Lifemark, the cash strapped Luxembourg-based backer of Keydata bonds, is embroiled in a multi-millon dollar legal battle in the US Court of Appeal.
The row is over a $10m US traded life-settlement policy - the asset class which underlies the Lifemark fund - bought by the company in 2007 for $1.9m.
American attorney Arthur Kramer bought several policies late in his life, assigned them to two trusts, named his children as beneficiaries and then directed them to sell their interest in the trusts to investors for cash.
Following his death, Kramer's widow Alice is claiming the death benefits should go to the estate, not Lifemark investors.
Investors who filed claims with the insurers have been told the policies are void.
The $10m in dispute would keep Lifemark, which is facing a severe liquidity crisis, out of insolvency until about February.
Lifemark must pay the premiums on over 300 life polices within its portfolio until they mature and the death benefit is paid into the fund.
But in New York's top court on Tuesday, lawyers argued over whether the state law prohibits people from buying life insurance policies and immediately selling them to investors who make money when the insured person dies.
In the US, the law was recently changed to regulate "stranger originated life insurance," (STOLI), and banned intermediaries, without any personal interest in an insured individual, from arranging in advance for someone to obtain and transfer to them a policy.
The question before the Court of Appeals is whether someone can buy a policy with no intention of protecting usual beneficiaries with a personal or economic stake in their welfare, and then simply sell it to someone else.
US lawmakers have noted "the moral hazards" posed by investors speculating on death.
One regulatory approach being considered by American lawmakers is to require a five-year waiting period before life insurance policies can be sold.
Last month, the FSCS confirmed it can compensate investors with Keydata products backed by Lifemark because it is satisfied the marketing materials produced by Keydata to promote the products failed to comply with FSA rules.
However, investors who have not received a monthly income from their investment since February, will not know the amount they will receive until the end of October.
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