SEC vs. Horowitz and Cohen

http://www.sec.gov/litigation/admin/2014/33-9620.pdf

Stranger-Originated Life Annuities - SEC Actions Against Michael Horowitz and Others -by Joseph M. Belth

July 31, 2014, the Securities and Exchange Commission (SEC) issued an order directed at Michael A. Horowitz, a Los Angeles resident who the SEC says was the "architect" of "a fraudulent scheme to profit from the imminent deaths of terminally ill hospice and nursing home patients" through more than $80 million of variable annuities. I refer to such annuities as stranger-owned life annuities (STOLA).

The Order
The order says Horowitz submitted a settlement offer the SEC accepted. Horowitz agreed to admit wrongdoing; pay the SEC $850,000 consisting of disgorgement, prejudgment interest, and civil penalties; cease and desist from violating federal securities laws; and be barred from the securities industry. (Administrative Proceeding File No. 3-15790.)

The order consists of 23 pages, including a four-page annex containing Horowitz's admissions. This summary paragraph appears near the beginning of the order:
The scheme was orchestrated by Respondent Horowitz, then a registered representative of a large broker-dealer firm. Horowitz, together with others, made material misrepresentations and used deceptive devices to obtain the personal health and identifying information of terminally ill hospice and nursing home patients in order to designate them as annuitants on variable annuity contracts that Horowitz marketed to wealthy investors. Horowitz marketed these variable annuities—which are designed by their issuers to be long-term investment vehicles—as opportunities for short-term gains with a hedge against market losses. Horowitz recruited Respondent Cohen to facilitate the sale of additional "stranger-owned" annuities and they each obtained their firms' approval of variable annuity sales by making material misrepresentations and omissions on trade tickets, customer account forms and/or point-of-sale forms, which the broker-dealer principals used to conduct investment suitability and related reviews. As a result of the Respondents' fraudulent acts and practices, certain insurance companies unwittingly issued variable annuities that they would not otherwise have sold. The annuities sold during the scheme—which included five annuities sold to Horowitz's close relatives for profits in excess of $900,000—generated lucrative upfront sales commissions for the Respondents, with Horowitz receiving more than $300,000 and Cohen receiving more than $700,000 in commissions.
The Other Respondents
Moshe Marc Cohen (Brooklyn, NY) is referred to in the above mentioned order. He has not yet agreed to terms.

Seven others were the subjects of three SEC orders issued on March 13, 2014. They are Harold Ten (Los Angeles), Menachem "Mark" Berger (Chicago), Debra Flowers (Chicago), Howard A. Feder (Woodmere, NY), BDL Manager LLC (Woodmere, NY), Marc Steven Firestone (Los Angeles), and Richard Mark Horowitz (Los Angeles). (Administrative Proceeding File Nos. 3-15787, 3-15788, and 3-15789.)

Flowers, an "annuitant finder" recruited by Berger, agreed to cooperate in the investigation. She submitted a sworn statement of her financial inability to pay anything, and she was not charged.

The other six respondents agreed to pay various amounts to the U.S. Treasury as disgorgement, prejudgment interest, and civil penalties. The total amounts were: Ten ($292,000), Berger ($231,000), Feder ($130,000), BDL Manager ($3.3 million), Firestone ($186,000), and Richard Horowitz ($370,000). They agreed to cease and desist from violations of federal securities laws. Ten, Berger, Feder, and BDL Manager also agreed to cooperate in the investigation and be barred from the securities industry.

My First Article about STOLA
The June 2009 issue of The Insurance Forum carried a short article entitled "Money Laundering through Annuities." The article lacked detail because I had heard about the subject only through an unsolicited telephone call. I did not mention STOLA, and hoped to learn more later. What I learned later was more than I wanted to know.

My Second Article about STOLA
The lead article in the April 2010 issue of The Insurance Forum was entitled "Stranger-Originated Life Annuities." The first section of the article dealt with an interpleader lawsuit filed by MetLife Investors USA. It involved a premium wired to the company by a trust. The forged application was for a large variable annuity on the life of a Chicago nursing home patient facing imminent death. Upon her death 12 days after the annuity was issued, the company was uncertain where to send the death benefit. The same trust had applied to other companies for large variable annuities on the same life: Genworth Life & Annuity, Hartford Life & Annuity, ING USA Annuity & Life, New York Life Insurance & Annuity, and Sun Life of Canada US.

The second section of the article dealt with a series of civil lawsuits filed by Transamerica Life and Western Reserve Life of Ohio. The defendants were Joseph Caramadre, a Rhode Island attorney, and Raymour Radhakrishnan, an employee of Caramadre. They had arranged for large variable annuities on the lives of terminally ill individuals for the benefit of Caramadre and his clients.

As my April 2010 article was going to press, The Wall Street Journal carried an article on February 16, 2010 by reporters Mark Maremont and Leslie Scism. The article was entitled "Investors Recruit Terminally Ill To Outwit Insurers on Annuities."

My Third Article about STOLA
The March 2012 issue of The Insurance Forum carried a major article entitled "Recent Civil and Criminal Cases Relating to Stranger-Originated Life Annuities." The first section of the article dealt with the ongoing Rhode Island civil cases.

The second section of the article dealt with the fact that the U.S. Attorney in Rhode Island had filed criminal charges against Caramadre and Radhakrishnan. The charges related not only to the variable annuity scheme, but also to a "death-put bond" scheme. The latter involved corporate bonds owned jointly by two parties—an investor and a terminally ill person—with right of survivorship. The bonds were purchased at prices well below their face value. At the death of a co-owner, the surviving co-owner redeemed the bond at full face value.

The third section of the article provided an update and a major elaboration on the interpleader case. Here are some of the names of individuals mentioned in the public documents I reviewed: Menachem (Mark) Berger, Marc (Moshe) Cohen, Eli Finestone, Debra Flowers, Abraham Gottesman, Asher Gottesman, Akiva Greenfield, the late Dr. Mark Harvey, and Daniel A. Zeidman. I expressed this opinion about the interpleader case:
I think the outright lies, fraudulent misrepresentations, deceptive practices, concealment of material information, forgery of documents, bribery of relatives, perjured testimony, identity misappropriation, and other forms of wrongdoing that allegedly occurred in the case warrant investigation into the existence of a criminal conspiracy—sweeping across the country from New York to Illinois to California—to misappropriate the identities of terminally ill individuals....
My Later Articles about Caramadre
I did not write further about the interpleader case. However, I wrote follow-up articles about the Caramadre criminal case in the February 2013, April 2013, and October 2013 issues of The Insurance Forum. Also, in No. 17 posted January 2, 2014, I wrote about the sentencing of Caramadre to a six-year prison term and the sentencing of Radhakrishnan to a one-year prison term.

General Observations
As stated in my third article about STOLA, I think the nature and scope of the case involving Michael Horowitz and others amounted to a criminal conspiracy. It is hard to believe that using hospice patients and others facing imminent death does not warrant criminal prosecution.

I am making available, as a complimentary PDF, the July 31 SEC order including the annex with the Michael Horowitz admissions. Send an e-mail to jmbelth@gmail.com and ask for the SEC/Horowitz order.soon die, Horowitz sold variable annuities contracts with death benefit 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 Enforcement 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. They 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. Horowitz and Cohen, meanwhile, generated more than $1 million in sales commissions.
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.
"This was a calculated fraud exploiting terminally ill patients," said Julie M. Riewe, co-chief of the SEC Enforcement Division's Asset Management Unit. "Michael Horowitz and others stole their most private information for personal monetary gain."
According to the SEC's orders instituting administrative proceedings, the scheme began in 2007 and continued into 2008. Horowitz agreed to compensate Harold Ten of Los Angeles and Menachem "Mark" Berger of Chicago for identifying terminally ill patients to be used as annuitants. Berger, in turn, recruited Debra Flowers of Chicago into the scheme and compensated her directly. Through the use of a purported charity and other forms of deception, Ten, Berger, and Flowers obtained confidential health data about patients for Horowitz.
According to the SEC's orders, after selling millions of dollars in variable annuities to individual investors, Horowitz still desired to generate greater capital into the scheme. Searching for a large source of financing, he began pitching his scheme to institutional investors. A pooled investment vehicle and its adviser 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. 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.
The order against Horowitz and Cohen alleges that they willfully violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and they willfully aided and abetted and caused violations of the Exchange Act's books-and-records provisions. Horowitz also acted as an unregistered broker.
Ten, Berger, Flowers, Feder, and BDL Manager consented to SEC orders finding that they willfully violated Section 10(b) of the Exchange Act and Rule 10b-5. They neither admitted nor denied the findings and agreed to cease and desist from future violations. The individuals agreed to securities industry or penny stock bars as well as the following monetary sanctions:
Ten agreed to pay disgorgement of $181,147.64, prejudgment interest of $20,858.80, and a penalty of $90,000.
Berger agreed to pay disgorgement of $119,000, prejudgment interest of $11,579.61, and a penalty of $100,000.
Feder agreed to pay a penalty of $130,000.
BDL Manager agreed to pay disgorgement of $1,550,565.55, prejudgment interest of $196,608.97, and a penalty of $1,550,565.55.
The SEC's order against Richard Horowitz and Marc Firestone finds that they negligently allowed point-of-sale forms for 12 annuities in the scheme to be submitted to their firm with inaccurately overstated answers to the form's question asking how soon the customer intended to access his or her investment. These inaccurate answers led to each annuity's issuance, and Horowitz and Firestone were each paid commissions.
Richard Horowitz and Firestone consented to the order finding that they caused their firm to violate Section 17(a) of the Exchange Act and Rule 17a-3. Without admitting or denying the findings, they agreed to cease and desist from committing or causing future violations of those provisions as well as the following monetary sanctions:
Horowitz agreed to pay disgorgement of $292,767.89, prejudgment interest of $36,512.20, and a penalty of $40,800.
Firestone agreed to pay disgorgement of $127,853.20, prejudgment interest of $17,140.89, and a penalty of $40,800.