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.”