SAN DIEGO — In 1996, Tom Lindner moved here from North Carolina. He was dying of AIDS and tens of thousands of dollars in debt.
But he had friends in San Diego, and they knew a way to earn money fast. Call a certain insurance broker, they said. There's no trick to it. You only have to tell one lie.
That lie was to tell life insurance companies he was healthy--allowing him to qualify for policies he could then sell for cash.
That's how Lindner got caught in one of the biggest federal busts targeting a business that profits from life insurance policies on the terminally ill--an industry that has fed on America's AIDS epidemic for the last decade.
His arrest won't be the last. Stunned by the depth of fraud in the industry, investigators increasingly are seeking charges against HIV-positive men and women who participate, even at the risk of rousing public sympathy for people already punished by illness.
"We've got to get the message out to the AIDS community that they'll pay a price for this," said Daniel S. Linhardt, an assistant U.S. attorney in Sacramento.
Nationwide, at least 37 people, most HIV-positive, have been arrested or indicted in the past year. At least 40 more federal and state investigations are in the works, with many more arrests expected.
Companies in the business known as "viatical settlements" buy life insurance policies from terminally ill people for a fraction of the face value, usually no more than 60%. The companies then resell the policies to an investor or group of investors, who become the beneficiaries and receive the policy's full value when the insured person dies.
A viatical settlement can give a dying person cash for medicine, a vacation or simply to pay rent and buy groceries.
A legitimate viatical business boomed in the early days of the nation's AIDS epidemic, when gay men with no dependents chose to cash in long-held life insurance policies for their own use. At the other end of the deal, viatical sellers used a humanitarian twist to persuade investors.
"You're helping and restoring dignity," says Steve Steiner, the former president of Mutual Benefits Corp. of Fort Lauderdale, Fla., in a promotional video.
But many life insurance policies sold by viatical companies, investigators say, are essentially stolen goods--policies taken out by people such as Lindner who lie to insurance companies about their health.
A Navy veteran and veterinarian's assistant, Lindner called the insurance broker who had helped his friends. He got an application for life insurance.
Lindner remembers the broker saying, "I can't tell you how to answer these questions. But I can tell you if you give a wrong answer."
Afflicted at the time with full-blown AIDS, Lindner admitted as much when the broker came to a question about HIV.
"He said, 'That's not a good answer,' " Lindner recalled.
So, by marking a "good" answer to the question, he applied by mail for six life insurance policies totaling $400,000 in value--each small enough that no medical exams were required--through two brokers. The brokers then sold the policies to viatical companies and paid Lindner a total of $20,000.
Lindner received just 5% of the face value because the policies were so new--they were within a two-year "contestability" period, during which they could be canceled by the insurance companies, and therefore made risky investments.
"I don't remember ever being this happy," Lindner told his mother in a phone call one evening in May. "I love my job, the money will be fine and I don't have any debts now."
The next day at dawn, six FBI agents crowded the front porch of his small San Diego home. He knew why, but asked anyway. Mail fraud, they said, and handcuffed him.
Lindner wasn't the only AIDS patient arrested that morning. In Laguna Niguel, Laguna Beach, in San Diego and in Virginia and Massachusetts, Federal Bureau of Investigation and U.S. Postal Service inspectors arrested six other HIV-positive men and women who allegedly committed fraud through the mail by lying on insurance applications.
A Florida grand jury estimated in February that 40% to 60% of policies resold by viatical companies were obtained through deception of insurance companies. Authorities estimate the total loss to insurance companies and investors through viatical fraud at $1 billion each year--losses that eventually are covered by consumers who pay higher rates for insurance.
Because it is a hybrid of insurance, investment, loan and gambling, viatical settlements fall outside the reach of most regulators. Seventeen states have no laws tailored to the industry. In California, oversight is split between the departments of insurance and corporations.
"It's an industry that existed below the radar for a good number of years," said James Quiggle, communications director for the Coalition Against Insurance Fraud in Washington, D.C., a watchdog group.