The Ninth Circuit heard arguments on Friday from agents involved in selling fractionalized interests in life insurance policies for Pacific West Capital Group. These agents are challenging a district court decision that mandates the repayment of commissions earned from the sale of life settlements, arguing that these transactions do not qualify as investment contracts under securities law.

This long-standing case, brought by the U.S. Securities and Exchange Commission (SEC), stems from a 2018 settlement in which Pacific West Capital Group agreed to disgorge $57.4 million in profits and pay $6.3 million in prejudgment interest. This settlement followed claims that the company defrauded investors by selling fractionalized interests in universal life insurance policies. The SEC filed additional claims against Pacific West's sales agents, leading to a ruling that found the agents violated securities and broker-dealer requirements. The key question in the case is whether the insurance policy deals in question qualify as investment contracts under the U.S. Supreme Court's Howey test, which defines securities.

The sales agents, represented by Igor Timofeyev of Paul Hastings LLP, contend that the court erred in ruling that the life settlement transactions were securities. Timofeyev argued that the investment returns primarily depended on the lifespan of the insured, rather than the managerial efforts of Pacific West. He compared the sales process to purchasing art, where the investors make decisions based on available options but do not rely on the company's management to generate profits.

U.S. Circuit Judge Richard Clifton challenged this analogy, noting that investors often select from various offered mutual funds, which are still considered securities. Timofeyev disagreed, stating that the key difference lies in the lack of managerial activities in the life settlement transactions. He emphasized that the expected profits were primarily based on external factors, such as the lifespan of the insured individuals, not the company's efforts.

The SEC, represented by Kerry Dingle, argued that Pacific West's involvement—particularly in managing policy premiums and selecting investment opportunities—met the requirements of the Howey test. The SEC lawyer also contended that disgorgement of commissions is appropriate, regardless of whether the agents were involved in fraud, as it addresses unjust enrichment.

The Ninth Circuit panel, which included Judges Ronald M. Gould, Richard R. Clifton, and Gabriel P. Sanchez, will now decide whether to uphold the district court's order for the sales agents to return their commissions. The case has raised significant questions about the classification of life settlements as securities and could have implications for the broader life settlement market.

The SEC sued Pacific West and its owner, Andrew B. Calhoun IV, in 2015 over the sale of life settlements, alleging that the company used proceeds from new life settlements to fund previous sales. Under a 2018 settlement, Pacific West agreed to pay $750,000 in civil penalties without admitting to the allegations.

The case is U.S. Securities and Exchange Commission v. Barry et al., case number 23-2699, in the U.S. Court of Appeals for the Ninth Circuit.