint.
Imperia asked investors to send $50 to secure $80,000 loans from foreign banks. The loan proceeds then would be invested in traded endowment policies — a British term for viatical settlements, which involve the sale of an insurance policy by the policy owner before the policy matures. Imperia promised returns of 1.2 percent a day; its website showed $50 turning into $134,000 in six months, according to the SEC.
The low initial investment and stratospheric returns probably accounted for the scheme’s appeal, Israel says. “People were basically putting in $50 and expecting to get hundreds of thousands back,” he says.
The fact that deaf investors were targeted by a member of their community also likely played a role. Such scams are known as “affinity scams,” says Gerri Walsh, vice president of investor education for the Financial Industry Regulatory Authority (FINRA) in Washington, D.C. “Affinity fraud is basically affinity marketing gone mad, gone too far,” Walsh says.
Such scams occur when a member of a group based on race, age, profession, hobby, disability or other characteristic fraudulently solicits investments from other members. When a scammer shares a background with a group of people, Walsh says, members of the group may become more vulnerable because the sharing creates a false foundation of trust.
Oftentimes, this type of fraud succeeds because of social consensus. That occurs when investors are convinced an investment is sound because others appear to have invested successfully. Another factor can be the halo effect, generated by a promoter’s appearance of being successful.
Life insurance settlements
Life insurance settlements, the transactions supposedly underlying the Imperia fraud, are somewhat controversial and sometimes figure in investment scams. They originated in the 1980s when people who were sick with AIDS sold the rights to collect the benefits on life insurance policies. These “viatical settlements” were expanded to include similar sales by people who were not sick.
Whether being asked to buy securities that are based on life insurance settlements or to sell their own insurance benefits, consumers should be wary, Walsh says. One problem is that there’s no market for the settlements, so it’s difficult to determine what a fair price is, she says.
The settlements may not be the best way for consumers who need cash to raise it, either, Walsh says. People who still need life insurance coverage may be better off looking into a so-called 1035 exchange, which allows policyholders to swap an existing policy for another without paying taxes on any investment gains.
Others might be able to borrow against the cash value of a policy, or arrange for accelerated death benefits, which allow people with long-term or terminal illnesses to get benefits before dying. FINRA has an explanation of life insurance settlements and alternatives on its website.
As a general rule, Walsh says, consumers presented with insurance-related or other investments should employ this mantra: “Ask and check.” Explanation: Ask whether a broker is licensed in the state and a security is registered with the SEC, and then check.
Asking about investment registration and broker licensing, and then verifying the information, will do a lot to reduce an investor’s risk of being scammed, Walsh says. “The bulk of fraud happens in the unregistered world, when you have unlicensed individuals selling unregistered investments,” she says.
The SEC’s case against Dunn asks that he be permanently barred from the securities industry, and that he return the money investors paid to him, plus interest. However, most of that money apparently was wired to Imperia through various offshore accounts. Israel says that even after years of investigation, they still don’t know who’s behind Imperia.
“From a fraud standpoint, it was very well constructed,” Israel says. “We were able to follow a lot of money to an extent, but that still didn’t get us to individuals.”
As a result, the only thing the investors in Imperia are left with is a valuable lesson. “There’s no chance, realistically, that they will recover anything,” Israel says.