Anatomy of alleged Mutual Benefits $1 billion Ponzi scheme
Anatomy of alleged Mutual Benefits $1 billion Ponzi scheme
Fraud case spreads its reach
By Vanessa Blum | South Florida Sun-Sentinel
February 1, 2009
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It's been called one of South Florida's biggest frauds, and it's back in the public eye. The alleged ringleaders are headed for trial in federal court, and questions have surfaced about potential fallout for one of Broward County's top elected officials.
Behind it all is the spectacular collapse of Mutual Benefits Corp., an alleged $1 billion Ponzi scheme that government prosecutors say was built on death, greed and deceit.
To help explain this complex, developing story, which has touched many segments of society, from AIDS patients and activists to prominent members of the region's legal community, here is a primer on Mutual Benefits, the crimes its executives are accused of committing, and the possible implications.
What was Mutual Benefits, and how did it make money?
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Mutual Benefits, which operated from 1994 to 2004, traded in what are known as viatical settlements, buying life insurance policies from elderly people and the terminally ill, mainly AIDS patients, and selling shares of their death benefits to investors.
Sales agents touted the investment as a way to make money and at the same time help the seriously ill by providing them with upfront cash. Investors, many of whom were retirees, were told the investment was low risk and would produce an attractive "fixed return."
During its existence, Mutual Benefits purchased more than 9,000 insurance policies and raised more than $1 billion from more than 28,000 investors around the globe.
What went wrong?
With the advent of more potent AIDS medications, patients began living longer and investors weren't able to cash in their death benefits. That meant premiums had to be paid longer to keep the insurance policies active.
Mutual Benefits faced a cash shortfall, court documents and prosecutors say, because it had not set aside sufficient funds to pay such premiums.
In May 2004, lawyers for the Securities and Exchange Commission received a federal court order freezing company accounts and turning operations over to a receiver. All told, prosecutors say, Mutual Benefits investors lost about $837 million.
What was the alleged crime?
Federal prosecutors say Mutual Benefits was a fraud from Day 1, because investors were misled about the company's management and the risks involved.
As laid out in court records, Mutual Benefits was run by a felon with a 1981 wire fraud conviction and several regulatory infractions. However, those facts were not disclosed to investors, court papers and government officials say, and should have been.
Moreover, prosecutors allege the firm pressured doctors to assign pre-determined life expectancies to patients without meaningful medical review.
Once patients began living longer, Mutual Benefits used new investor funds to pay premiums on older policies, according to prosecutors. As more policies went beyond life expectancy, Mutual Benefits needed to sell more and more new policies to keep the old ones active.
In other words, court documents have said and prosecutors will tell jurors at trial, it was a giant Ponzi scheme.
All the while, prosecutors say the firm's executives were pocketing millions of dollars.
Who was involved and what has happened to them?
Three Fort Lauderdale brothers — Steven Steiner and Joel and Les Steinger — started Mutual Benefits and served key roles in the company. Joel Steinger was said by prosecutors to have secretly run the company despite his earlier conviction.
n January, federal prosecutors announced conspiracy, fraud and money laundering charges against Steven and Joel. Les, the youngest brother, died last year.(It is not clear why the brothers spell their names differently).
Also charged in the 30-page indictment are prominent Broward County attorneys Michael McNerney and Anthony Livoti Jr.
McNerney helped in the formation of Mutual Benefits and handled its legal services. Livoti served as a trustee, purportedly responsible for safeguarding investor funds and paying policy premiums.
The four men have pleaded not guilty. If convicted, they could face life in prison. Nine former Mutual Benefits employees already are serving prison terms for crimes related to their work.
What's their side of the story?
Defense lawyers say Mutual Benefits was on solid financial footing when federal enforcers shut it down, with sufficient reserves to pay policy premiums for three years.
They say the company's problems stemmed from advances in AIDS treatment, not fraud, and that investors were warned life expectancy predictions could not be guaranteed. Mutual Benefits ceased its involvement in AIDS policies in about 2000.
Additionally, defense lawyers point out that federal and state regulators long knew about business practices prosecutors are now calling fraud.
At no time did the company operate as a Ponzi scheme, defense lawyers insist.
What, if any, was the involvement of Broward Mayor Stacy Ritter and her husband?
As a member of the Florida Legislature, now-Broward County Mayor Stacy Ritter twice voted in a manner favorable to the industry on how viatical and life settlement investments should be regulated while her husband lobbied state lawmakers on behalf of Mutual Benefits.
The firm paid Ritter's spouse, Russ Klenet, up to $20,000 a month as a lobbyist at the time and spent $100,000 to redecorate Klenet and Ritter's home in Parkland, according to court records.
Minutes from the state House of Representatives show Ritter never disclosed any potential conflict of interest surrounding her votes in spring 2003 and 2004. Klenet withdrew as Mutual Benefits' chief lobbyist in July 2004 after federal and state regulators shut down the firm. Ritter has said there was no conflict and insisted her votes violated no law or ethics rule.
Steiner and his domestic partner have sued Klenet over allegations that he owes them $2 million in unpaid loans.
Why have some federal officials and judges disqualified themselves from involvement with the case?
The recusals of two senior law enforcement officials and two federal judges remain shrouded in mystery but are reportedly discussed in sealed court documents.
In early January, two Miami federal judges, Marcia Cooke and Paul Huck, stepped aside from the case without explanation. Huck's order, without specifics, cited "a conflict."
Earlier Alex Acosta, the U.S. attorney for South Florida, and his top assistant had removed themselves from the prosecution. Justice Department officials then tapped anti-fraud chief Eric Bustillo to supervise.
Judges and prosecutors generally recuse themselves when they have conflicts of interest — for instance, a personal relationship with someone involved or a financial stake in the litigation.
The case is now assigned to U.S. District Judge Adalberto Jordan. The federal criminal trial has not been scheduled, but could begin within months.
Staff Writer Scott Wyman contributed to this article.
Vanessa Blum can be reached at vblum@SunSentinel.com or 954-356-4605.
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