02-003583 Department Of Financial Services, Office Of Financial Institutions And Securities Regulation vs. Empire Insurance And James A. Torchia Status: Closed Recommended Order on Monday, May 19, 2003.

Summary: Insurance agent selling viatical settlement agreements is selling securities and is an unregistered dealer or assoc. person. Subject trust interests are securities that are not exempt, and Viatical Settlement Act does not supercede Chapter 517.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF FINANCIAL )

SERVICES, OFFICE OF FINANCIAL )

INSTITUTIONS AND SECURITIES )

REGULATION, )

)

Petitioner, )

)

vs. ) Case No. 02 - 3582

)

JAMES A. TORCHIA, )

)

Respond ent. )

______________________________)

)

DEPARTMENT OF FINANCIAL )

SERVICES, OFFICE OF FINANCIAL )

INSTITUTIONS AND SECURITIES )

REGULATION, )

)

Petitioner, )

)

vs. ) Case No. 02 - 3583

)

EMPIRE INSURANCE, INC., and )

JAMES A. TORCHI A, )

)

Respondents. )

______________________________)

RECOMMENDED ORDER

Robert E. Meale, Administrative Law Judge of the Division

of Administrative Hearings, conducted the final hearing in Fort

Lauderdale, Florida, on February 11 - 12, 2003.

APPEA RANCES

For Petitioner: Fred H. Wilsen

Senior Attorney

Office of Financial Institutions and

Securities Regulation

South Tower, Suite S - 225

400 West Robinson Street

Orlando, Florida 32801 - 1799

For Respondents: Barry S. Mittelberg

Mittelberg & Nicosia, P.A.

8100 North University Drive, Suite 102

Fort Laud erdale, Florida 33321

STATEMENT OF THE ISSUES

The issues are whether Respondents offered and sold

securities in Florida, in violation of the registration

requirements of Section 517.07(1), Florida Statutes; offered and

sold securities in Florida while R espondents were unregistered,

in violation of Section 517.12(1), Florida Statutes; or

committed fraud in the offer, sale, or purchase of securities in

Florida, in violation of Section 517.301(1)(a), Florida

Statutes. If so, an additional issue is the pena lty to be

imposed.

PRELIMINARY STATEMENT

By Administrative Complaint for Entry of Final Order to

Cease and Desist, Impose Penalties, and Notice of Rights filed

October 29, 2001, Petitioner alleged that, from March 21, 1998,

through July 21, 1999, Responde nt Torchia offered and sold

unregistered securities issued by American Benefits Services,

Inc. The securities were allegedly in the form of investment

contracts that were interests in viaticated life insurance

policies and settlement agreements. Petition er alleged that

Respondent Torchia was at no time licensed in Florida as a

broker/dealer, registered representative, or investment advisor.

Petitioner alleged that Respondent Torchia sold these

securities to 45 Florida investors in 65 transactions

represe nting $1,757,070.88. Petitioner alleged that Respondent

Torchia represented to investors that their investment return

would be either 9.86 percent annually for three years, paid

monthly (Income Program), or 42 percent at the end of three

years, but no les s than 15 percent at the end of three years,

regardless whether the insured died (Growth Program).

Respondent Torchia allegedly knew or should have known that

his representations were false when made because he knew or

should have known that the viatica ted life insurance policies

did not exist, and any payments to investors were from the

investors' funds or sources other than the insurance proceeds.

Lastly, Petitioner alleges that Respondent Torchia knew or

should have known that he was engaged in the s ale of securities.

The Administrative Complaint alleges that Respondent

Torchia thus violated Section 517.07(1) and (2), Florida

Statutes, which prohibit the sale or offer for sale of

unregistered nonexempt securities; Section 517.12(1), Florida

Statutes, which prohibits unregistered persons from selling or

offering for sale any securities as a dealer, associated person,

or issuer; Section 517.301(1), Florida Statutes, which prohibits

fraud, misstatement or nondisclosure of material fact, or deceit

in the sale, offer for sale, or purchase of any security.

Count One of the Administrative Complaint alleges that

Respondent is guilty of 65 counts of having offered and sold

unregistered securities in Florida, in violation of Section

517.07, Florida Statutes. Count Two of the Administrative

Complaint alleges that Respondent is guilty of 65 counts of

having offered and sold unregistered securities while Respondent

was not registered in the securities business, in violation of

Section 517.12, Florida Statutes. Count Three alleges that

Respondent is guilty of 65 counts of engaging in fraud in the

offer and sale of securities, in violation of Section 517.301,

Florida Statutes. This Administrative Complaint commenced DOAH

Case No. 02 - 3582.

By Administrative Compl aint for Entry of Final Order to

Cease and Desist, Impose Penalties, and Notice of Rights filed

October 29, 2001, Petitioner alleged that, from April 22, 1997,

through March 22, 1999, Respondents Torchia and Empire Insurance

offered and sold unregistered s ecurities issued by American

Benefits Services, Inc. Petitioner alleged that Respondent

Torchia was an officer, owner, operator, and controlling person

of Respondent Empire Insurance. Petitioner alleged that neither

Respondent was licensed as a broker/de aler or investment advisor

and that Respondent Empire Insurance was not licensed with the

Department of Insurance as a general agency. Petitioner alleged

that Respondents sold these securities to 18 Florida residents

in 38 transactions representing $1,147 ,973.32. The remainder of

the allegations are the same as those set forth in the above -

described case, except that each of the three counts alleges 262

separate counts for the violation of each of the three cited

statutes. The Administrative Complaint ag ainst both Respondents

commenced DOAH Case No. 02 - 3583.

At the hearing, Petitioner called eight witnesses and

offered into evidence six exhibits, which were all admitted.

Respondent called three witnesses and offered no exhibits into

evidence.

The court reporter filed the transcript on February 25,

2003. The parties filed their proposed recommended orders by

April 30, 2003.

FINDINGS OF FACT

1. At all material times, Respondent James A. Torchia

(Respondent) held a valid life and health insurance license .

Respondent was the president and owner of Respondent Empire

Insurance, Inc. (Empire Insurance), a now - dissolved Florida

corporation. Empire Insurance was in the insurance business,

and Respondent was its sole registered insurance agent.

2. At no mater ial time has Respondent or Empire Insurance

held any license or registration to engage in the sale or offer

for sale of securities in Florida. At no material time were the

investments described below sold and offered for sale by

Respondent or Empire Insur ance registered as securities in

Florida.

3. These cases involve viaticated life insurance policies.

A life insurance policy is viaticated when the policy owner,

also known as the viator, enters into a viatical settlement

agreement. Under the agreement, the viator sells the policy and

death benefits to the purchaser for an amount less than the

death benefit -- the closer the viator is perceived to be to

death, the greater the discount from the face amount of the

death benefit.

4. The viatical industry emerged to provide dying

insureds, prior to death, a means by which to sell their life

insurance policies to obtain cash to enjoy during their

remaining lives. As this industry matured, brokers and dealers,

respectively, arranged for the sale of, and bou ght and resold,

life insurance policies of dying insureds. Prior to the death

of the viator, these viaticated life insurance policies, or

interests in such policies, may be sold and resold several

times.

5. In these cases, viators sold their life insuran ce

policies to Financial Federated Title & Trust, Inc. (FinFed).

Having raised money from investors, American Benefit Services

(ABS) then paid FinFed, which assigned viaticated policies, or

interests in the policies, to various trusts. The trusts held

t he legal title to the policies, and the trust beneficiaries,

who are the investors from whom ABS had obtained the funds to

pay FinFed, held equitable title to the policies. Sometimes in

these cases, a broker or dealer, such as William Page and

Associates, intervened between the viator and FinFed.

6. At some point, though, ABS obtained money from

investors to acquire policies, but did not pay the money to

FinFed to purchase viaticated life insurance policies. The

FinFed and ABS investment program eventu ally became a Ponzi

scheme, in which investor payouts were derived largely, if not

exclusively, from the investments of other investors.

7. ABS typically acquired funds through the promotional

efforts of insurance agents, such as Respondent and Empire

I nsurance. Using literature provided by ABS, these agents often

sold these investments to insurance clients. As was typical,

Respondent and Empire Insurance advertised the types of claims

described below by publishing large display ads that ran in

Florida newspapers.

8. Among the ABS literature is a Participation Disclosure

(Disclosure), which describes the investment. The Disclosure

addresses the investor as a "Participant" and the investment as

a "Participation." The Disclosure contains a Participatio n

Agreement (Agreement), which provides that the parties agree to

the Disclosure and states whether the investor has chosen the

Growth Plan or Income Plan, which are described below; a

Disbursement Letter of Instruction, which is described below;

and a Let ter of Instruction to Trust, which is described below.

The agent obtains the investor's signature to all three of these

documents when the investor delivers his check, payable to the

escrow agent, to purchase the investment.

9. The Disclosure states th at the investments offer a

“High Return”: “Guaranteed Return on Participation 42% at

Maturity.” The Disclosure adds that the investments are “Low

Risk”: “Secured by a Guaranteed Insurance Industry Receivable”;

“Secured by $300,000 State Insurance Guaran tee Fund”; “Short

Term Participation (Maturity Expectation 36 Months)”; “Principal

Liquid After One Year With No Surrender Charge”; “State

Regulated Participation”; “All Transactions By Independent Trust

& Escrow Agents”; and “ If policy fails to mature at 36 months,

participant may elect full return of principal plus 15% simple

interest .”

10. The Disclosure describes two alternative investments:

the Growth Plan and Income Plan. For the Growth Plan, the

Disclosure states: “At maturity, Participant rece ives principal

plus 42%, creating maximum growth of funds.” For the Income

Plan, the Disclosure states: “If income is desired,

participation can be structured with monthly income plans.”

11. Different rates of return for the Growth and Income

plans are set forth below. For investors choosing the Income

Plan, ABS applied only 70 percent of the investment to the

purchase of viaticated life insurance policies. ABS reserved

the remaining 30 percent as the source of money to "repay" the

investor the income that he was due to receive under the Income

Plan, which, as noted below, paid a total yield of 29.6 percent

over three years.

12. The Disclosure states that ABS places all investor

funds in attorneys’ trust accounts, pursuant to arrangements

with two “ bonded and insured” “financial escrow agents.” At

another point in the document, the Disclosure states that the

investor funds are deposited “directly” with a “financial escrow

agent,” pursuant to the participant’s Disbursement Letter of

Instruction.

13. The Disbursement Letter of Instruction identifies a

Florida attorney as the “financial escrow agent,” who receives

the investor’s funds and disburses them, “to the order of

[FinFed) or to the source of the [viaticated insurance] benefits

and/or its design ees.” This disbursement takes place only after

the attorney receives “[a] copy of the irrevocable, absolute

assignment, executed in favor of Participant and recorded with

the trust account as indicated on the assignment of [viaticated

insurance] benefits, and setting out the ownership percentage of

said [viaticated insurance] benefits”; a “medical overview” of

the insured indicative of not more than 36 months’ life

expectancy; confirmation that the policy is in full force and

effect and has been in force b eyond the period during which the

insurer may contest coverage; and a copy of the shipping airbill

confirming that the assignment was sent to the investor.

14. The Disclosure states that the investor will direct a

trust company to establish a trust, or a fractional interest in

a trust, in the name of the investor. When the life insurance

policy matures on the death of the viator, the insurer pays the

death benefits to the trust company, which pays these proceeds

to the investor, in accordance with his int erest in the trust.

15. Accordingly, the Letter of Instruction to Trust

directs FinFed, as the trust company, to establish a trust, or a

fractional interest in a trust, in the name of the investor.

The Letter of Instruction to Trust provides that the v iaticated

insurance benefits obtained with the investor's investment shall

be assigned to this trust, and, at maturity, FinFed shall pay

the investor a specified sum upon the death of the viator and

the trustee's receipt of the death benefit from the insur er.

16. The Disclosure provides that, at anytime from 12 to 36

months after the execution of the Disclosure, the investor has

the option to request ABS to return his investment, without

interest. At 36 months, if the viator has not yet died, the

investor has the right to receive the return of his investment,

plus 15 percent (five percent annually).

17. The Disclosure states that ABS will pay all costs and

fees to maintain the policy and that all policies are based on a

life expectancy for the viator of n o more than 36 months. Also,

the Disclosure assures that ABS will invest only in policies

that are issued by insurers that are rated "A" or better by

A.M. Best "at the time that the Participant's deposit is

confirmed." The Disclosure mentions that the tr ust company will

name the investor as an irrevocable assignee of the policy

benefits.

18. The irrevocable assignment of policy benefits

mentioned in the Disclosure and the Disbursement Letter of

Instruction is an anomaly because it does not conform to the

documentary scheme described above. After the investor pays the

escrow agent and executes the documents described above, FinFed

executes the “Irrevocable Absolute Assignment of Viaticated

Insurance Benefits.” This assignment is from the trustee, as

gran tor, to the investor, as grantee, and applies to a specified

percentage of a specific life insurance policy, whose death

benefit is disclosed on the assignment. The assignment includes

the "right to receive any viaticated insurance benefit payable

under t he Trusts [sic] guaranteed receivables of assigned

viaticated insurance benefits from the noted insurance company;

[and the] right to assign any and all rights received under this

Trust irrevocable absolute assignment."

19. On its face, the assignment ass igns the trust corpus --

i.e., the insurance policy or an interest in an insurance

policy -- to the trust beneficiary. Doing so would dissolve the

trust and defeat the purpose of the other documents, which

provide for the trust to hold the policy and, upon th e death of

the viator, to pay the policy proceeds in accordance with the

interests of the trust beneficiaries.

20. The assignment bears an ornate border and the

corporate seal of FinFed. Probably, FinFed intended the

assignment to impress the investors with the "reality" of their

investment, as the decorated intangible of an "irrevocable"

interest in an actual insurance policy may seem more impressive

than the unadorned intangible of a beneficial interest in a

trust that holds an insurance policy. Or p ossibly, the

FinFed/ABS principals and professionals elected not to invest

much time or effort in the details of the transactional

documentation of a Ponzi scheme. What was true then is truer

now.

21. Obviously, in those cases in which no policy existed,

the investor paid his money before any policy had been selected

for him. However, this appears to have been the process

contemplated by the ABS literature, even in those cases in which

a policy did exist.

22. The Disbursement Letter of Instruction and

correspondence from Respondent, Empire Insurance, or Empire

Financial Consultant to ABS reveal that FinFed did not assign a

policy, or part of a policy, to an investor until after the

investor paid for his investment and signed the closing

documents. In some cases, Respondent or Empire Insurance

requested ABS to obtain for an investor a policy whose insured

had special characteristics or a investment plan with a maturity

shorter than 36 months.

23. FinFed and ABS undertook other tasks after the

investo r paid for his investment and signed the closing

documents. In addition to matching a viator with an investor,

based on the investor's expressed investment objectives, FinFed

paid the premiums on the viaticated policies until the viator

died and checked o n the health of the viator. Also, if the

viator did not die within three years and the investor elected

to obtain a return of his investment, plus 15 percent, ABS, as a

broker, resold the investor's investment to generate the 15

percent return that had be en guaranteed to the investor.

Similarly, ABS would sell the investment of investors who wanted

their money back prior to three years.

24. The escrow agent also assumed an important duty -- in

retrospect, the most important duty -- after the investor paid fo r

his investment and signed the closing documents; the escrow

agent was to verify the existence of the viaticated policy.

25. Respondent and Empire Insurance sold beneficial

interests in trusts holding viaticated life insurance policies

in 50 separate t ransactions. These investors invested a total

of $1.5 million, nearly all of which has been lost. Respondent

and Empire Insurance earned commissions of about $120,000 on

these sales.

26. Petitioner proved that Respondent and Empire Insurance

made the fo llowing sales. Net worths appear for those investors

for whom Respondent recorded net worths; for most, he just wrote

"sufficient" on the form. Unless otherwise indicated, the yield

was 42 percent for the Growth Plan. In all cases, investors

paid money for their investments. In all cases, FinFed and ABS

assigned parts of policies to the trusts, even of investors

investing relatively large amounts.

27. On March 21, 1998, Phillip A. Allan, a Florida

resident, paid $69,247.53 for the Growth Plan.

28. O n March 26, 1998, Monica Bracone, a Florida resident

with a reported net worth of $900,000, paid $8000 for the Growth

Plan.

29. On April 2, 1998, Alan G. and Judy LeFort, Florida

residents with a reported net worth of $200,000, paid $10,000

for the Grow th Plan. In a second transaction, on June 8, 1998,

the LeForts paid $5000 for the Growth Plan. In the second

transaction, the yield is 35 percent, but the Participation

Agreement notes a 36 - month life expectancy of the viator. The

different yields based on life expectancies are set forth below,

but, as noted above, the standard yield was 42 percent, and, as

noted below, this was based on a 36 - month life expectancy, so

Respondent miscalculated the investment return or misdocumented

the investment on the L eForts' second transaction.

30. On April 29, 1998, Doron and Barbara Sterling, Florida

residents with a reported net worth of $250,000, paid $15,000

for the Growth Plan. In a second transaction, on August 14,

1998, the Sterlings paid $100,000 for the Gro wth Plan. The

yield for the second transaction is 35 percent, and the

Participation Agreement notes that the Sterlings were seeking a

viator with a life expectancy of only 30 months.

31. When transmitting the closing documents for the second

Sterling t ransaction, Respondent, writing ABS on Empire

Insurance letterhead, stated in part:

This guy has already invested with us

(15,000) [sic]. He gave me this application

but wants a 30 month term. Since he has

invested, he did some research and has asked

tha t he be put on a low T - cell count and the

viator to be an IV drug user. I know it is

another favor but this guy is a close friend

and has the potential to put at least

another 500,000 [sic]. If you can not [sic]

do it, then I understand. You have done a

lot for me and I always try to bring in good

quality business. If this inventory is not

available, the client has requested that we

return the funds . . .

32. In a third transaction, on February 24, 1999, the

Sterlings paid $71,973 for the Growth Plan . The yield is only

28 percent, but the Participation Agreement reflects the typical

36 - month life expectancy for the viator. Although the investors

would not have received this document, Respondent completed an

ABS form entitled, "New Business Transmitt al," and checked the

box, "Life Expectancy 2 years or less (28%). The other boxes

are: "Life Expectancy 2 1/2 years or less (35%)" and "Life

Expectancy 3 years or less (42%)."

33. On May 4, 1998, Hector Alvero and Idelma Guillen,

Florida residents wit h a reported net worth of $100,000, paid

$6000 for the Growth Plan. In a second transaction, on

October 29, 1998, Ms. Guillen paid $5000 for the Growth Plan.

In a third transaction, on November 30, 1998, Ms. Guillen paid

$5000 for the Growth Plan. For t his investment, Ms. Guillen

requested an "IV drug user," according to Respondent in a letter

dated December 1, 1998, on Empire Financial Consultants

letterhead. This is the first use of the letterhead of Empire

Financial Consultants, not Empire Insurance, and all letters

after that date are on the letterhead of Empire Financial

Consultants. In a fourth transaction, on January 29, 1999,

Ms. Guillen paid $15,000 for the Growth Plan.

34. On April 23, 1998, Bonnie P. Jensen, a Florida

resident with a reporte d net worth of $120,000, paid $65,884.14

for the Growth Plan. Her yield was 35 percent, but the

Participation Agreement reflects a 36 - month life expectancy.

35. On May 20, 1998, Michael J. Mosack, a Florida resident

with a reported net worth of $500,000, paid $70,600 for the

Income Plan. He was to receive monthly distributions of $580.10

for three years. The total yield, including monthly

distributions, is $20,883.48, which is about 29.6 percent, and

the Participation Agreement reflects a 36 - month life expectancy.

36. On May 27, 1998, Lewis and Fernande G. Iachance,

Florida residents with a reported net worth of $100,000, paid

$30,000 for the Growth Plan.

37. On June 3, 1998, Sidney Yospe, a Florida resident with

a reported net worth of $1,500,000, p aid $30,000 for the Growth

Plan. The yield is 35 percent, and the Participation Agreement

reflects a 30 - month life expectancy.

38. On June 12, 1998, Bernard Aptheker, with a reported

net worth of $100,000, paid $10,000 for the Growth Plan. The

yield i s 35 percent, but the Participation Agreement reflects a

36 - month life expectancy.

39. On June 10, 1998, Irene M. and Herman Kutschenreuter,

Florida residents with a reported net worth of $200,000, paid

$30,000 for the Growth Plan. The yield is 35 percen t, but the

Participation Agreement reflects a 36 - month life expectancy.

40. On June 9, 1998, Daniel and Mary Spinosa, Florida

residents with a reported net worth of $300,000, paid $10,000

for the Growth Plan. The yield is 35 percent, but the

Participat ion Agreement reflects a 36 - month life expectancy.

41. On June 5, 1998, Pauline J. and Anthony Torchia,

Florida residents with a reported net worth of $300,000 and the

parents of Respondent, paid $10,000 for the Growth Plan. The

yield is 35 percent, but the Participation Agreement reflects a

36 - month life expectancy.

42. On June 29, 1998, Christopher D. Bailey, a Florida

resident with a reported net worth of $500,000, paid $25,000 for

the Growth Plan. The yield is 35 percent, but the Participation

Agree ment reflects a 36 - month life expectancy. In a second

transaction on the same day, Mr. Bailey paid $25,000 for the

Growth Plan.

43. Petitioner submitted documents concerning a purported

purchase by Lauren W. Kramer on July 21, 1998, but they were

marke d "VOID" and do not appear to be valid.

44. On July 22, 1998, Laura M. and Kenneth D. Braun,

Florida residents with a reported net worth of $150,000, paid

$25,000 for the Growth Plan, as Respondent completed the

Participation Agreement. However, the agre ement calls for them

to receive $205.42 monthly for 36 months and receive a total

yield, including monthly payments, of 29.6 percent, so it

appears that the Brauns bought the Income Plan. In a second

transaction, also on July 22, 1998, the Brauns paid $25 ,000 for

the Growth Plan.

45. On January 20, 1999, Roy R. Worrall, a Florida

resident, paid $100,000 for the Income Plan. The Participation

Agreement provides that he will receive monthly payments of

$821.66 and a total yield of 29.6 percent.

46. On J uly 16, 1998, Earl and Rosemary Gilmore, Florida

residents with a reported net worth of $250,000, paid $5000 for

the Growth Plan. In a second transaction, on February 12, 1999,

the Gilmores paid $20,000 for the Growth Plan. The yield is 28

percent, but t he Participation Agreement reflects a 36 - month

life expectancy. The New Business Transmittal to ABS notes a

life expectancy of two years or less.

47. On July 14, 1998, David M. Bobrow, a Florida resident

with a reported net worth of $700,000 on one form and $70,000 on

another form, paid $15,000 for the Growth Plan. The yield is 35

percent, but the Participation Agreement reflects a 36 - month

life expectancy. In a second transaction, on the same day,

Mr. Bobrow paid $15,000 for the Growth Plan.

48. On Ju ly 27, 1998, Cecilia and Harold Lopatin, Florida

residents with a reported net worth of $300,000, paid $10,000

for the Growth Plan.

49. On July 30, 1998, Ada R. Davis, a Florida resident,

paid $30,000 for the Income Plan. Her total yield, including

month ly payments of $246.50 for three years, is 29.6 percent.

In a second transaction, on the same day, Ms. Davis paid $30,000

for the Income Plan on the same terms as the first purchase.

50. On July 27, 1998, Joseph F. and Adelaide A. O'Keefe,

Florida reside nts with a net worth of $300,000, paid $12,000 for

the Growth Plan.

51. On August 5, 1998, Thurley E. Margeson, a Florida

resident, paid $50,000 for the Growth Plan.

52. On August 19, 1998, Stephanie Segaria, a Florida

resident, paid $20,000 for the Gr owth Plan.

53. On August 26, 1998, Roy and Glenda Raines, Florida

residents, paid $5000 for the Growth Plan. The yield is 35

percent, but the Participation Agreement reflects a 36 - month

life expectancy. The New Business Transmittal to ABS notes a

life e xpectancy of 30 months or less. In a second transaction,

on the same day, the Raineses paid $5000 for the Growth Plan.

The yield is 35 percent, but the Participation Agreement

reflects a 36 - month life expectancy, although, again, the New

Business Transmi ttal notes the life expectancy of 30 months or

less.

54. On November 24, 1998, Dan W. Lipford, a Florida

resident, paid $50,000 for the Growth Plan in two transactions.

In a third transaction, on January 13, 1999, Mr. Lipford paid

$30,000 for the Growth Plan.

55. On December 1, 1998, Mary E. Friebes, a Florida

resident, paid $30,000 for the Growth Plan.

56. On December 4, 1998, Allan Hidalgo, a Florida

resident, paid $25,000 for the Growth Plan.

57. On December 17, 1998, Paul E. and Rose E. Frechet te,

Florida residents, paid $25,000 for the Income Plan. The yield,

including monthly payments of $205.41 for three years, is 29.6

percent.

58. On December 26, 1998, Theodore and Tillie F. Friedman,

Florida residents, paid $25,000 for the Growth Plan.

59. On January 19, 1999, Robert S. and Karen M. Devos,

Florida residents, paid $10,000 for the Growth Plan.

60. On January 20, 1999, Arthur Hecker, a Florida

resident, paid $50,000 for the Income Plan. The yield,

including a monthly payment of $410.83 f or 36 months, is 29.6

percent.

61. On February 11, 1999, Michael Galotola, a Florida

resident, paid $25,000 for the Growth Plan. In a second

transaction, on the same day, Michael and Anna Galotola paid

$12,500 for the Growth Plan.

62. On November 3, 1 998, Lee Chamberlain, a Florida

resident, paid $50,000 for the Growth Plan.

63. On December 23, 1998, Herbert L. Pasqual, a Florida

resident, paid $200,000 for the Income Plan. The yield,

including a monthly payment of $1643.33 for three years, is 29.6

percent.

64. On December 1, 1998, Charles R. and Maryann Schuyler,

Florida residents, paid $10,000 for the Growth Plan.

65. Respondent and Empire Insurance were never aware of

the fraud being perpetrated by FinFed and ABS at anytime during

the 38 tra nsactions mentioned above. Respondent attempted to

verify with third parties the existence of the viaticated

insurance policies.

66. When ABS presented its program to 30 - 40 potential

agents, including Respondent, ABS presented these persons an

opinion letter from ABS's attorney, stating that the investment

was not a security, under Florida law. Respondent also

contacted Petitioner's predecessor agency and asked if these

transactions involving viaticated life insurance policies

constituted the sale of s ecurities. An agency employee informed

Respondent that these transactions did not constitute the sale

of securities.

CONCLUSIONS OF LAW

67. The Division of Administrative Hearings has

jurisdiction over the subject matter. Sections 120.57(1) and

517.241( 1), Florida Statutes. (All references to Sections are

to Florida Statutes.)

68. These cases raise the questions whether the trust

interests that Respondent and Empire Insurance sold are

securities; if so, whether the trust interests are exempt

securities ; and, if they are nonexempt securities, whether the

regulation of the trust interests falls exclusively under the

Viatical Settlement Act, Chapter 626, Part X, Florida Statutes.

69. It is unlawful to sell unregistered securities in

Florida. Section 517. 07(1) provides:

It is unlawful and a violation of this

chapter for any person to sell or offer to

sell a security within this state unless the

security is exempt under s. 517.051, is sold

in a transaction exempt under s. 517.061, is

a federal covered secur ity, or is registered

pursuant to this chapter.

70. It is unlawful for an unregistered person to sell

securities in Florida. Section 517.12(1) provides:

No dealer, associated person, or issuer of

securities shall sell or offer for sale any

securities in or from offices in this state,

or sell securities to persons in this state

from offices outside this state, by mail or

otherwise, unless the person has been

registered with the department pursuant to

the provisions of this section. The

department shall n ot register any person as

an associated person of a dealer unless the

dealer with which the applicant seeks

registration is lawfully registered with the

department pursuant to this chapter.

71. Section 517.021(6)(a), defines a "dealer" as a person

who en gages "as broker or principal in the business of offering,

buying, selling, or otherwise dealing or trading in

securities . . .." Rule 3E - 200.001(7)(a) defines an "associated

person" as "any person who for compensation refers, solicits,

offers, or negoti ates for the purchase or sale of

securities . . .."

72. Section 517.301(1) generally prohibits fraud or

deception in the sale of securities. However, this provision is

irrelevant in these cases. There is no proof of fraud by

Respondent or Empire Insura nce.

73. Petitioner must prove the material allegations by

clear and convincing evidence. Department of Banking and

Finance v. Osborne Stern and Company, Inc. , 670 So. 2d 932 (Fla.

1996) and Ferris v. Turlington , 510 So. 2d 292 (Fla. 1987).

However, und er Section 517.171, Respondent and Empire Insurance

bear the burden of proving their entitlement to an exemption.

74. Section 517.021(i), (q), or (r) defines a "security"

as a "certificate of interest or participation," "investment

contract," or "benefici al interest in title to property,

profits, or earnings." The trust interests in these cases

appear to meet all three of these definitions of securities.

Presumably, though, the case law discussed immediately below

applies to all three definitions, even t hough it explicitly

addresses only "investment contracts."

75. Under Securities and Exchange Commission v. W.J. Howey

Co. , 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946), an

investment contract constitutes any contract, transaction, or

scheme in whic h a person: 1) invests money; 2) in a common

enterprise; 3) expects profit; and 4) solely from the efforts of

other persons. Thirty years later, in United Housing

Foundation, Inc., v. Forman , 421 U.S. 837, 95 S. Ct. 2051,

44 L. Ed.2d 2621 (1975), the Sup reme Court eased the fourth

requirement by restating it as expecting profits "from the

entrepreneurial or managerial efforts of others." 421 U.S. at

852, 95 S. Ct. at 2060.

76. In these cases, the investors obviously invested

money, so the first Howey re quirement is met.

77. The second Howey requirement is that the investors

invest money in a common enterprise. Courts have identified

"horizontal commonality," which is the stricter test and

requires a pooling of all the investors' funds so that they are

treated alike, and "vertical commonality," which is the easier -

to - satisfy test and requires only that the investors' economic

return be based on the essential managerial efforts of other

persons.

78. In Farag v. National Databank Subscriptions, Inc. , 44 8

So. 2d 1098 (Fla. 2d DCA 1984), the court rejected a defense

based on the stricter horizontal commonality and seemed to adopt

an approach consistent with vertical commonality, at least where

the promoter obtains a "number of investors."

79. In Brown v . Rairigh , 363 So. 2d 590, 593 (Fla. 4th DCA

1978), cert. denied , 367 So. 2d 1122 (Fla. 1979), the court

stated:

[W]e adopt the view that not only should

there be more than one investor, but that

there should be some form of interaction

between the inves tors, or, in the

alternative, if there is no such interaction

between the investors then the success of

the enterprise should be dependent upon

obtaining a number of investors.

80. This approach to "common enterprise" in the courts is

the same as the app roach to "common enterprise" by Petitioner's

predecessor agency in its final order in Department of Banking

and Finance v. Philip E. Mehl, Sr., and Susan E. Mehl , DBF I

2002 - 397, DOAH Case No. 02 - 0526, p. 4 (Final Order issued

October 17, 2002).

81. As in any Ponzi scheme, where the promoter

fraudulently applies the money of later investors to pay

obligations owed earlier investors, the investments in these

cases were pooled, so as to satisfy the horizontal commonality

test.

82. Additionally, the FinFed /ABS programs, as structured,

pooled the investors' funds, although not at the trust level.

In each transaction, the investor paid his money to an escrow

agent, who, upon the satisfaction of the conditions in the

Disbursement Letter of Instruction, paid t he escrowed money to

FinFed. At this point, the investor's funds were pooled with

the funds of other investors. No investor paid a sufficient sum

to purchase an entire insurance policy; in many cases, the

investor's funds would pay for only a small fract ion of a

policy. Thus, the funds of multiple investors were necessarily

pooled when the escrow agents paid them to FinFed, which, when

it received sufficient cash, was to assign portions of the

purchased policy to individual trusts. See SEC v. Life

Partn ers, Inc. , 87 F.3d 536 (D.C. Cir. 1996).

83. The FinFed/ABS program also satisfies the vertical

test of commonality. The success of the program was dependent

upon finding a number of investors. First, as noted above, the

program required multiple invest ors to acquire just one

insurance policy. Second, the program required multiple

investors for ABS to be able to honor the refund provisions. As

noted above, if the viator had not yet died, investors could get

their money back, without interest, at anytim e up to 36 months,

and, at 36 months, with a 15 percent total yield. The record

discloses that ABS honored this obligation by selling the

redeeming investor's trust interest to another investor.

84. The third Howey requirement is the expectation of

profi t. The strictest approach to this requirement is

illustrated in SEC v. ETS Payphones, Inc. , 300 F.3d 1281 (11th

Cir. 2002). The investors bought individual payphones and

leased them to an affiliate of the seller for a fixed monthly

rental. The court hel d that these arrangements were not

securities because of the absence of earnings or capital

appreciation, concluding that the investors would not realize

profits, only rent.

85. The FinFed/ABS program is different from the program

in ETS Payphones . On th eir face, the Growth and Income plans

appear to call for fixed returns on investment, such as 42

percent and 29.6 percent. Although the expressed rates of

return are fixed, the terms are unfixed.

86. Assume a situation in which an investor has purchase d

the standard Growth Plan, which pays 42 percent at the expected

maturity, which is marked by the death of the viator whose

policy (or part thereof) forms the corpus of the trust. If the

viator dies 12 months after the investor purchases the Growth

Plan, the annual rate of return will be 42 percent, because the

payout, not the expressed rate of return, is fixed. Likewise,

if the viator dies 72 months after the investor purchases the

Growth Plan, the annual rate of return will be five percent, if

the inve stor cashed out at 36 months, or seven percent, if the

investor patiently holds onto his investment. See Life

Partners , cited above.

87. In any event, in the Mehl final order, cited above,

Petitioner's predecessor agency rejected the ETS Payphones

treatm ent of profits as to exclude investments bearing a fixed

rate of return. Under this approach, the FinFed/ABS program

clearly satisfies the third requirement of Howey because the

investors expected to make money on their initial investments.

88. The fourt h Howey requirement is that the investors'

expectation of profits is based on the managerial or

entrepreneurial efforts of others.

89. As noted above, Life Partners favors Petitioner on the

Howey requirements of a common enterprise and expectation of

pr ofits. However, Life Partners favors Respondent and Empire

Insurance on the fourth Howey requirement of managerial or

entrepreneurial efforts of others. In Life Partners , the court

held that the promoter of a viatical settlement investment

program perfor med no significant post - investment acts.

90. The Life Partners decision emphasizes that the

promoter has already medically underwritten each viator prior to

the investor's purchase of a portion of the policy. However,

the decision overlooks the entrepren eurial task of matching

investors to viators. As noted above, the viability of this

investment is the time that elapses until the viator's death --

the sooner after the investment, the higher the return for the

investor. The Life Partners court examines th e pre - purchase

medical underwriting, but ignores the crucial post - purchase

process in which the promoter assigns viators to investors.

91. Perhaps Life Partners operated a simpler program, but

the FinFed/ABS program offers Growth Plan investors three

di fferent projected maturation periods. Considerable expertise

may be required to differentiate between one viator projected to

die in 24 months, another projected to die six months later, and

another projected to die six months after that. Perhaps the

rec ord in Life Partners supported a finding that a promoter

could perform all of the required matching pre - purchase (even

though, by definition, no investor would have yet been

identified). But the present record supports the finding that,

in making the clos e calls distinguishing viators projected to

die within six months of each other, ABS necessarily had

significant work to do after the investor's purchase.

92. Another fact not reported in the Life Partners

decision is the treatment accorded certain invest ors. As

suggested in some of the correspondence, some investors sought

preferred features in their viators, such as the twice - requested

intravenous drug use. The correspondence from Respondent and

Empire Insurance suggests that they believed that ABS was

exercising important discretion in matching viators with

investors, who did not know which policies (or parts thereof)

their trusts were getting until after the closing. Respondent

and Empire Insurance seemed to think that the bigger investors

might get the shortest - lived viators, or at least the shortest -

lived viators classified within the purchased class of 24 - , 30 - ,

and 36 - month survivors.

93. One more fact distinguishes these cases from Life

Partners . Even if the viator did not die, the investors in

these cases had a right to a return of their investment up to 36

months and a return of their investment, plus 15 percent, at 36

months. These crucial features of the FinFed/ABS program

ostensibly provided a floor for the investments -- investors could

alw ays get their principal and, after three years, could get

their principal and a modest return. These safety features were

entirely dependent, though, on the entrepreneurial expertise of

ABS in reselling the trust interests of the redeeming investors.

94. Probably, Petitioner will join the many other states

in rejecting this treatment of the fourth Howey requirement in

Life Partners . See , e.g. , Siporin v. Carrington , 200 Ariz. 97,

23 P.3d 92 (App. 2001); Michelson v. Voison , 658 N.W. 2d 188

(Mich.App. 200 3); Poyser v. Flora , 780 N.E. 2d 1191 (Ind.App.

2003); and Joseph v. Viatical Management, LLC , 55 P.3d 264

(Colo.App. 2002). Clearly, under this authority, investors have

relied on the managerial or entrepreneurial efforts of ABS in

finding them suitable viators, before or after the closing.

95. Petitioner has thus proved that the trust interests in

these cases are securities.

96. Respondent has not proved its entitlement to any of

the exemptions contained in Chapter 517, Florida Statutes.

Probably, the statutory exemption closest to the facts of this

case is Section 517.051(10), which provides:

Any insurance or endowment policy or annuity

contract or optional annuity contract or

self - insurance agreement issued by a

corporation, insurance company, re ciprocal

insurer, or risk retention group subject to

the supervision of the insurance

commissioner or bank commissioner, or any

agency or officer performing like functions,

of any state or territory of the United

States or the District of Columbia.

9 7. However, investors purchased trust interests -- not

insurance contracts -- so Section 517.051(10) does not exempt

these transactions from Chapter 517, Florida Statutes.

98. Notwithstanding the difficulty of some of the legal

issues already discussed, the most difficult legal question in

this case is whether the Office of Insurance Regulation has

exclusive jurisdiction in these cases, pursuant to the Viatical

Settlement Act, Chapter 626, Part X, Florida Statutes.

99. The Viatical Settlement Act is a compre hensive

statutory scheme requiring pre - investment disclosure for the

benefit of viators and purchasers of interests in viatical

settlement agreements, registration of brokers and dealers, and

broad anti - fraud prohibitions. As the following provisions

sugg est, the Office of Insurance Regulation has jurisdiction

over the transactions described in these cases.

100. Sections 626.9911(9) and (10) provide:

(9) "Viatical settlement purchase

agreement" means a contract or agreement,

entered into by a viatical se ttlement

purchaser, to which the viator is not a

party, to purchase a life insurance policy

or an interest in a life insurance policy,

which is entered into for the purpose of

deriving an economic benefit. The term also

includes purchases made by viatical

settlement purchasers from any person other

than the provider who effectuated the

viatical settlement contract.

(10) "Viatical settlement purchaser" means

a person who gives a sum of money as

consideration for a life insurance policy or

an equitable or legal interest in the death

benefits of a life insurance policy that has

been or will be the subject of a viatical

settlement contract, for the purpose of

deriving an economic benefit, including

purchases made from any person other than

the provider who e ffectuated the viatical

settlement contract or an entity affiliated

with the provider. The term does not

include a licensee under this part, an

accredited investor as defined in Rule 501,

Regulation D of the Securities Act Rules, or

a qualified institutio nal buyer as defined

by Rule 144(a) of the Federal Securities

Act, a special purpose entity, a financing

entity, or a contingency insurer. The above

references to Rule 501, Regulation D and

Rule 144(a) of the Federal Securities Act

are used strictly for d efining purposes and

shall not be interpreted in any other

manner. Any person who claims to be an

accredited investor shall sign an affidavit

stating that he or she is an accredited

investor, the basis of that claim, and that

he or she understands that as an accredited

investor he or she will not be entitled to

certain protections of the Viatical

Settlement Act. This affidavit must be kept

with other documents required to be

maintained by this act.

101. Investors in these cases are viatical settlement

purchasers. Sections 626.99235 and 626.99236 provide a

comprehensive set of disclosures that they must receive.

102. However, a distinct question is whether the Office of

Insurance Regulation has exclusive jurisdiction over the

transactions in these ca ses, or whether its jurisdiction

overlaps with the jurisdiction of the Office of Financial

Institutions and Securities Regulation. No provision in Chapter

517, Florida Statutes, or the Viatical Settlement Act expressly

answers this question.

103. Section 626.99245(1) explicitly mentions the absence

of regulation in Florida, but only under certain conditions.

Section 626.99245(1) provides:

A viatical settlement provider who from this

state enters into a viatical settlement

purchase agreement with a purcha ser who is a

resident of another state that has enacted

statutes or adopted regulations governing

viatical settlement purchase agreements,

shall be governed in the effectuation of

that viatical settlement purchase agreement

by the statutes and regulations of the

purchaser's state of residence. If the

state in which the purchaser is a resident

has not enacted statutes or regulations

governing viatical settlement purchase

agreements, the provider shall give the

purchaser notice that neither Florida nor

his o r her state regulates the transaction

upon which he or she is entering. For

transactions in these states, however, the

viatical settlement provider is to maintain

all records required as if the transactions

were executed in Florida. However, the

forms us ed in those states need not be

approved by the department.

104. However, the statement in Section 626.99245(1) that

Florida does not regulate the viatical purchase agreement means

merely that Florida does not regulate such agreements when the

purchasers reside outside of Florida. The registration

requirements of Sections 517.07(1) and 517.12(1) are both

predicated on sales within Florida; thus, a viatical purchase

agreement sold to a nonFlorida purchaser might be a security,

but would not be within the r each of Florida's securities laws.

105. Overlapping jurisdiction is not unprecedented. See ,

e.g. , Elder v. Fischer , 717 N.E. 2d 730 (OhioApp. 1st Dist.

1998).

106. In Lemelledo v. Beneficial Management Corp. of

America , 150 N.J. 255, 696 A.3d 546 (199 7), the court considered

a case involving "loan packing," in which a lender allegedly

increased the amount of a consumer loan with undesired services,

such as various forms of credit insurance. The plaintiff

alleged violations of the Consumer Fraud Act (C FA) and the

Consumer Loan Act. The court noted that lenders offering credit

insurance stated were subject to regulation by several state

agencies, including the Department of Insurance and the

Department of Banking.

107. The Lemelledo court then consid ered the problems of

underenforcement:

Both of those aspects of the CFA -- its

recognition of cumulative remedies and its

empowerment of citizens as private attorneys

general -- reflect an apparent legislative

intent to enlarge fraud - fighting authority

and t o delegate that authority among various

governmental and nongovernmental entities,

each exercising different forms of remedial

power. That legislative intent is readily

inferable from the ongoing need for consumer

protection and the salutary benefits to b e

achieved by expanding enforcement authority

and enhancing remedial redress. When

remedial power is concentrated in one

agency, underenforcement may result because

of lack of resources, concentration on other

agency responsibilities, lack of expertise,

a gency capture by regulated parties, or a

particular ideological bent by agency

decisionmakers. See , e.g. , Arcadia v. Ohio

Power Co. , 498 U.S. 73, 87 - 88, 111 S.Ct.

415, 423 - 24, 112 L.Ed. 2d 374,388 - 89 (1990).

(Stevens, J., concurring) (emphasizing that

Con gress intended that Securities and

Exchange Commission and Federal Energy

Regulatory Commission both have jurisdiction

over particular aspect of utility regulation

because of the "difference between the goals

and expertise of the two agencies").

Underenfor cement by an administrative agency

may be even more likely where, as in this

case, the regulated party is a relatively

powerful business entity while the class

protected by the regulation tends to consist

of low - income persons with scant resources,

lack of knowledge about their rights,

inexperience in the regulated area, and

insufficient understanding of the prohibited

practice. The primary risk of

underenforcement -- the victimization of a

protected class -- can be greatly reduced by

allocating enforcement re sponsibilities

among various agencies and among members of

the consuming public in the forms of

judicial and administrative proceedings and

private causes of action.

The Legislature, of course, need not diffuse

enforcement power to combat fraud, and it

ce rtainly may concentrate that authority in

one or more agencies or in private citizens.

That judgment, however, is for the

Legislature, not for this Court. We are

loathe to undermine the CFA's enforcement

structure, which specifically contemplates

cumulati ve remedies and private attorneys

general, by carving out exemptions for each

allegedly fraudulent practice that may

concomitantly be regulated by another source

of law. The presumption that the CFA

applies to covered practices, even in the

face of other existing sources of

regulation, preserves the Legislature's

determination to effect a broad delegation

of enforcement authority to combat consumer

fraud.

150 N.J. at 269 - 70, 696 A.3d at 553 - 54.

108. As was the case in Lemelledo , Section 517.241

provides for private rights of action and cumulative remedies

for violations of Chapter 517.

109. The Lemelledo court also noted that the two statutory

schemes did not create a conflict, which, to create the

inference not to apply both statutes, must be "patent and

sharp," and not the "mere possibility of incompatibility." 150

N.J. at 270, 696 A.3d at 554.

110. The Lemelledo court observed:

In the modern administrative state,

regulation is frequently complementary,

overlapping, and comprehensive. Absent a

near ly irreconcilable conflict, to allow one

remedial statute to preempt another or to

co - opt a broad field of regulatory concern,

simply because the two statutes regulate the

same activity, would defeat the purposes

giving rise to the need for regulation. It

is not readily to be inferred that the

Legislature, by enacting multiple remedial

statutes designed to augment protection,

actually intended that parties be subject

only to one source of regulation. Cf.

Hinfey v. Matawan Regional Bd. of Educ. , 77

N.J. 51 4, 527 - 28, 391 A.2d 899 (1978)

(holding that more specific

antidiscrimination statute did not preempt

broader antidiscrimination statute despite

the existence of separate administrative

bodies charged with combatting the same form

of discrimination); Dodd , supra , 365 N.E.

2d at 805 ("The mere existence of one

regulatory statute does not affect the

applicability of a broader, nonconflicting

statute, particularly when both statutes

provide for concurrent coverage of their

common subject matter.").

111. Exa mining the statutes in question, the Lemelledo

court noted that the objective of both statutes was the

prevention of fraud in the sale of credit or insurance. The

court reasoned that subsequent courts enforcing both statutes

could avoid conflicting result s by not imposing conflicting

duties or imposing duplicative financial obligations on the

regulated parties. Likewise, the Lemelledo court suggested that

the agencies could harmonize their exercise of jurisdiction to

avoid the possibility of conflict. Th e agency with primary

jurisdiction could act first, and the deferring agency could

wait to take action to award complementary or additional relief.

112. In these cases, one agency, the Department of

Financial Services, has jurisdiction over the Viatical

S ettlement Act and Chapter 517, Florida Statutes. The

Department's Office of Insurance Regulation has jurisdiction

over the viatical settlements, and the Department's Office of

Financial Institutions and Securities Regulation has

jurisdiction over securiti es. Thus, the potential for inter -

agency conflict is nonexistent.

113. Even ignoring the fact that one agency has

jurisdiction over viatical settlements and securities, the issue

of relative expertise suggests primary jurisdiction in this case

rests wi th the Office of Financial Institutions and Securities

Regulation.

114. Insurance law regulates the initial viatical

transaction, in which the viator conveys ownership of his life

insurance policy. This phase of the overall transaction will

typically i nvolve recurring insurance issues, such as fraud

against the insurer in the form of clean sheeting (in which

insurance applicants may hide disqualifying conditions from the

insurer) and fraud against the insured, or viator.

115. However, securities law better regulates the ensuing

phases of the overall transaction, when brokers or dealers

assemble fractional interests of several policies, perhaps with

other investments, and market investment contracts, such as

trust interests. By these phases, securitie s law better serves

the needs of the marketplace that are jeopardized by such frauds

as Ponzi schemes or inadequately trained brokers and dealers,

whose viatical training and licensing is less pertinent than

securities training and licensing.

116. Secti on 517.221(1) provides that Petitioner may

impose a cease and desist order against any person who has

violated any provision of Chapter 517, Florida Statutes.

Section 517.221(3) provides that Petitioner may impose an

administrative fine of $5000 per viola tion.

117. Petitioner seeks fines of $380,000 against each

Respondent. Petitioner alleged that Respondent and Empire

Insurance sold to 38 different purchasers, and the failure to

register the security and failure to register as a dealer

constitute two separate violations by each Respondent with

respect to each of the 38 purchasers. This approach overlooks

the fact that Empire Financial Consultants replaced Empire

Insurance by December 1, 1999.

118. More importantly, the proposed fines are excessive.

These cases appear to have been only the third time, all in

recent months, that Petitioner has attempted to impose

securities laws upon the type of transactions in which FinFed,

ABS, Respondent, and Empire Insurance engaged. The

applicability of the secur ities laws to these transactions has

been a very close question, on which there exists presently no

consensus.

119. The Life Partners decision in particular may have

understandably misled many informed persons into concluding that

the securities laws do not apply to the facts involved in these

cases. Petitioner's predecessor agency expressed this opinion

to Respondent when he approached it for guidance. But the

closer question arises from the Legislature's recent adoption of

the Viatical Settlement Act . Specific to viaticals, this

legislation, on its face, understandably may seem to deal

definitively with all aspects of the transactions involved in

these cases.

120. The novelty of the legal issues involved in these

cases militates against a harsh pe nalty. On the other hand,

many innocent investors lost a considerable sum of money due to

the FinFed/ABS investments that Respondent and Empire Insurance

promoted. And Respondent's claims of due diligence in verifying

the existence of the viaticated insu rance policies are

undermined by his reckless promotion of the FinFed/ABS

investments as guaranteed and safe; sloppy completion of the

closing documents, which often fail to reflect the proper

projected life expectancies; carelessness in noting reported ne t

worths for many clients; and sale of FinFed/ABS investments

that, based on reported net worths, were clearly unsuitable,

such as, most notably, in the case of the Sterlings, who

invested about $187,000 of their $250,000 net worth, and Bonnie

Jensen, who invested about $66,000 of her $120,000 net worth.

Of course, Respondent's claims of due diligence in verifying the

existence of the viaticated insurance policies are also

undermined by the fact that, for the most part, there were no

policies. Overall, Re spondent, an insurance agent, repeatedly

demonstrated incompetence in discharging his securities - like

responsibilities -- once more underscoring the primacy of

securities regulation over insurance regulation of these later

phases of the FinFed/ABS transactio ns.

121. In 50 separate transactions, Respondent has violated

Section 517.07(1), and, in 50 separate transactions, he has

violated Section 517.12(1). Petitioner has charged him with

only 38 such violations of each statute, for a total of 76

violations. Empire Insurance has similarly violated these

statutes, except that it ceased its activities by December 1,

1998, so that it is not liable for any transactions from that

date forward.

122. After considering all of the mitigating and

aggravating circumstan ces, the total fine should equal

Respondent's approximate commissions, or $120,000. Because it

is doubtful that Empire Insurance has remained in business or

has any assets, the entire fine should be imposed against

Respondent. Petitioner should also orde r each Respondent to

cease and desist from further violations of Chapter 517, Florida

Statutes.

RECOMMENDATION

It is

RECOMMENDED that Petitioner enter a final order:

1. Finding James A. Torchia and Empire Insurance, Inc.,

not guilty of violating Sectio n 517.301(1), Florida Statutes;

2. Finding James A. Torchia guilty of 38 violations of

Section 517.07(1), Florida Statutes, and 38 violations of

Section 517.12(1), Florida Statutes;

3. Finding Empire Insurance, Inc., guilty of 38 violations

of Section 517.07(1), Florida Statutes, and 38 violations of

Section 517.12(1), Florida Statutes, except for transactions

closed on or after December 1, 1998;

4. Directing James A. Torchia and Empire Insurance, Inc.,

to cease and desist from further violations of C hapter 517,

Florida Statutes; and

5. Imposing an administrative fine in the amount of

$120,000 against James A. Torchia.

DONE AND ENTERED this 19th day of May, 2003, in

Tallahassee, Leon County, Florida.

___________________ ________________

ROBERT E. MEALE

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Ap alachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 19th day of May, 2003.

COPIES FURNISHED:

Honorable Tom Gallagher

Chief Financial Officer

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0300

Mark Casteel, General Counsel

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0300

Fred H. Wilsen

Senior Attorney

Office of Financial Institutions and

Securities Regulation

South Tower, Suite S - 225

400 West Robinson Street

Orlando, Florida 32801 - 1799

Barry S. Mittelberg

Mittelberg & Nicosia, P.A.

8100 North University Drive, Suite 102

Fort Lauderdale, Florida 33321

NOTICE OF RIGHT TO SUBMIT EXCEPTIO NS

All parties have the right to submit written exceptions within

15 days from the date of this recommended order. Any exceptions

to this recommended order must be filed with the agency that

will issue the final order in this case.