The Ninth Circuit Finds That Fractional Interests In “Death Bets” Are Securities, Joining Circuit Split

In August, the Ninth Circuit found that the sale of fractional interests in life settlements, sometimes called “death bets,” are investment contracts subject to the federal securities laws. In so holding, they joined the Eleventh and Fifth Circuits and departed from the D.C. Circuit.

A life settlement is a transaction in which a person sells their life insurance policy to investors for less than face value. Thereafter, the investors who bought the policy pay the premiums on it until the insured dies. Those investors then receive the policy’s death benefit.

The case, SEC v. Barry, 2025 BL 281533 (9th Cir. Aug. 11, 2025), was brought by the U.S. Securities and Exchange Commission (“SEC”) against Pacific West Capital Group (“PWCG”) and others, alleging that they violated federal securities laws by, inter alia, promoting and selling fractional interests in life settlements without registering them as securities. See Barry, 2025 BL 281533, at *3-4. By the time the case got to the Ninth Circuit, all parties besides three PWCG sales agents had settled or been dismissed. Id. at *4. The remaining defendants appealed the District Court’s orders granting the SEC’s motion for summary judgment and imposing certain penalties on the defendants. Id.

The Ninth Circuit was tasked with determining, among other things, “whether fractional interests in life settlements are investment contracts, and thus securities, under the federal securities laws.” Id. at *4. Applying the so-called “Howey test” from SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the court answered this question in the affirmative. Barry, 2025 BL 281533, at *4. In Howey, “the Supreme Court interpreted ‘investment contract’ to mean ‘a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.’” Id. The “‘efforts of others’ element turns on the source of an enterprise’s profits.” Id. at *5. While the efforts of others need not be the only factor for profit, those efforts must be “undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” Id.

The Ninth Circuit agreed with the District Court, finding that PWCG’s selection of specific life insurance polices on certain terms, its construction and operation of a premium reserve system, and the fractionalized nature of the interests satisfied the “efforts of others” component of the Howey test. Id. at *6. Specifically, PWCG reviewed information such as the insured’s ages, medical records, and family histories and bought only the policies of those likely to die within 4-7 years of purchase. Id. This curation, based on PWCG’s purported “efforts and expertise,” was valuable to potential investors. Id. To fund the payment of the policies’ premiums, PWCG created a three-tiered premium reserve system that was dependent on accurately estimating the lifespans of the insured and the amount needed to pay the premiums. Id. at *11. After all three tiers are exhausted, PWCG can then make “premium calls,” forcing investors to kick in additional money to pay the premiums. Id. The Ninth Circuit found that PWCG’s efforts in structuring the premium reserve system was “undeniably significant” to investors’ ability to profit, because profitability hinged on PWCG’s skill in doing so. Id. at *12. This was amply demonstrated when the system failed and investors had to pay massive premium calls. Id. Additionally, the fact that investors’ interests were fractionalized, meaning that each policy had multiple investors, meant that the investors were “forced to rely exclusively on PWCG.” Id. at *14. For example, investors seeking to invest in specific policies needed to go through PWCG, and they relied on PWCG to make premium payments and bring together sufficient creditworthy investors to maintain policies. Id. at *13-14.

In addition, the Ninth Circuit found that the securities were not exempt from registration, and affirmed the penalties imposed on defendants (disgorgement, civil penalties, and an injunction). Id. at 14-21.