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SEC Charges Hedge Fund Manager in Scheme Involving Terminally Ill

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The Securities and Exchange Commission is pressing fraud charges against a hedge fund manager and his firm, accusing them of paying individuals with terminal illnesses to use their names for purportedly joint brokerage accounts, the regulator said Monday. The accounts were then used to purchase investments on behalf of fund manager, who would redeem them early by invoking a survivor’s option.

An SEC examination of Eden Arc Capital Management uncovered the scheme in which New York-based Donald “Jay” Lathen allegedly used contacts at nursing homes and hospices to identify patients with less than six months to live.

The regulators found that Lathen recruited at least 60 of them, paying each $10,000 to use their names on accounts. When a patient died, the fund manager allegedly redeemed investments in the accounts “by falsely representing to issuers that he and the terminally ill individuals were joint owners of the accounts,” according to the SEC.

Lathen’s hedge fund was “the true owner” of the survivor’s option investments, regulators say. Issuers paid out more than $100 million in early redemptions due to the alleged misrepresentations and omissions by Lathen and Eden Arc Capital.

According to FINRA BrokerCheck, the fund manager has been in the securities business for 14 years and has no regulatory disclosures or events in his records.

“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, in a statement. “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 regulators also claim 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 advisor’s name as agent or trustee for the client.”

The matter is set to be resolved at a public hearing before an administrative law judge, who will make an initial decision and could take remedial actions.

“We have no doubt that Mr. Lathen’s investment strategy is entirely legitimate and violates no law, and we intend to vigorously defend him against the SEC’s meritless charges,” said Harlan Protass, the attorney representing the fund manager, in a statement.

“Indeed, it’s bizarre that the SEC would have – just days ago – dropped fraud charges against another individual who engaged in the same basic investment strategy as Mr. Lathen, yet assert today that Mr. Lathen’s investment strategy is fraudulent,” explained Protass, who is with Clayman & Rosenberg. “It’s also noteworthy that the SEC is trying to game its case by filing administrative charges against Mr. Lathen in its own in-house court, the constitutionality of which is questionable.”

The attorney adds that his client “looks forward to clearing his name.”

— Check out SEC Charges Cardiologist in Biotech Drug Trial With Insider Trading on ThinkAdvisor.


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