07-001218PL Department Of Financial Services vs. Bradley Wayne Kline Status: Closed Recommended Order on Tuesday, October 9, 2007.

Summary: Respondent`s insurance license is revoked.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF FINANCIAL )

SERVICES, )

)

Petitioner, )

)

vs. ) Case No. 07 - 1218PL

)

BRADLEY WAYNE KLINE, )

)

Respondent. )

)

RECOMMENDED ORDER

The final hearing in this case was held on July 2, 2007, in

Orlando, Florida, before Bram D.E. Canter, an Administrative Law

Judge of the Division of Administrative Hearings (DOAH).

APPEARANCES

For Petitioner: David J. Busch, Esquire

Department of Fin ancial Services

Division of Legal Services

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399 - 0333

For Respondent: Bradley Wayne Kline, pro se

7614 Brisbane Court

Orlando, Florida 32835

STATEMENT OF THE ISSUES

The issues for determination in this case are whether

Respondent violated the law as charged by Petitioner in its

Administrative Complaint, and, if so, what discipline is

appropriate.

PRELIMINARY STATEMENT

On February 6, 2007, Petitioner fi led a four - count

Administrative Complaint against Respondent, who holds a license

as a Florida life and health insurance agent. The

Administrative Complaint charged Respondent with numerous

violations of the Florida Insurance Code and Petitioner's

rules arising from alleged misrepresentations by Respondent in

his sale of viatical settlement contracts and for his sale of

unregistered securities. In the Administrative Complaint,

Petitioner stated its intent to discipline Respondent, but did

not indicate th e specific discipline that it was seeking.

Respondent requested a hearing to contest the charges of

the Administrative Complaint, and the matter was referred to

DOAH on March 14, 2007, to conduct a formal adjudicatory

hearing.

At the final hearing, Petit ioner presented the testimony of

Charles Simons, Floy Leuenberger, and Oscar Berge. Petitioner's

Exhibits 1 through 22, 27 through 46, and 49 were admitted into

evidence and included transcripts of the depositions of Allan

Lenois and Joseph Long. Respond ent testified on his own behalf

and offered no exhibits. The 2003 and 2006 versions of Section

517.021 and Sections 626.991 through 626.99295, Florida

Statutes, were officially recognized.

The two - volume Transcript of the final hearing was prepared

and f iled with DOAH. Petitioner filed a Proposed Recommended

Order that was considered in the preparation of this Recommended

Order. Respondent made no post - hearing submittal.

FINDINGS OF FACT

1. Petitioner is the state agency with the statutory

authority an d duty to license and regulate insurance agents in

Florida.

2. Respondent holds license D033674 as a life and health

insurance agent.

3. At the time of the events which are the subject of this

case, Respondent also held a license to sell securities.

4. At the time of the events which are the subject of this

case, Respondent was employed by First Liberty Group and sold

life insurance, annuities, and viatical settlement purchase

agreements ("viaticals").

5. A viatical is a written agreement which provide s for an

investor's purchase of an interest in the proceeds of a life

insurance policy of an anonymous insured person, the "viator."

The agreement provides for the amount of money that the investor

will receive upon the death of the viator.

6. One genera l principle underlying a viatical is that it

provides a means for a terminally ill person who needs money to

sell or assign the proceeds of a life insurance policy that

would be paid upon his or her death. Another general principle

is that the viator, due to the terminal illness, has been

diagnosed to have a short life expectancy. Although the

identity of the viator is not revealed to the investor, the

investor is provided information about the viator's gender, age,

illness, and life expectancy.

Facts Com mon to All Counts

7. A company that "viaticates" life insurance policies and

arranges for diagnoses of life expectancies by medical doctors

is called a "viatical settlement provider." For all the

viaticals sold by Respondent, the viatical settlement prov ider

was Mutual Benefits Corporation.

8. Mutual Benefits Corporation was charged with and

ultimately determined to have committed fraud with respect to

its practices as a viatical settlement provider. The nature of

the fraud was not made a part of the re cord in this case.

Mutual Benefits Corporation was placed in a receivership to

manage the remaining assets, liabilities, and contracts of the

company.

9. Respondent's employer, First Liberty Group, advertised

that it offered a certificate of deposit (CD) at a very

competitive annual interest rate. Potential customers who came

in to inquire about or to purchase a CD were also informed about

annuities and viaticals. Petitioner referred to this as a "bait

and switch" technique. However, although the CD in terest rate

might have been the bait, there was no switch. Customers who

wanted CDs were able to and did purchase CDs from First Liberty

Group through Respondent at the advertised interest rate. Some

customers also purchased annuities and viaticals.

10. In the advertising materials provided to the investors

by Respondent and in the Viatical Settlement Purchase Agreements

signed by the investors, the amount the investors would receive

upon the death of the insured is described as "fixed." For

example, th e return on an investment in a viaticated insurance

policy for a viator with a three - year life expectancy was

represented to be 42 percent. The 42 percent return was fixed

in the sense that on an investment of $20,000, for example, the

investor would rece ive 42 percent of $20,000, or $8,400, when

the viator died. If the viator died six months after the

purchase of the viatical, the investor would receive $8,400. If

the viator died three years later, the investor would receive

$8,400. If the viator died ten years later, the investor would

receive $8,400.

11. The viatical sales literature that Respondent gave to

customers disclosed that the life expectancy of the viator, as

determined by a doctor, was not guaranteed. Therefore, the

amount of the return o n the viatical investment was not fixed in

the sense of an annual interest rate. In the examples given

above, the annualized rate of return to the investor if the

insured died six months later would be 84 percent (42 divided by

.5 years). The annualized rate of return if the viator died

three years later would be 14 percent (42 divided by 3 years).

The annualized rate of return if the viator died ten years later

would be 4.2 percent (42 divided by 10 years).

12. Petitioner charged Respondent with not ex plaining to

the investors that "the real rate of return on the investment

was tied to the viator's date of death." However, Petitioner

failed to prove this charge. Respondent did not tell the

investors that the 42 percent return, for example, was an annu al

rate of return. The viatical sales materials provided to

customers by Respondent did not describe the return on the

investment as an annual rate of return.

13. The effect that the date of the viator's death would

have on the rate of return on the viat ical is obvious. The

sooner the viator died, the better the return; the later the

viator died, the worse the return. The investors did not need

specialized knowledge to understand this simple concept. No

investor in this case said they did not understan d that their

return would be affected by when the viator died. None of the

investors said they thought the "fixed rate" figure, such as

42 percent for a three - year viatical, was a guaranteed annual

return. Each investor signed a Viatical Settlement Purch ase

Agreement that included a statement that the returns "are fixed

and not annualized returns." (Emphasis in the original).

14. Another factor affecting the actual return on a

viatical investment is the possibility provided for under the

terms of the via tical contract that the investor might have to

pay a portion of the premiums on the life insurance policy in

the event the viator lived longer than his or her life

expectancy. Any payment of an insurance premium by the investor

would cause a reduction in the return on the viatical

investment. In the example given above, if the investor was

required to pay $2,000 in premiums, his return on the $20,000

would no longer be $8,400, but only $6,400. The annualized

return on the investment would be correspondin gly reduced.

15. In a worse case scenario, the possibility exists that

the requirement to make premium payments could completely

eliminate any potential return to the investor and even

jeopardize the principal.

16. The viatical advertising materials that Respondent

provided to customers did not describe the possibility or impact

of having to make premium payments as discussed above. The

advertising materials generally downplayed the risks associated

with a viatical. For example, one sales document descr ibed the

viatical as appropriate for a conservative investor and

suggested that viaticals are investments that provide "peace of

mind."

17. It was reasonable for Respondent and the sales

materials to describe the insurance companies that issued the

insura nce policies as reliable and secure. However, it was not

reasonable, nor accurate, to describe the viaticals as

conservative investments because of the possibility that the

insured person would live many years beyond his or her life

expectancy and the pos sibility that the investor would have to

make premium payments.

18. Viaticals have the potential to provide a much better

investment return than other types of investments. However, in

conformance with the general rule that the higher the potential

retur n on an investment, the greater the risk, the relatively

high potential return on a viatical comes with a relatively high

risk. 1/

19. Respondent disclosed to the investors that there was a

possibility they might have to make future premium payments, and

i t was described in paragraphs 20 and 21 of the Viatical

Settlement Purchase Agreements signed by the investors under the

heading "Payment of Future Premiums." The agreement states that

the payment of insurance premiums beyond the life expectancy of

the vi ator is at the discretion of Mutual Benefits Corporation.

20. Respondent told the investors that Mutual Benefits

Corporation had a reserve or escrow fund that was managed in a

way that created a premium "pool" so that the early death of a

viator provided a surplus of money that could be used to pay

premiums on the insurance policies of viators who lived beyond

their life expectancies. Respondent also told the investors

that 85 percent of the viators died early, which created a large

surplus in the escrow fund to pay future premiums. The viatical

contracts, however, only stated that unused premiums "may" be

retained in the reserve fund by Mutual Benefits Corporation.

21. At some point after the investors involved in this

case purchased viaticals from Resp ondent, Mutual Benefits

Corporation was the subject of enforcement action for fraud and

placed in receivership. There was evidently no longer a surplus

or reserve fund to pay premiums on insurance policies associated

with viators who lived beyond their li fe expectancy, and that

burden fell on the investors.

22. All the investors involved in this case told

Respondent they were conservative investors with a low tolerance

for risk. There is a commonality in their perceptions of

viaticals derived from their discussions with Respondent, that

viaticals were safe and conservative investments. However,

viaticals are relatively risky investments due to their

illiquidity and the fundamental conditions affecting the return

and the security of the principal that are beyond the control of

the investor. Respondent knew or should have known, through the

exercise of reasonable diligence on behalf of the customers who

purchased viaticals, that viaticals are relatively high - risk

investments.

23. Respondent misrepresented the risk character of

viaticals in his discussions with the investors involved in this

case. He had a motive to downplay the true risk character of

the viaticals, because he received a commission for every sale

of a viatical. If Respondent had informed the investors of the

true risk character of viaticals, the investors might not have

purchased the viaticals.

24. The definition of "security" in Section 517.021,

Florida Statutes, was amended in 2006 to specifically identify

"viatical settlement investmen t" as a type of security.

Respondent does not dispute that a viatical is a security.

25. There is no dispute that the viaticals sold by

Respondent, which are the subject of this case, were not

registered securities when Respondent sold them in 2003.

Cou nt I - Simons

26. Charles Simons was 81 years old in 2003. He has eight

years of education. He used to work as a truck driver in a

quarry associated with a cement plant, but is now retired. He

owns real estate and has an annual income over $100,000 an d a

net worth of $600,000 to $700,000.

27. Mr. Simons saw the CD advertised by First Liberty

Group and came in with his wife to invest $100,000 he had

acquired from the recent sale of real estate. They met with

Respondent in July 2003.

28. Mr. and Mrs . Simons invested $50,000 in two or more

CDs and an annuity. They also purchased two viaticals for

$50,000.

29. Mr. and Mrs. Simons purchased two three - year

viaticals, meaning that medical doctors who had purportedly

examined the medical records of the insured persons expected

them to die of their terminal illnesses within three years.

The Simons invested $25,000 in each of the viaticals.

30. Although four years have passed since the Simons

purchased the three - year viaticals, neither of the insured

pe rsons has died. Mr. Simons has had to make a premium payment

of approximately $2,000 on one of the underlying policies. 2/

Count II – Lenois

31. Allan Lenois was 70 years old in 2003. He is a high

school graduate, studied accounting and taxation, and wo rked for

a lumber company where he supervised 300 employees. His wife,

Marion, was an accountant. They are now retired.

32. In August 2003, Mr. and Mrs. Lenois went to see

Respondent after seeing the CD advertisement in the newspaper.

While in Respo ndent's office, they noticed a poster

advertisement on the office wall about viaticals and asked

Respondent about them.

33. Mr. Lenois' deposition testimony that Respondent

called the viaticals "guaranteed" is not persuasive, given

Respondent's testimony at the final hearing that he used these

kinds of words to describe the industry rating of the insurance

companies involved and the federal - insured reserve fund account,

not the viatical itself. However, as previously found,

Respondent misrepresented the viaticals to be relatively

conservative investments to all the investors.

34. Mr. and Mrs. Lenois invested $20,000 in an annuity.

In a deposition of Mr. Lenois, he stated that he thought he had

purchased a CD from Respondent, not an annuity, and was

sur prised that he had to pay a surrender penalty. Petitioner

makes this same allegation in its Proposed Recommended Order,

but Mr. Lenois' testimony is not persuasive because he signed a

disclosure document that states "I understand that I have

purchased an annuity . . . and not a Bank Certificate of

Deposit," and the word "annuity" is written on the personal

check used to purchase the annuity. Furthermore, the allegation

was not included in the Administrative Complaint.

35. Mr. and Mrs. Lenois purchased o ne three - year viatical

for $10,000.

36. Although four years have passed since they purchased

the viatical, the viator is still alive.

37. Mr. and Ms. Lenois have not yet had to make a premium

payment associated with their viatical.

Count II – Luenberge r

38. Floy Leuenberger is a retired school teacher. She has

a master's degree in counseling and education. Her husband is a

retired bank employee. The Leuenbergers have a net worth just

over $500,000.

39. The Leuenbergers saw the CD advertised by Fi rst

Liberty Group and came in to invest $75,000. They met with

Respondent in October 2003. They saw a poster on the wall of

Respondent's office about viaticals and asked Respondent about

them.

40. The Leuenbergers invested $50,000 in CDs and purchased

two viaticals for $12,500 each.

41. One of the viaticals purchased by the Leuenbergers

"paid out" because the viator died, and they received the return

Respondent quoted to them. The other viatical they purchased

from Respondent has not yet paid out.

4 2. The Leuenbergers have had to make a premium payment of

approximately $1,500 on the remaining viatical.

Count III – Berge

43. Oscar Berge is retired from the United States Air

Force and from a subsequent job as a maintenance supervisor for

a health ca re facility. Mr. Berge obtained a college degree in

avionics instrument technology while in the Air Force.

44. Mr. Berge saw the CD advertised by First Liberty

Group. He and his wife met with Respondent in late 2002 and, in

January 2003, invested in tw o annuities and five viaticals.

45. Mr. and Mrs. Berge purchased two three - year viaticals

for $30,000 each and three five - year viaticals for $30,000 each;

a total investment of $150,000.

46. Although four years have passed since the Berges

purchased th e three - year viaticals, the two viators have not

died. The Berges have had to make two premium payments totaling

approximately $5,000.

CONCLUSIONS OF LAW

47. DOAH has jurisdiction over the subject matter pursuant

to Section 120.569 and Subsection 120.57( 1), Florida Statutes

(2006). 3/

48. Petitioner must prove the factual allegations in its

Administrative Complaint by clear and convincing evidence.

Department of Banking and Finance v. Osborne Stern and Company,

Inc. , 670 So. 2d 932 (Fla. 1996); Ferris v. Turlington , 510

So. 2d 292 (Fla. 1987).

49. The "clear and convincing" evidence standard has been

described as follows:

[C]lear and convincing evidence requires

that the evidence must be found to be

credible; the facts to which the witnesses

testify must be distinctly remembered; the

testimony must be precise and explicit and

the witnesses must be lacking in confusion

as to the facts in issue. The evidence must

be of such weight that it produces in the

mind of the trier of fact a firm belief or

convictio n, without hesitancy, as to the

truth of the allegations sought to be

established.

Slomowitz v. Walker , 429 So. 2d 797, 800 (Fla. 4th DCA 1983).

50. In each count of its Administrative Complaint,

Petitioner charged Respondent with violating Subsections

626.611(5), (7), (9), (16), and 626.621(9), Florida Statutes.

These statutes provide as follows:

§ 626.611

The department shall deny an application

for, suspend, revoke, or refuse to renew or

continue the license or appointment of any

. . . agent . . . i f it finds that . . . any

one or more of the applicable grounds exist:

* * *

(5) Willful misrepresentation of any

insurance policy or annuity contract or

willful deception with regard to any such

policy or contract, done either in person or

by any f orm of dissemination of information

or advertising.

* * *

(7) Demonstrated lack of fitness or

trustworthiness to engage in the business of

insurance.

* * *

(9) Fraudulent or dishonest practices in

the conduct of business under the license or

appointment.

* * *

(16) Sale of an unregistered security that

was required to be registered, pursuant to

chapter 517.

§ 626.621

The department may, in its discretion, deny

an application for, suspend, revoke, or

refuse to renew or continue the lic ense or

appointment of any . . . agent . . . if it

finds that . . . any one or more of the

following applicable grounds exist under

circumstances for which denial, suspension,

revocation, or refusal is not mandatory

under s. 626.611:

* * *

(9) If a life agent, violation of the code

of ethics.

51. Petitioner proved by clear and convincing evidence

that Respondent, by his own statements and through the

advertising materials he provided to the investors, willfully

misrepresented the risk character of the viaticals. By doing

so, Respondent violated each of the statutes set forth above.

52. Respondent objects to being charged with selling

unregistered securities, because viaticals were not specifically

defined as securities until 2006. Petitioner c laims that,

although viaticals were not specifically defined as securities

in Section 517.021, Florida Statutes, in 2003, the prior

definition, which included "investment contracts," was

sufficient to include viaticals. Petitioner further asserts

that via ticals have all the elements of a security as

established by the case law.

53. Petitioner is correct that a viatical met the

definition of a security under the law that existed in 2003.

However, the Administrative Law Judge does not agree with

Petitioner 's argument that this interpretation of the law was

clear and settled in 2003. The regulation of viaticals under

the insurance code was a cause of confusion.

Appropriate Penalty

54. Under Florida Administrative Code Rule 69B - 231.080,

the penalty for e ach violation of Subsections 626.611(5)

and (7), Florida Statutes, is a six - month suspension; the

penalty for each violation of Subsection 626.611(9), Florida

Statutes, is a nine - month suspension; and the penalty for each

violation of Subsection 626.611(16 ), Florida Statutes, is a

12 - month suspension.

55. Florida Administrative Code Rule 69B - 231.090 provides

that the penalty for each violation of Subsection 626.621(9),

Florida Statutes, is a three - month suspension.

56. However, under Florida Administrativ e Code Rule

69B - 231.040(1)(a), the "penalty per count" cannot exceed the

highest penalty for any violation under the count, which in this

case is the 12 - month suspension for sale of an unregistered

security. Therefore, based on the four counts of the

Admi nistrative Complaint, the "total penalty" would be four

years.

57. Florida Administrative Code Rule 69B - 231.160 sets

forth the aggravating and mitigating factors to be considered in

imposing an appropriate final penalty. Among these, willfulness

and pers onal financial gain are applicable aggravating factors

with respect to the misrepresentations made by Respondent

regarding the risk character of the viaticals. The

Administrative Law Judge disagrees with Petitioner's contention

that the age of the victims is an aggravating factor. None of

the investors involved in this case was lacking in intelligence,

common sense, or any mental capacity that made them more likely

to rely on the misrepresentations made by Respondent. The

record also does not show that t he amount invested by these

individuals was a large percentage of their net worth or

otherwise had significance based on their ages.

58. A mitigating factor is the unsettled state of the law

in 2003 regarding the legal status of viaticals as securities.

However, even if the penalty for the sale of unlicensed

securities were eliminated altogether and the penalty per count

were reduced to a nine - month suspension, the total penalty would

be suspension for 36 months. Subsection 626.641(1), Florida

Statutes, does not permit Petitioner to suspend a license for

more than two years. Therefore, the required penalty in this

case is revocation of Respondent's license.

RECOMMENDATION

Based on the Findings of Fact and Conclusions of Law set

forth above, it is

RECOMME NDED that a final order be entered which finds that

Respondent Bradley Kline violated Subsections 626.611(5), (7),

(9), and (16) and 626.621(9), Florida Statutes, and revokes his

license as an insurance agent.

DONE AND ENTERED this 9th day of Octob er, 2007, in

Tallahassee, Leon County, Florida.

S

BRAM D. E. CANTER

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee 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 9th day of October, 2007.

ENDNOTES

1/ Petitioner describes viaticals as a "crap shoot" or "rip - off

scheme," but those are not legal in Florida, and viaticals are

legal investments.

2/ Petitioner claims that Mr. Simons also had to pay a $190

insurance premium on the other viaticated policy. However, this

amount, which was also paid by some of the other viators,

appears to be a management fee charged by Viatical Services,

Inc. See Mr. Berge's testimony at page 223 of the Transcript of

the final hearing and Mr. Lenois' testimony at page 56 of his

deposition transcript.

3/ Unless otherwise indicated, all future reference s to the

Florida Statutes are to the 2006 codification.

COPIES FURNISHED :

David J. Busch, Esquire

Department of Financial Services

Division of Legal Services

612 Larson Building

200 East Gaines Street

Tallahassee, Florida 32399 - 0333

Bradley Wayne Kline

7614 Brisbane Court

Orlando, Florida 32835

Honorable Alex Sink

Chief Financial Officer

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0300

Daniel Sumner, General Counsel

Department of Financial Services

T he Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0307

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

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 sh ould be filed with the agency that

will issue the Final Order in this case.