The mid-term congressional election is less than two months away and some observers wonder whether the event will be all about nothing.
The Securities and Exchange Commission today 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.