The Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) are warning consumers about companies that offer to pay lump sums in exchange for the future income stream of individuals’ pension or retirement benefits. These payouts are similar to those sometimes offered by “factoring” or “pension advance” companies in exchange for payment streams in negotiated litigation settlements.
The factoring company places a value on the future income stream using a specified interest rate, based on an estimate of the consumer’s life expectancy. In theory, the lump sum payment is sufficient to provide the same income to the consumer if they are able to invest it, and make payments to themselves. More often than not these “lump-sum” payments are marketed as a way to address current debt, pay for a child’s education, or other expenses.
While these payouts might initially appear advantageous, they rarely accurately reflect the “present value” of the payment stream, explained securities and investment attorney Marc A. Wites of Wites & Rogers The firms often deduct various fees from the final payment. In some cases, although presented as a cash buy-out, firms have instead disguised the agreement as a long-term loan that could survive the payee’s death. The effective rates on these “advances” or “loans” often exceed those permitted by state usury laws. In other cases, the firms do not even try to hide the fact that they payment is a loan, and require that the borrower take out life insurance to pay off the balance should they die before the loan is paid out.
The State of New York’s Department of Financial Services, in particular, has accused many of these companies of preying on elderly retirees. Benjamin M. Lawsky, the head of the agency, called them “nothing more than payday loans in sheep’s clothing.” He has issued subpoenas to ten companies that have solicited New York retirees.
The firms that target elderly veterans, in particular, use complicated schemes to skirt the laws that forbid third parties from receiving veterans’ pension benefits. Despite the prohibitions, some pension advance websites explicitly state that they will provide buy-outs of those benefits.
A recent New York Times article indicated that “[t]he pension advance firms, which largely advertise on the Internet, are in California, Florida, Delaware, Indiana, Michigan and Washington.”
Marc Wites commented that “it is appalling how illegitimate financial business continue to create methods to prey upon elderly investors, particularly those that experience financial hardship.” If you have been induced, or know someone such as a relative who has been induced, to enter an agreement to sell their future benefits, it could be wise to consult with an attorney with experience in securities laws. Wites & Rogers represents victims – including, particularly, elderly victims – of securities frauds.
