Variable annuity scam architect settles with SEC, admits to wrongdoing

Ex-broker admitted to helming an $80 million scheme that profited from the deaths of the terminally ill

Jul 31, 2014 @ 2:54 pm

By Darla Mercado

+ Zoom

The Securities and Exchange Commission Thursday struck a settlement with an ex-broker who admitted helming an $80 million variable annuity scheme that profited from the deaths of the terminally ill.

In March, the SEC charged the ex-broker, Michael A. Horowitz of Los Angeles, and a slate of other individuals in a scheme that identified sickly individuals in nursing homes and hospice care in California and Chicago.

The SEC charged that Mr. Horowitz devised an investment strategy to take advantage of the fact that variable annuity issuers don't require medical underwriting for contracts with less than $2 million and don't require the annuity purchaser to prove an insurable interest in the annuitant.

In Mr. Horowitz's strategy, which ran from July 2007 to February 2008, a sickly patient would be chosen as the contract annuitant, while a wealthy client would fund the variable annuity, according to the SEC.

The VA products were particularly lucrative, as not only could the contract owner — the investor — allocate his or her money to the investment options in the annuity, but the insurer also provided a bonus credit of up to 5%, the SEC noted. Upon the death of the annuitant — the patient — the contract's death benefits would kick in, resulting in a windfall for the investor.

Between July 2007 and October 2007, Mr. Horowitz sold at least 14 of these annuities, selecting a terminally ill person as the contract annuitant for each of these transactions. In his admission of wrongdoing, he noted that he obtained patient identification information and health data through annuitant finders.

Mr. Horowitz earned a total of $317,724 in sales commissions stemming from the stranger-owned variable annuities he had sold, according to the admission. He also admitted to using false information when filing trade tickets with his broker-dealer. The broker-dealer would not have cleared the sales if its principals had been aware of what was really going on, according Mr. Horowitz's admission.

The SEC has also filed a cease-and-desist order against Mr. Horowitz and has ordered him to pay disgorgement of $347,724, plus prejudgment interest of $103,025 and a $400,000 penalty. He is barred from associating with a broker-dealer or investment adviser or from participating in any penny stock offering.

“Mr. Horowitz has been out of the business many months now, and he doesn't plan to return,” said the former broker's attorney, Robert Rose of Sheppard Mullin Richter & Hampton. “He isn't going to fight this.”


Do you think justice was done in this case?

View comments

Recommended for you

Featured video


Proposal to delay the DOL fiduciary rule is a turning point

Senior reporter Mark Schoeff Jr. and managing editor Christina Nelson discuss the Labor Department's latest move and what it means for the future of the regulation and the firms preparing for it.

Latest news & opinion

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

Plaintiffs win in Tibble vs. Edison 401(k) fee case

After a decade of activity around the lawsuit, including a hearing before the U.S. Supreme Court, judge rules a prudent fiduciary would have invested in institutional shares.

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print