Joel Steinger was born in Brooklyn in 1949 and in later life became friends with the gangster Meyer Lansky (known as the "Mob's Accountant"), after his brother redecorated Lansky's house. Steinger eventually married the daughter of a Miami banker, who is alleged to have been one of Lansky's associates. After a spell working at his father-in-law's import/export firm, Steinger set up a boiler room selling phoney commodity options, resulting in a conviction for fraud and a lifetime ban from the securities industry. This didn't stop him running a variety of scams related to investments in everything from oil wells to diet pizza. In 1994 Steinger set up the Mutual Benefits Corporation (MBC).
What was the scam?
MBC specialised in selling viaticals, shares in the life-insurance policies of the terminally ill. MBC would buy the life-insurance policies of Aids patients at a discount to the death benefits and sell portions of them on to investors, with part of the money supposedly set aside to cover any remaining insurance premiums. Many of the medical reports that MBC provided to investors were doctored so that the patients' prognoses appeared worse than they were. Steinger started skimming off large sums of money, relying on money from new sales to cover premium costs.
What happened next?
Despite hundreds of complaints from investors angry that 90% of patients were living much longer than expected, lax oversight from state regulators and a botched investigation in 1998 by the Securities and Exchange Commission allowed MBC to operate for more than a decade. In 2001 the doctor who made many of the false estimates of life expectancy was arrested for fraud and eventually turned on Steinger in return for a lighter sentence. As a result, the SEC finally shut down MBC in 2004 and Steinger would be sentenced to 20 years in prison in 2014.
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Lessons for investors
According to estimates from US authorities, around 30,000 investors lost around three-quarters of the estimated $1.25bn that MBC raised. The viaticals industry is notoriously prone to fraud (indeed, MBC argued that it was the only honest operator in the industry) as investors are essentially relying on doctors' guesswork. In general, situations where a seller has much a better idea of an asset's true value than the buyer (information asymmetry) should be avoided.
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