The US Securities and Exchange Commission (SEC) today announced fraud charges against a hedge fund manager and his firm for 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.
The news comes less than a week after the SEC charged a former football player for running a $10 million fraud scheme where the perpetrators used funds raised from investors to pay for personal expenses and to repay earlier investors.
After an SEC examination of investment advisory firm Eden Arc Capital Management, it was found that New York-based Donald Lathen allegedly used contacts at nursing homes and hospices to identify patients with less than six months to live and successfully recruited around 60 of them by paying $10,000 each to use their names on accounts.
How to Prepare for CySEC’s New Tiered LeverageGo to article >>
Falsely Redeemed Investments
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.
As a result, issuers paid out more than $100 million in early redemptions following the alleged misrepresentations and omissions by Lathen and Eden Arc Capital.
Failure To Segregate Funds
The SEC has also alleged 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.
Andrew M. Calamari, Director of the SEC’s New York Regional Office, commented: “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. 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 case is now scheduled for a public hearing whereby an initial decision will be prepared stating what remedial actions will be taken.