Wall Street’s Death Puts: Here’s What the SEC Didn’t Tell You
Pam Martens and Russ Martens report in Wall Street on Parade:
On Monday, the Securities and Exchange Commissionreleased the details of an enforcement action it plans to bring before one of its own Administrative Law Judges against Donald (Jay) Lathen, Eden Arc Capital Management, LLC and a related hedge fund, Eden Arc Capital Advisors, LLC.
Lathen is charged with using terminally ill patients in nursing homes, who were expected to die within six months, to reap profits from issuers of bonds or Certificates of Deposits (CDs) that had a death put feature (also known as a Survivor Option or SO). The bonds or CDs can be purchased in joint name and redeemed at the full face amount if one of the owners of the joint account dies. Lathen was racking up profits by buying the bonds or CDs at a discount from the full face amount.
Naturally, the issuers of the bonds and CDs expected buyers to constitute a random pool of investors, not a ginned up pool created by a hedge fund of people slated to die within six months. (This has a familiar ring to Goldman Sachs and hedge fund titan, John Paulson, creating Abacus with bonds expected to experience negative credit events so Paulson could make $1 billion on his short bets while unknowing investors lost the same amount. Paulson skated without being charged by the SEC.)
To induce the terminally ill patients (who, let’s face it, are not always thinking clearly and may potentially be on judgment-impairing pain killers) to loan out their name, social security number, date of birth, etc. to set up joint accounts with right of survivorship, Lathen paid the patients $10,000. Lathen listed himself as the other joint owner on the accounts, even though the money actually belonged to investors in his hedge fund. (That was one of the issues the SEC nailed him on; violating the custody rule for hedge fund money.) According to the SEC, no hedge fund money was pilfered.
This story has been covered widely over the past two days in the business press. What has not been covered (because the SEC did not utter a peep about it in their statement or their enforcement action) is the role of, and the names of, the brokerage firms that allowed this flagrantly improper conduct to occur under the noses of their compliance departments and licensed branch managers who have to approve new account openings. This scheme has been going on since 2011 according to the SEC, with Lathen setting up 60 of these accounts and buying 2,350 investments, sometimes on margin, to the tune of $100 million.
One paragraph in the SEC statement should grab the attention of the U.S. Attorney’s Office for the Southern District of New York and the New York State Attorney General. It reads: . . .
Also worth reading at the same site: “Here’s Why Americans Are Mad as Hell at Wall Street and Washington.”