SEC, NY broker face off over scheme to profit from terminally ill
NEW YORK (Reuters) - A New York broker went on trial on Monday over a U.S. securities regulator's claims he participated in a scheme designed by a Morgan Stanley employee to profit from the death of terminally ill patients through variable annuity sales.
The U.S. Securities and Exchange Commission called its first witnesses in an administrative proceeding in New York against Moshe Marc Cohen, a former Woodbury Financial Services broker who the agency said deceived the firm to obtain approval to sell the annuities.
The annuities also include a death benefit, in which insurers pay the policyholder's beneficiary under certain conditions.
The SEC, which initiated the case in March, said that feature was at the heart of a scheme developed by Michael Horowitz, a Los Angeles broker then with Morgan Stanley who advised investors on buying the variable annuities.
The SEC said Horowitz recruited people to help him obtain personal health information of terminally ill hospice and nursing home patients in California and Chicago.
At least 16 patients were ultimately linked to the policies, despite the lack of ties to the investors buying the products, the SEC says.
Brian Jedwab, a portfolio manager at New York hedge fund Platinum Partners, which invested in the annuities, testified Monday the plan was attractive since the insurers would guarantee the principle, making it risk-free if the portfolio's value decreased before the patient died.
The deals were also short-term, he said, since the people were expected to die "within a few months," providing for potentially exponential profits.
"It was a key part of the strategy," he said.
Jedwab testified that he first spoke about the plan in 2007 with Horowitz, who at the time was looking for an institutional backer.
At its height, Jedwab said, Platinum had invested in more than $60 million of annuities, setting up a firm, BDL Group, to buy the stranger-owned policies.
The SEC contends while insurance companies did not ask about the health of the patients, both Morgan Stanley and Woodbury Financial had review processes that required them to ensure customers buying variable annuities had long-term investment horizons.
Yet both Horowitz and Cohen, who was recruited later to act as a sales representative for the annuities, falsified forms their firms used for the reviews, the SEC said. The agency said the scheme enabled the two to generate more than $1 million in commissions.
Horowitz reached a $850,749 settlement in July in which he admitted wrongdoing.
The SEC is seeking an order requiring Cohen, who is representing himself in the proceedings, to forfeit $766,958 plus interest along with civil penalties. The agency also wants an order barring Cohen from the securities industry.
The SEC is expected to rest its case before SEC Chief Administrative Law Judge Brenda Murray on Wednesday.
(Reporting by Nate Raymond in New York; Editing by Noeleen Walder and Tom Brown)