Press Release Hedge Fund Manager Charged in Scheme Involving Terminally Ill FOR IMMEDIATE RELEASE 2016-162 Washington D.C., Aug. 15, 2016 — The Securities and Exchange Commission today announced fraud charges against a hedge fund manager and his firm accused of paying terminally ill individuals to use their names on purportedly joint brokerage accounts so he could purchase investments on behalf of his hedge fund and redeem them early by invoking a survivor’s option. An SEC examination of investment advisory firm Eden Arc Capital Management uncovered the scheme alleged by the SEC Enforcement Division in an order instituted today. Donald Lathen of New York City allegedly used contacts at nursing homes and hospices to identify patients with less than six months to live, and he successfully recruited at least 60 of them by paying $10,000 apiece to use their names on accounts. When a patient died, Lathen allegedly redeemed investments in the accounts by falsely representing to issuers that he and the terminally ill individuals were joint owners of the accounts. Lathen’s hedge fund was the true owner of the survivor’s option investments. Issuers paid out more than $100 million in early redemptions as a result of the alleged misrepresentations and omissions by Lathen and Eden Arc Capital. The SEC Enforcement Division further alleges that 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 adviser’s name as agent or trustee for the client. “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. “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 SEC Enforcement Division alleges that Lathen, Eden Arc Capital Management, and Eden Arc Capital Advisors violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Enforcement Division further alleges that Eden Arc Capital Management violated Section 206(4) of the Advisers Act and Rule 206(4)-2, and Lathen aided and abetted and caused those violations. The matter will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate. The SEC’s investigation was conducted by Janna Berke, Judith Weinstock, Frank Milewski, Adam Grace, and Michael Birnbaum. The case was supervised by Lara Shalov Mehraban and the litigation will be led by Alexander Janghorbani, Ms. Weinstock, and Ms. Berke. The SEC examiners who detected the wrongdoing during the examination of Eden Arc Capital Management are Kathleen Raimondi, Lawrence Chinsky, and George DeAngelis.
Scamming from high net worth investors is deceptive enough, but scamming those who have six months or less to live by offering them $10,000 and designing a scheme to cheat them out of their brokerage accounts is simply beyond the pale. https://www.sec.gov/litigation/admin/2016/33-10120.pdf Here is red flag #1: At paragraph 13: "Meanwhile, because the strategy required an additional natural person to be on the joint accounts with Participants, Lathen himself would "serve as Nominee for the the Partnership on the Joint Accounts for no consideration." Was he a saint? Was he running a charity? Obviously, he wasn't going to serve as "nominee" for "no consideration." It's interesting, however, that the SEC didn't file an actual lawsuit seeking damages, but rather is calling for a hearing before an administrative law judge.
He didn't scam the terminally ill people. He scammed the issuers of notes that had a death clause. He would pay the terminally ill to say they owned the notes - even though they didn't. The terminally ill people got 10,000 for their families to do this. The companies who issued the notes were scammed because they had to pay their notes early due to a death clause. He was in effect abusing pre-payment triggers. None of the terminally-ill patients (or their families) were hurt by this.
Ok, I get your point. They weren't "hurt" in essence they didn't fund the brokerage account(s). However, paragraph 37 states the following: "In order to exercise the survivor option, the SO Investments required redemption by a surviving owner. Therefore, when a Participant died, Lathen redeemed the instruments at full face value by sending letters to the issuers, which were located in various states, stating that the “joint owner” or “joint and beneficial owner” on the account that held the SO Investment had died. Lathen also represented that as the “surviving joint owner on the account,” he was immediately entitled to redemption." Furthermore, according to paragraph 56: "Since the Fund began, Lathen has similarly altered the agreements that he signed with the Participants in an effort to obscure Participants' lack of ownership rights over the accounts he opened during their names." Why would he have to obscure a lack of ownership rights if the participants were fully aware they were only receiving a one time $10,000 fee? He obscured it because he didn't want any SO payment triggers going to the families, he wanted it for himself, hence the supposed scam. You're right, unlike a traditional scam where the advisor or hedge fund manager simply uses client funds where he has custody, this case doesn't involve the actual funding of brokerage accounts by the participant. .
Exactly. Otherwise the owners estate (Sick persons family) would have claim over those funds. It's fraud for sure. I was just clarifying that the sick people and their families weren't explicitly hurt other than being accomplices (presumably unknowingly) of his scheme.
Agreed. I think the SEC, however, will have a difficult time proving that the participants were unknowingly giving up their ownership rights upon death. You can't take a subpoena from a deceased person, obviously. This is why they did not file a complaint seeking damages, but rather called for a public judicial hearing. Lathen will probably deny any wrongdoing in his response, and depending on how the families' estates want to push it, he may fight them on the $9.5 million he made off the SO profits, or just settle.