The Securities and Exchange Commission has filed charges against brokers Michael A. Horowitz and Moshe Marc Cohen, investment adviser BDL Manager LLC, and four others for their involvement in a variable annuities scam. The financial fraud purportedly aimed to make money from the deaths of terminally sick patients living under hospice care and in nursing homes.
Variable annuities are supposed to act as long-term investment vehicles to offer income upon retirement. One common feature is that a beneficiary of an annuity, usually a child or spouse, is paid a death benefit if the annuitant passes away. There is also usually a bonus credit that the issuer of the annuity adds to the value of the contract according to a specific percentage of purchase payments.
The SEC Enforcement Division claims that Horowitz set up a scam to exploit the benefits offered in annuities. Working with the help of others, he used the information of terminally ill patients in Southern California and Chicago, Illinois and sold variable annuity contracts, along with the bonus credit and benefit, to rich investors.
Horowitz is accused of designating the patients as individuals whose deaths would result in a benefit payout. He then promoted these annuities as investments that would bring short-term gains. Investors were to avail of the payouts upon the deaths of the annuitants.
The enforcement division says that Horowitz and Cohen fooled their brokerage firms so they could get the approvals required to sell the annuities. They also falsified the firms’ forms for performing investment suitability assessments. Because of this, insurers issued variable annuities they wouldn’t have put up for sale while the two brokers made over $1 million in commissions from sales.
The variable annuities scam ran from 2007 into 2008. The SEC orders note that even after selling millions of dollars in variable annuities, Horowitz purportedly wanted to make more capital still and began pursuing institutional investors.
Investment adviser BDL Manager LLC and its pooled investment vehicle were set up in 2007 so institutional investors could get involved. Howard Feder, a commodities trader, became the principal of both. He is accused of fraudulently obtaining the approval of breaker dealers for over $56 million in annuities sold via Horowitz’s financial scam. BDL Group ended up making over $1.5 million from investing in annuities involving designated terminally ill patients.
BDL Manager, Feder, Harold Ten and Menachem Berger, who identified the terminally ill patients to use for the scam, and Debra Flowers, who was another recruited, consented to the Commission finding that they violated the Exchange Act’s Section 10(b) and Rule 10b5. Without denying or admitting to the findings, they agreed to cease and desist from committing violations in the future and will pay monetary sanctions. They’ve also accepted penny stock or securities industry bars. Also two other brokers have been charge over violations involving books-and-records. About $4.5 million of money paid will go toward settlements. Meantime, litigation against Cohen and Horowitz, however, continues.
Also, Marc Firestone and Richard Horowitz face SEC charges that they allowed the submissions of point-of-sale forms for a dozen annuities to their firms. These forms had inaccurate answers that resulted in the issuance of each annuity. Both men were paid commissions. The two men have consented to the finding that they violated the Exchange Act’s Section 17(a0 and Rule 17a-3. They too will pay fines although they did not deny or admit to the findings.
SEC Announces Charges Against Brokers, Adviser, and Others Involved in Variable Annuities Scheme to Profit From Terminally Illhttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541121951#.UzCrl9zfZl8, SEC, March 13, 2014
Variable Annuities Investor Bulletin, SEC (PDF)
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Insurance Companies Experiencing Sellers’ Regret Over Variable Annuities, Stockbroker Fraud Blog, July 15, 2013
SEC Focuses More Attention On Accounting Fraud, Variable Annuities, & Market-Maker Risk, Stockbroker Fraud Blog, June 26, 2013
Annuity Assets are Hot Commodities Among Investment Managers Private-Equity Groups, and Hedge Fund-Controlled Entities, Institutional Investor Securities Blog, October 20, 2012