More On Legal & Compliancefrom The Advisor's Professional Library
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The Securities and Exchange Commission on Thursday announced enforcement actions against a pair of brokers, an investment advisory firm, and several others involved in a variable annuities scheme to profit from the imminent deaths of terminally ill patients in nursing homes and hospice care.
The SEC Enforcement Division alleges that Michael A. Horowitz, a broker who lives in Los Angeles, developed an illicit strategy to exploit VAs’ death benefits by recruiting others to help him obtain personal health and identifying information of terminally ill patients in Southern California and Chicago.
Anticipating they would soon die, Horowitz sold variable annuities contracts with death benefits and bonus credit features to wealthy investors, and he designated the patients as annuitants whose death would trigger a benefit payout. “Horowitz marketed these annuities as opportunities for investors to reap short-term investment gains. When the annuitants died, the investors collected death benefit payouts,” the SEC says.
“This was a calculated fraud exploiting terminally ill patients,” said Julie Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. “Michael Horowitz and others stole their most private information for personal monetary gain.”
The Division alleges 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.
Both falsified various broker-dealer forms used by firms to conduct investment suitability reviews. “As a result of the fraudulent practices used in the scheme, some insurance companies unwittingly issued variable annuities that they would not otherwise have sold,” the SEC states. Horowitz and Cohen, meanwhile, generated more than $1 million in sales commissions.
The SEC states that, after selling millions of dollars in variable annuities to individual investors, Horowitz still wanted to generate greater capital into the scheme and began pitching it to institutional investors.
According to the SEC, a pooled investment vehicle and its advisor BDL Manager LLC were created in late 2007 in order to facilitate institutional investment in variable annuities through the use of nominees. Commodities trader Howard Feder, who lives in Woodmere, N.Y., became each firm’s sole principal. Feder and BDL Manager fraudulently secured broker-dealer approvals of more than $56 million in annuities sold through Horowitz’s scheme.
“Feder furnished the brokers with blank forms signed by the nominees enabling the brokers to complete the forms with false statements indicating that the nominees did not intend to access their investments for many years,” the SEC says. “Feder understood that the purpose of Horowitz’s scheme was to designate terminally ill patients as annuitants in the expectation that their deaths would result in short-term lucrative payouts.”
BDL Group received more than $1.5 million in proceeds from its investment in the annuities.
Agreeing to settle the SEC’s charges are four non-brokers and a New York-based investment advisory firm recruited into the scheme. Also agreeing to settlements are two other brokers who are charged with causing books-and-records violations related to annuities sold through the scheme. A combined total of more than $4.5 million will be paid in the settlements.
The SEC’s litigation continues against Horowitz and Cohen.
Check out SEC: Banker Made Insider Trades in Accounts of Ex-Wife, Father to Pay Child Support on ThinkAdvisor.