SEC ANNOUNCES FRAUD CHARGES AGAINST HEDGE FUND INVOLVED WITH TERMINALLY ILL PATIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

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Hedge Fund Manager Charged in Scheme Involving Terminally Ill

FOR IMMEDIATE RELEASE

2016-162

Washington D.C., Aug. 15, 2016 — The Securities and Exchange Commission today announced fraud charges against a hedge fund manager and his firm accused of paying terminally ill individuals to use their names on purportedly joint brokerage accounts so he could purchase investments on behalf of his hedge fund and redeem them early by invoking a survivor’s option.
An SEC examination of investment advisory firm Eden Arc Capital Management uncovered the scheme alleged by the SEC Enforcement Division in an order instituted today.  Donald Lathen of New York City allegedly used contacts at nursing homes and hospices to identify patients with less than six months to live, and he successfully recruited at least 60 of them by paying $10,000 apiece to use their names on accounts.  When a patient died, Lathen allegedly redeemed investments in the accounts by falsely representing to issuers that he and the terminally ill individuals were joint owners of the accounts.  Lathen’s hedge fund was the true owner of the survivor’s option investments.  Issuers paid out more than $100 million in early redemptions as a result of the alleged misrepresentations and omissions by Lathen and Eden Arc Capital.

The SEC Enforcement Division further alleges that Lathen violated the custody rule by failing to properly place the hedge fund’s cash and securities in an account under the fund’s name or in an account containing only clients’ funds and securities, under the investment adviser’s name as agent or trustee for the client.

“We allege that Lathen deceived issuers by falsely claiming that he and the deceased jointly owned the bonds when the hedge fund was the true owner of the investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Lathen allegedly put hedge fund client assets at risk by keeping them in accounts in his and the terminally ill individuals’ names rather than following the custody rule.”

The SEC Enforcement Division alleges that Lathen, Eden Arc Capital Management, and Eden Arc Capital Advisors violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The Enforcement Division further alleges that Eden Arc Capital Management violated Section 206(4) of the Advisers Act and Rule 206(4)-2, and Lathen aided and abetted and caused those violations.

The matter will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate.

The SEC’s investigation was conducted by Janna Berke, Judith Weinstock, Frank Milewski, Adam Grace, and Michael Birnbaum.  The case was supervised by Lara Shalov Mehraban and the litigation will be led by Alexander Janghorbani, Ms. Weinstock, and Ms. Berke.  The SEC examiners who detected the wrongdoing during the examination of Eden Arc Capital Management are Kathleen Raimondi, Lawrence Chinsky, and George DeAngelis.

TERMINALLY ILL PATIENT VARIABLE ANNUITIES ARCHETECH BARRED FROM SECURITIES INDUSTRY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced that the architect of a variable annuities scheme designed to profit from the imminent deaths of the terminally ill has agreed to settle charges brought against him earlier this year by paying more than $850,000, admitting wrongdoing, and being barred from the securities industry.

The SEC’s Enforcement Division previously charged Michael A. Horowitz and several others he recruited into his scheme to identify terminally ill patients in nursing homes and hospice care in southern California and Chicago.  Horowitz, a broker who lives in Los Angeles, sold variable annuities contracts with death benefit and bonus credit features to wealthy investors, and designated the terminally ill patients as annuitants whose death would trigger a benefit payout.  Anticipating the patients would soon die, Horowitz marketed these annuities as opportunities for investors to reap short-term investment gains.

The SEC’s Enforcement Division alleged that Horowitz enlisted another broker, Moshe Marc Cohen of Brooklyn, N.Y., and they each deceived their own brokerage firms to obtain the approvals they needed to sell the annuities and generate hefty sales commissions.  They falsified various broker-dealer forms used by firms to conduct investment suitability reviews, causing some insurance companies to unwittingly issue variable annuities they may not have sold otherwise.

Among the admissions made by Horowitz in the settlement, he knew that if the “stranger annuitants” did not die within a matter of months, his customers would be locked into unsuitable, highly illiquid long-term investment vehicles that they would be able to exit only by paying substantial surrender charges.  He also submitted at least 14 trade tickets containing materially false statements concerning how long his clients intended to hold their annuities while knowing that his broker-dealer would not have approved his annuities sales if he had provided truthful timing information concerning his customers’ intention to use the annuities as short-term investment vehicles.

“Horowitz devised a scheme in which he used terminally ill patients’ private information for personal gain, and misled his brokerage firm into approving the variable annuity sales,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “The settlement ensures that he will never work in the securities industry again, and he must pay back his ill-gotten sales commissions from the scheme plus interest and an additional penalty.”

The SEC’s order finds that Horowitz willfully violated Section 17(a) of the Securities Act of 1933 as well as Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5.  The order finds that he willfully aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rules 17a-3(a)(6) and (17).  Horowitz is required to cease-and-desist from violating those provisions.  He is ordered to pay disgorgement of $347,724, prejudgment interest of $103,025.21, and a penalty of $400,000.  The order also bars Horowitz from association with a broker, dealer, or investment adviser among others, and bars him from participating in any penny stock offering.

The SEC’s investigation was conducted by Peter Haggerty, Marilyn Ampolsk, Jeremiah Williams, and Anthony Kelly of the Asset Management Unit along with Christopher Mathews and J. Lee Buck II.  The SEC’s litigation, which continues against Cohen, is being led by Mr. Haggerty and Dean M. Conway.