1. Between mid-November and mid-December 2007, Firestone signed as the registered representative in the sale of twelve deferred variable annuities. Firestone so acted with the knowledge of Horowitz, to whom he reported. With respect to each sale, new account forms of the affiliated broker-dealer, NFP Securities, Inc. (“NFP”) included a question regarding the customer’s investment “time horizon,” which was NFP’s term in this context for how soon the customer intended to access the investment. As submitted to NFP, this question was answered on the forms with long-term time periods. Instead, it should have been answered with substantially
shorter periods. The incorrect time horizons provided on these forms led to NFP supervisory principals’ approval of the sales, which, in turn, allowed the variable annuities to be issued. By
negligently allowing new account forms containing the aforementioned incorrect information to be submitted to NFP, Respondents caused NFP to violate Section 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 17a-3 thereunder, and each realized commissions deriving therefrom.
B. RESPONDENTS AND ASSOCIATED BROKER-DEALER
2. Marc Steven Firestone, age 57, is an insurance agent residing in Los Angeles, California. From January 2004 through May 2008, Firestone was a registered representative with NFP, but has not been associated with a registered entity since then. An employee of Management Brokers, Inc. (“MBI”)—a wholly-owned subsidiary and independent affiliate of NFP that sells insurance products—he formerly held Series 6 and 63 securities licenses.
3. Richard Mark Horowitz, age 72, is an insurance broker residing in Los Angeles, California and President of MBI where, at all relevant times, Firestone reported to him. He was a registered representative with NFP between January 2004 and May 2008, but has not been associated with a registered entity since then. He formerly held Series 6 and 63 securities licenses.
4. NFP Securities, Inc. (“NFP”) is a broker-dealer and an investment adviser, registered as both with the Commission, and headquartered in New York, New York.
5. Between mid-November and mid-December 2007, Respondent Firestone signed as the registered representative on the sale of twelve deferred variable annuities, each of which was sold through NFP. The customers purchasing these twelve variable annuities included natural persons.
6. In so signing, Respondent Firestone acted with the knowledge of Respondent Horowitz, the President of MBI, to whom Firestone reported, and who shared in commissions generated by Firestone. As Respondents knew contemporaneously, in all twelve of these sales,
customers intended for their variable annuity purchases to be short-term investments.
7. Each of the aforementioned variable annuity sales was subject to supervisory principal review by NFP, and could be submitted to the issuer for consummation only after NFP principal approval of each proposed sale. That review, in turn, required Respondents to furnish a completed new account form, for each annuity sale, containing information that included the customer’s investment “time horizon,” which was NFP’s term in this context for how soon the customer intended to access his or her investment. As Respondents should have known, NFP’s reviewing principals scrutinized each customer’s investment “time horizon” to ensure that it exceeded the multi-year “surrender charge” period for the deferred variable annuity being purchased.2
8. Without reviewing the new account forms (which neither Respondent had prepared), Firestone signed and submitted them to NFP. As submitted, all twelve answered the time horizon question with long-term periods, each exceeding the relevant surrender-charge period.
These answers were incorrect because the customers purchasing the annuities intended to hold their investments for much shorter periods.
9. All twelve annuities sales subsequently withstood NFP’s principal review. This, in turn, led to issuance of the annuities. Had accurate time horizons been provided on the new account forms, however, none of these annuities would have withstood NFP’s principal review.
10. Of the total commissions paid by the annuity issuers on the twelve annuities referenced above, Respondent Horowitz received $292,767.89, and Respondent Firestone received $127,853.20.
11. Section 17(a) of the Exchange Act [15 U.S.C. § 78q(a)] and the rules thereunder require a registered broker or dealer to make and keep current specific books and records relating to its business. Exchange Act Rule 17a-3(a)(17) [17 C.F.R. §§ 240.17a-3(a)(17)] requires, in pertinent part, that every registered broker or dealer make and keep an account record for each account with a natural person as a customer or owner, that includes, among other things, the account’s investment objectives. Implicit in these provisions is the requirement that information contained in a required record or report be accurate, In re Merrill Lynch, Pierce, Fenner & Smith,
Inc., Exchange Act Rel. No. 33367, 55 SEC Docket 1970 (Jan. 11, 1994), regardless of whether the information entered itself is mandated. See Sinclair v. SEC, 444 F.2d 399, 401 (2nd Cir. 1971);
In re James F. Novak, Exchange Act Release No. 19660 (Apr. 8, 1983).
12. Firestone and Horowitz should have known that the time horizon entries in the new account forms submitted to NFP for the twelve sales described above were incorrect. The NFP new account forms that Firestone signed, and which were submitted to NFP, constituted required books and records under Exchange Act Rule 17a-3(a)(17), and were relied on by NFP’s supervisory principals in approving these annuity sales.
13. As a result of the conduct describe above, the Commission finds that Respondents caused NFP to violate Section 17(a) of the Exchange Act and Rule 17a-3 thereunder.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondents’ Offers.
Accordingly, it is hereby ORDERED that:
A. Pursuant to Section 21C of the Exchange Act, Respondents Firestone and Horowitz, and each of them, cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder.
B. Respondent Firestone shall, within ten (10) days of the entry of this Order, pay (i) disgorgement of $127,853.20 plus prejudgment interest of $17,140.89; and (ii) a civil money penalty in the amount of $40,800, to the United States Treasury. If timely payment of disgorgement is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. If payment of a civil penalty is not timely made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment shall be made in conformity with the payment procedures detailed in paragraph V.D. below.
C. Respondent Horowitz shall, within ten (10) days of the entry of this Order, pay: (i) disgorgement of $292,767.89 plus prejudgment interest of $36,512.20; and (ii) a civil money penalty in the amount of $40,800, to the United States Treasury. If timely payment of disgorgement is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. If payment of a civil penalty is not timely made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment shall be made in conformity with the payment procedures detailed in paragraph V.D. below.
1. These proceedings arise from a fraudulent scheme to profit from the imminent deaths of terminally ill hospice and nursing home patients through the purchase and sale of more than $80 million in deferred variable annuities (“variable annuities”) between July 2007 and at least February 2008.
2. The scheme was orchestrated by Respondent Horowitz, then a registered representative of a large broker-dealer firm (“Broker-Dealer 1”). Horowitz, together with others, made material misrepresentations and used deceptive devices to obtain the personal health and identifying information (“ID and Health Data”) of terminally ill hospice and nursing home patients in order to designate them as annuitants on variable annuity contracts that Horowitz marketed to wealthy investors. Horowitz marketed these variable annuities – which are designed by their issuers to be long-term investment vehicles – as opportunities for short-term gains with a hedge against market losses. Horowitz recruited
Respondent Cohen to facilitate the sale of additional “stranger-owned” annuities and they each obtained their firms’ approval of variable annuity sales by making material misrepresentations and omissions on trade tickets, customer account forms and/or point-of sale forms, which the broker-dealer principals used to conduct investment suitability and related reviews. As a result of the Respondents’ fraudulent acts and practices, certain insurance companies unwittingly issued variable annuities that they would not otherwise have sold. The annuities sold during the scheme – which included five annuities sold to Horowitz’s close relatives for profits in excess of $900,000 – generated lucrative upfront
sales commissions for the Respondents, with Horowitz receiving more than $300,000 and Cohen receiving more than $700,000 in commissions.
3. By virtue of the foregoing conduct and as alleged further herein, Respondents, directly or indirectly, singly or in concert, have engaged in acts, practices, schemes and courses of business that violated Section 10(b) of the Exchange Act and Rule
10b-5 thereunder. Respondents Horowitz and Cohen also violated Sections 17(a)(1) and (2) of the Securities Act, and aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. In addition, Respondent Horowitz violated Section 15(a) of the Exchange Act.
4. Michael A. Horowitz, age 39, the scheme architect, resides in Los Angeles, California. Horowitz is currently a registered representative of an SEC-registered brokerdealer.
Horowitz also manages Monarch Capital, Inc., an investment adviser formerly registered with the SEC. Between June 2000 and August 2008, Horowitz was a registered representative at Broker-Dealer 1. He resigned during Broker-Dealer 1’s investigation into his sale of the variable annuities at issue. Horowitz holds Series 7 and 66 licenses.
5. Moshe Marc Cohen, age 38, was a registered representative recruited to the scheme by Horowitz, and resides in Brooklyn, New York. He is not currently associated with any SEC-registered entity. From 2003 to February 2008, Cohen was a registered representative at Broker-Dealer 3. Broker-Dealer 3 terminated Cohen’s employment on February 25, 2008 after he refused to cooperate with Broker-Dealer 3’s internal review of Cohen’s variable annuity sales at issue. Cohen held Series 6, 7, 24 and
OTHER RELEVANT ENTITIES
6. Broker-Dealer 1 is a broker-dealer and investment adviser registered with the Commission and headquartered in New York, New York.
7. Broker-Dealer 2 is a broker-dealer and investment adviser registered with the Commission and headquartered in New York, New York.
8. Broker-Dealer 3 is a broker-dealer and investment adviser registered with the Commission and headquartered in Oakdale, Minnesota.
9. Charity 2 was established by “Annuitant Finder 1” in or about June 2007, as a registered d/b/a of an existing non-profit 501(c)(3) organization. Also in or about June 2007, Annuitant Finder 1 set up a web page for Charity 2, which described Charity 2 as an
organization “dedicated to helping patients with a life limiting illness to live their remainder days in comfort and dignity.” In fact, the purpose of Charity 2 was to obtain ID and Health Data of terminally ill patients for use in the purchase and sale of variable annuities.
THE RESPONDENTS’ SCHEME
10. Variable annuities are designed to serve as long-term investment vehicles, typically to provide income at retirement. Although variable annuities offer investment features similar in many respects to mutual funds, a typical variable annuity offers certain features not commonly found in mutual funds, including death benefits1 and/or bonus credits.2 Horowitz solicited wealthy individual and institutional investors to make large
investments in variable annuities that offered these benefits.
Horowitz’s “Stranger-Owned” Variable Annuities Investment Strategy
11. In or about May 2007, Respondent Horowitz devised the scheme that is the subject of this proceeding after learning about the features of certain variable annuity contracts offered by an annuity issuer (“VA Issuer”).
12. In particular, Horowitz learned that, unlike traditional life insurance, these variable annuity contracts—as long as they were purchased under a certain dollar threshold—required neither a physical examination of, nor proof of an “insurable interest”
in, the “annuitant,” i.e., the person whose death would trigger the products’ payout provisions. Horowitz further determined that with respect to certain of the VA Issuer’s deferred variable annuity products: (i) the VA Issuer provided an immediate “bonus credit”
of up to 5% of the amount invested, which was credited to the contract owner’s investment account; (ii) the contract owner could invest his or her premiums in mutual funds available under the contract; (iii) the annuities contained death benefit options; (iv) although substantial “surrender charges” were ordinarily assessed if the annuities were liquidated within the first 7-10 years, such charges were typically not incurred in the event of a death
benefit payout; and (v) even if the annuitant died before the “surrender charge” period had run, the VA Issuer would not “claw back” any of the sales commissions it paid to the selling representative.
13. Horowitz developed a strategy to exploit these benefits by using terminally ill hospice and nursing home patients as the contract annuitants and soliciting wealthy individual and institutional investors to make large investments in variable
annuities that offered these benefits.
14. In each of these contracts, a terminally ill hospice or nursing home patient was designated as the contract annuitant. At least 16 terminally ill hospice patients were designated as annuitants in more than 50 variable annuities sold by Horowitz, Cohen, or
other registered representatives recruited to the scheme. All of the hospice patients were residents of southern California or Chicago, Illinois.
15. The hospice patients designated as annuitants had no familial or business relationship with the investors who purchased the annuities. Instead, they were selected based on their terminal illnesses and the likelihood that they would die soon, and thereby
trigger death benefit payouts in variable annuity contracts in the very near term. As part of his pitch to investors, Horowitz told them that he would supply the annuitants, with investors needing to furnish only their funds.
16. These “stranger annuitants” likewise had no contractual right to any portion of the death benefits paid out under the terms of the variable annuities sold during the scheme. Instead, each of the contracts directed these benefits be paid to one of the investor’s family members or relatives, or to a family trust created by the investor.
17. Anticipating that the annuitants would soon die, triggering death benefit payouts in the annuity contracts, Horowitz advised his customers to invest their premiums aggressively because if the value of their portfolio increased, they would receive the portfolio value as the death benefit payout. If the value of their portfolio decreased, the death benefit nonetheless guaranteed them a payout equal to the value of their premiums paid minus any withdrawals. Horowitz also advised his customers to invest large sums of money in each annuity they purchased to maximize their “bonus credit.”
18. Horowitz employed at least two varieties of fraud in carrying out his sale of “stranger-owned” annuities. First, Horowitz and others fraudulently obtained and used the ID and Health Data of certain unwitting terminally ill hospice and nursing home patients who were designated as annuitants. Second, Horowitz and Cohen falsified broker-dealer trade tickets, customer account forms and/or point-of-sale forms (including suitability questionnaires) to obtain supervisory approval of the annuities that were sold
pursuant to the scheme. As a result of these fraudulent acts and practices, certain insurance companies, including VA Issuer, unwittingly issued variable annuities that they would not otherwise have sold.
Horowitz Obtains Confidential ID and Health Data through Deceptive
19. To implement his plan, Horowitz needed a ready supply of terminally ill persons, unrelated to the investors, to use as annuitants in variable annuity sales. Horowitz recruited certain individuals (“Annuitant Finders”) to identify the terminally ill persons to be used as annuitants. Working with Horowitz, these Annuitant Finders engaged in a scheme to obtain the patients’ confidential ID and Health Data, which they then fraudulently misused. Horowitz needed patients’ Health Data to confirm that the
individuals he designated as annuitants had a terminal medical diagnosis. He needed their ID Data (including social security number and date of birth) to designate them as annuitants
and to submit death benefit claims to the issuers whose annuities he sold.
The California Annuitants
20. In May 2007, Horowitz approached Annuitant Finder 1and described his stranger-owned annuities scheme to him. Because Annuitant Finder 1 worked at a nonprofit 501(c)(3) organization (“Charity”), Horowitz asked Annuitant Finder 1 to assist him
with identifying terminally ill patients and obtaining their confidential ID Data.
21. After a series of closed-door meetings between Horowitz and Annuitant Finder 1 at Charity’s offices in May 2007, Annuitant Finder 1 told his assistant that he was going to start a new charity, Charity 2. Charity 2 was purportedly going to focus on
providing charitable assistance exclusively to hospice care patients.
22. Charity 2 was used in the scheme to obtain patient ID and Health Data. On June 1, 2007, Annuitant Finder 1 filed a fictitious name certificate with the State of California, allowing one of his existing charities to do business under Charity 2’s name.
23. Annuitant Finder 1 created a website for Charity 2 and set up Charity 2 email accounts. The Charity 2 webpage stated that Charity 2 was: an organization dedicated to helping patients with a life limiting illness to live their remainder days in comfort and dignity….
Through the generosity of private and corporate philanthropists
[Charity 2] helps patients who have chosen hospice care and are at home or in a facility….
24. In reality, Charity 2 had no private or corporate donors, and its true purpose was to obtain patient ID and Health Data for Horowitz’s use in selling stranger-owned annuities. Charity 2’s website failed to disclose these facts.
25. In July 2007, Annuitant Finder 1 opened a bank account in the name of Charity 2, and funded it with several thousand dollars from his personal bank account.
These funds were to be used for the charitable donations Annuitant Finder 1 planned to offer hospice patients as part of the plan to obtain their ID and Health Data.
26. Beginning in June 2007, Annuitant Finder 1 held Charity 2 out as a charity devoted to providing assistance to hospice patients. Annuitant Finder 1 solicited hospice care providers in Los Angeles, San Francisco and New Orleans by touting Charity 2’s purported charitable services. In contemporaneous emails to those hospice care providers, Annuitant Finder 1 and his assistant described Charity 2 as a “non-profit 501(c)(3) organization.”
27. In June 2007, Annuitant Finder 1 met with the Director of Development of a southern California hospice care provider (“HCP”). During the June 2007 meeting, Annuitant Finder 1 told HCP’s Director of Development that Charity 2 was an organization of some large, very high profile donors, the type of donors whose names are often on the sides of buildings at Universities, that sort of donor, Universities, hospitals. And that in this instance, they wanted to give and remain anonymous in that gift so that they had established [Charity 2]….[Annuitant Finder 1] indicated that they would like to see the patient, they would like to meet the patient. He, specifically. [sic] And the purpose for that was that they could tell – he could tell their donors or his donors who those individuals were that they were actually meeting – so he would be able to tell a story to help receive other donations to continue those donations to come into the individual patient requests
that they were filling.
28. Annuitant Finder 1’s statements to HCP’s Director of Development were false because, among other reasons, Charity 2 had no donors other than Annuitant Finder 1.
29. Annuitant Finder 1 implied that there were conditions on the purported aid to be offered. First, only HCP hospice patients (i.e., those who had been diagnosed with terminal illnesses and were receiving only palliative care in their home), as opposed to
other HCP patients receiving in-home curative care or treatment, were eligible for Charity 2’s donations. Second, Annuitant Finder 1 capped the amount to be donated per patient at between $250-$500. Third, Charity 2 required that HCP provide it with the following
information concerning any candidate for a donation: (i) the patient’s name and address;
(ii) the patient’s date of birth; (iii) the patient’s social security number; (iv) the patient’s medical diagnosis; and (v) confirmation that the patient was receiving hospice care. This
was the information that Respondent Horowitz needed to designate the hospice patients as annuitants. Finally, Annuitant Finder 1 conditioned the donations on his right to visit the HCP patient in question. Annuitant Finder 1 told HCP that he wanted to be able to tell his donors each patient’s “story” to help raise additional donations for other patients. After visiting Charity 2’s website to confirm the legitimacy of the charity, the HCP administrator—grateful for what he understood to be Charity 2’s purely charitable
donations to HCP’s hospice patients—agreed to Annuitant Finder 1’s conditions.
30. Annuitant Finder 1 never told HCP that he planned to forward patient personal identifying information to Horowitz, or that Horowitz intended to sell annuity contracts to third parties who would profit when HCP patients died.
31. Between late July 2007 and at least December 2007, Annuitant Finder 1 met with multiple HCP hospice patients and with certain patients receiving care from other hospice providers. These meetings took place at the patients’ homes. Horowitz attended
many of these meetings.
32. Social workers from HCP also attended the meetings with HCP hospice patients. Annuitant Finder 1 told HCP social workers that he wanted to meet with the patients who were receiving charitable assistance from Charity 2 so he could tell their story to Charity 2’s “donors.” According to one HCP social worker When – at the meeting when we met with the patient in their home, before we met, they, [Annuitant Finder 1] and [Horowitz], met me and stated that the patients – the donors for this money did not want to give to hospitals. They didn’t want to give to big organizations, that they would just receive a nameplate. They wanted to see where their money was being spent; so therefore, [Annuitant Finder 1] and [Horowitz] showed up. They had a box of candy for the patient.
Horowitz was present when Annuitant Finder 1 made these statements to the HCP social worker and knew them to be false. Horowitz did not, however, clarify or correct them in any way.
33. The patients, their families and their HCP health care providers all believed that the purpose of the visits was charitable. However, Horowitz’s true purpose in visiting patients was to confirm that they were in fact dying, and, therefore, that they were suitable annuitants. Horowitz actively concealed his true purpose for attending from HCP and the hospice patients they visited, telling one HCP social worker that he represented persons
“who were going to be making donations.” This statement was materially false because Horowitz did not represent any donors and in fact there were never any donors to Charity 2, other than Annuitant Finder 1. Horowitz’s statement was also materially misleading because he omitted the true purpose for his visit.
34. Unbeknownst to HCP and its patients, after each patient meeting, Annuitant Finder 1 provided Horowitz with the ID and Health Data that he obtained from HCP under false pretenses. Horowitz arranged for Annuitant Finder 1 to send the patient ID and Health Data to Horowitz’s personal email account. Horowitz then used the patient ID and Health Data to sell variable annuities in which the hospice patients were designated as the contract annuitants.
35. Between July 2007 and at least December 2007, Annuitant Finder 1 provided Horowitz with the ID and Health Data of hospice patients in southern California. At least six of these patients were designated as annuitants in at least 18 variable annuities
sold by Horowitz and a second representative whom Horowitz recruited to the scheme, with some of the patients designated as annuitants in multiple policies. Horowitz paid Annuitant Finder 1 at least $130,000 for his services to the scheme.
36. As part of the ruse, Annuitant Finder 1 asked HCP to keep him informed of the health status of each patient whom he had visited, falsely telling HCP that Charity 2’s “donors” wanted to remain apprised of each patient’s story. In reality, Horowitz and Annuitant Finder 1 wanted this information so they would know when each patient died so that Horowitz could timely file annuity death benefit claims for his customers, who then stood to receive payouts on their variable annuity investments. As part of the scheme,
Annuitant Finder 1 obtained death certificates for each of the patients who had been designated as an annuitant and provided the death certificates to Horowitz for his use in filing death benefit claims.
37. HCP, its hospice patients, and their families were completely unaware that Horowitz had sold variable annuities on the lives of HCP hospice patients and that third parties stood to profit from their deaths.
38. HCP would not have released patient ID and Health Data to Annuitant Finder 1 or allowed Horowitz and Annuitant Finder 1 to meet with its patients if it had been aware of the true purpose of Charity 2 and of Horowitz’s scheme. Similarly, the patients and their caregivers would not have allowed Horowitz and Annuitant Finder 1 to meet with them had they known the true purpose of Charity 2 and of Horowitz’s scheme.
Horowitz Travels to Chicago to Recruit Additional Annuitant Finders
39. In Fall 2007, Horowitz decided to grow his variable annuity business by expanding the pool of terminally ill individuals available to be designated as annuitants. He travelled to Chicago, Illinois in October 2007, and met with Annuitant Finder 2, an
executive officer of a privately held company that owned and operated nursing homes in the Chicago area.
40. Horowitz agreed to pay Annuitant Finder 2 in exchange for his
identification of hospice patients and in exchange for supplying Horowitz with the ID & Health Data of terminally ill individuals in the Chicago area. Annuitant Finder 2 recruited an associate, Annuitant Finder 3, to assist him in identifying terminally ill
patients. As part of their arrangement, Annuitant Finders 2 and 3 agreed to keep Horowitz and his associates apprised of the health status of the patient-annuitants, and Annuitant Finder 2 provided Horowitz and his associates with death certificates when the
41. Between November 2007 and February 2008, Annuitant Finders 2 and 3 supplied Horowitz, or his associates, with the names and ID and Health Data of at least 10 terminally ill patients in Chicago. These patients were designated as annuitants in at least 7 variable annuities sold through Broker-Dealer 2, and in at least 28 variable
annuities sold by Respondent Cohen. Horowitz paid Annuitant Finder 2 at least $150,000 for his and Annuitant Finder 3’s services to the scheme.
Fraud in the Execution of Broker-Dealer Trade Tickets and Point-of-Sale Forms
Horowitz Falsifies his Broker-Dealer 1 Trade Tickets
42. Between July 2007 and October 2007, Horowitz sold at least 14 deferred bonus variable annuities to his customers through his registration with Broker-Dealer 1.
43. For each of these 14 annuities, Horowitz designated a terminally ill hospice patient as the contract annuitant and used the patient ID and Health Data that he and Annuitant Finder 1 had fraudulently obtained from hospice care providers, through Charity
2 or directly from patients or their family caregivers. By designating patients with terminal medical diagnoses as the contract annuitants, Horowitz sought to guarantee that his customers would receive death benefit payouts within months of the annuities sales. For his part, Horowitz stood to receive lucrative upfront commissions on each stranger-owned annuity he sold.
44. Horowitz marketed his stranger-owned annuities investment strategy to customers as an opportunity for obtaining short-term investment gains with a hedge against investment losses, and Horowitz’s customers intended to use the variable annuities as short-term investment vehicles. However, Horowitz also knew that, in the event the “stranger annuitants” did not die within a matter of months, his customers would be locked into unsuitable, highly illiquid long-term investment vehicles that they would be unable to
exit without paying substantial surrender charges.
45. To ensure that its registered representatives were selling suitable investments to their customers, and to ensure that the investment was being used for its intended purpose, Broker-Dealer 1 required its principals to review and approve each proposed sale of an annuity. As part of this process, Broker-Dealer 1 mandated that
Horowitz complete an electronic trade ticket, including a suitability questionnaire, for every variable annuity that he sold. A Broker-Dealer 1 principal reviewed each trade ticket. Variable annuity applications could be submitted to the issuing insurance company only after principal approval of the ticket.
46. Each trade ticket required Horowitz to state how long the customer intended to hold the variable annuity being purchased. As part of the review process, Broker-Dealer 1’s principals closely scrutinized the response to this question to ensure, among other
things, that the customer intended to hold the investment for a period of time exceeding the surrender charge period in the deferred variable annuity contract being purchased. The 14
annuities that Horowitz sold through Broker-Dealer 1 had a nine year surrender charge period.
47. Knowing that his stranger-owned annuities sales would be rejected by Broker-Dealer 1’s reviewing principals if he provided truthful timing information concerning his customers’ intention to use the annuities as short-term investment vehicles, Horowitz submitted trade tickets falsely stating that his customers intended to hold their annuities from anywhere between 20 and 40 years. Horowitz submitted at least 14 trade tickets containing these materially false statements.
48. The same trade tickets also required Horowitz to state the relationship between the owner of the annuity and the annuitant. With respect to each trade ticket that Horowitz submitted for principal review, he falsely stated that there was a “partner”
relationship between the owner and the annuitant.
49. In fact, there was no relationship, either familial or business, between the customers purchasing the annuities from Horowitz and the terminally ill hospice patients designated as annuitants. Indeed, the hospice patients had no idea that they had been designated as annuitants or that investors stood to profit from their deaths. Broker-Dealer 1’s principals would not have approved Horowitz’s annuities sales if they had known that
there was no relationship between the annuity purchaser and the annuitant.
50. By providing false information about his customers, Horowitz fraudulently obtained principal approval of his stranger-owned annuities sales, which were then submitted to the variable annuity issuer. As a result of Horowitz’s fraudulent acts and practices, the issuer then unwittingly issued stranger-owned variable annuities to Horowitz’s customers and paid out substantial upfront sales commissions to Horowitz.
Jane Doe 1: An Illustration of How Horowitz Carried Out the Scheme at Broker-Dealer 1
51. By way of example, Annuitant Finder 1 was approached by John Doe 1, who requested assistance for his wife, Jane Doe 1, who was dying of colon cancer.
52. John and Jane Doe 1 had a young son, and John Doe 1 had a full-time job.
Jane Doe 1’s condition had reached the point where she required 24-hour nursing, and John Doe 1 was requesting Annuitant Finder 1’s help with half of the nursing costs.
53. Annuitant Finder 1 told Horowitz about Jane Doe 1’s condition and Horowitz decided to designate Jane Doe 1 as the annuitant in a variable annuity contract that he sold.
54. To that end, in late July 2007, Annuitant Finder 1 and Horowitz met with John and Jane Doe 1 at their home in Los Angeles, under the pretense of providing charitable assistance. Horowitz noted the meeting in his day-timer.
55. During their brief meeting, Annuitant Finder 1 discussed the aid that Jane Doe 1 would need, but neither Annuitant Finder 1 nor Horowitz ever mentioned variable annuities, or proposed designating Jane Doe 1 as an annuitant in variable annuities to be sold to third parties.
56. Shortly after this meeting—and unbeknownst to Jane and John Doe 1—Annuitant Finder 1 emailed Jane Doe 1’s name and ID Data (including her social security number and date of birth) to Horowitz’s personal email account.
57. On July 31, 2007, Horowitz sold a $1.7 million variable annuity contract to a close family member in which Jane Doe 1 was designated as the annuitant.
58. In order to process this annuity sale, Horowitz completed an electronic trade ticket on which he identified Jane Doe 1 as the investor’s “partner.” This statement was false because there was no business, familial or other relationship between Jane Doe 1 and
59. In response to the investment access question on the trade ticket, Horowitz stated that the investor intended to hold the annuity for “25 years.” In fact, as Horowitz knew, the investor intended to hold the investment only until Jane Doe 1 died, and
Horowitz had selected Jane Doe 1 to be the annuitant because he understood her death to be imminent.
60. Based on these false representations, a Broker-Dealer 1 principal approved the trade ticket and Broker-Dealer 1 electronically submitted the investor’s variable annuity application to the variable annuity issuer, which thereafter unwittingly issued a strangerowned annuity contract.
61. The variable annuity issuer subsequently paid out a commission to Broker-Dealer 1, with Horowitz netting over $28,500 in commissions on the sale of the annuity.
62. On August 5, 2007, four days after the annuity contract became effective, Jane Doe 1 died. John Doe 1 notified Annuitant Finder 1 of Jane Doe 1’s death via email on August 14, 2007. John Doe 1 requested approximately $1,200, representing half the cost of the 24-hour nursing coverage for Jane Doe 1.
63. Annuitant Finder 1 never responded to John Doe 1’s August 14 email.
Having received no aid or assistance, and no response from Annuitant Finder 1, John Doe 1 wrote to Annuitant Finder 1 again on August 21 and told him to “use the money for someone else that is more in need.”
64. Unbeknownst to John Doe 1, Annuitant Finder 1 thereafter obtained a copy of Jane Doe 1’s death certificate and provided it to Horowitz. Horowitz used the death certificate to prepare a death benefit claim on the investor’s annuity, which was then submitted to the issuer.
65. On October 19, 2007, the investor received a death benefit payout on the “Jane Doe 1” annuity of $2,002,073.85. The investor realized a net profit on his initial $1.7 million investment of $302,073.85—representing a 17.7% rate of return over a period of
two and a half months.
Horowitz Falsifies Broker-Dealer 2 Point-of-Sale Forms
66. In mid-November 2007, Horowitz’s supervisors at Broker-Dealer 1
discovered that he was selling stranger-owned annuities and instructed him to immediately stop doing so.
67. At the time, Horowitz had over $24 million in variable annuities business pending at Broker-Dealer 1.
68. Unable to sell additional stranger-owned annuities through Broker-Dealer 1, Horowitz sought assistance from a senior associated person of Broker-Dealer 2 (“Senior Rep”) in completing the sale of stranger-owned annuities through an affiliate of Broker-Dealer 2.
69. Working with the office staff of the Broker-Dealer 2 affiliate, Respondent Horowitz completed the Broker-Dealer 2 new account forms and deferred variable annuity applications for the deferred variable annuities he had initially intended to sell to his
customers through Broker-Dealer 1.
70. In each of those annuities, Horowitz designated a hospice patient as the contract annuitant, utilizing patient ID and Health Data that the Annuitant Finders had obtained and supplied to him. Horowitz did this in an effort to structure the annuities as
short-term investment vehicles.
71. As was the case at Broker-Dealer 1, variable annuity sales at Broker-Dealer 2 were subject to principal review and approval to ensure that the proposed sale was suitable and that the investment was being used for its intended purpose. Broker-Dealer 2 representatives were required to complete a new account form that required the representative to state the customer’s investment time horizon (i.e., when the customer anticipated accessing their investment) and to disclose certain financial profile information.
72. Broker-Dealer 2 also required its brokers to complete a “Variable Annuity Acknowledgement” form, specifically identifying the surrender charge period associated with the annuity being purchased. As part of the review process, a Broker-Dealer 2
principal closely scrutinized each customer’s investment time horizon to ensure that it exceeded the surrender charge period in the deferred variable annuity contract being purchased.
73. Knowing that these stranger-owned annuity sales would be rejected by Broker-Dealer 2’s reviewing principals if he provided truthful investment time horizons, Horowitz prepared new account forms falsely stating that the customers intended to hold
their annuities from anywhere between 9 to 45 years.
74. The Senior Rep then recruited his subordinate business partner (“Signing Rep”) to sign the new account forms and variable annuity applications as the selling registered representative. The Signing Rep agreed to do so in exchange for a percentage of the commissions to be earned on these annuities sales. The Signing Rep did not complete any variable annuity application paperwork or Broker-Dealer 2 new account forms, and he did not consider the purchasers of the annuities to be his customers.
75. By providing false customer information on the Broker-Dealer 2 new account forms, and by using a nominee broker to sign off on the required Broker-Dealer 2 point-of-sale paperwork, Horowitz fraudulently obtained principal approval of strangerowned
annuities sold through Broker-Dealer 2.
76. Working in this manner, between late November 2007 and mid-December 2007, Horowitz was able to effect the sale of at least 12 additional stranger-owned variable annuities – 2 of which were sold to a close Horowitz family member – through Broker-Dealer 2. During the same time period, Horowitz was not an associated person of Broker-Dealer 2, nor was he separately registered with the Commission as a broker or dealer.
Jane Doe 2: An Illustration of how Horowitz Continued the Scheme through Broker-Dealer 2
77. On November 19, 2007—after Horowitz had been instructed by Broker-Dealer 1 to stop selling stranger-owned annuities—Annuitant Finder 1 met with Jane Doe 2, a terminally ill HCP hospice patient, under the pretense of providing charitable assistance through Charity 2. Horowitz travelled with Annuitant Finder 1 to Jane Doe 2’s home.
78. Jane Doe 2, dying of stomach cancer, had previously told her HCP social worker about her desire to take her children to Disneyland before she passed away. HCP notified Charity 2 about Jane Doe 2’s request for assistance, after first determining that she likely would not live long enough to have her request processed through another wellknown charitable foundation.
79. Charity 2 paid $405 towards the cost of the trip to Disneyland, which Jane Doe 2 was able to take with her children. As a condition of the donation, Annuitant Finder 1 required HCP to provide him with Jane Doe 2’s ID and Health Data prior to the visit and,
thereafter, met with Jane Doe 2 at her home. During the brief meeting, neither Annuitant Finder 1 nor Horowitz mentioned variable annuities or proposed designating Jane Doe 2 as an annuitant in variable annuities to be sold to third parties.
80. On the drive back from Jane Doe 2’s home, Horowitz asked Annuitant Finder 1 if he wanted to purchase an annuity on Jane Doe 2’s life. Annuitant Finder 1 agreed to do so.
81. On the same day, Horowitz arranged for Annuitant Finder 1 to purchase a deferred variable annuity through Broker-Dealer 2, in which Jane Doe 2 was designated as the contract annuitant. Annuitant Finder 1 provided Horowitz with Jane Doe 2’s ID
and Health Data (including date of birth, address and social security number) that Horowitz needed in order to designate her as the annuitant in Annuitant Finder 1’s annuity. Annuitant Finder 1 invested $1 million in the annuity.
82. To ensure that Annuitant Finder 1’s variable annuity application was approved by Broker-Dealer 2, Horowitz made several material false statements on Annuitant Finder 1’s Broker-Dealer 2 new account form. First, Horowitz falsely stated that Annuitant Finder 1 had a “27” year investment “time horizon” on his annuity. In fact, Annuitant Finder 1 intended to utilize the annuity as a short-term investment vehicle of no more than several months.
83. Second, Horowitz falsely stated that Annuitant Finder 1’s net worth was “$15,000,000” and that Annuitant Finder 1 had liquid assets of “$7,500,000.” In fact, Annuitant Finder 1’s total net worth was no more than $2 million; he had liquid assets of
no more than $750,000 to $1 million; and he had margined his brokerage account to obtain the funds to purchase the annuity.
84. Horowitz falsely inflated Annuitant Finder 1’s financials because he knew that Broker-Dealer 2’s principals were unlikely to approve a $1 million investment in an illiquid, long-term investment vehicle by a customer with liquid assets equal to or less than that amount.
85. Finally, Horowitz had the Signing Rep sign off as the selling representative on Annuitant Finder 1’s new account form and variable annuity application while knowing that Annuitant Finder 1 had never spoken with the Signing Rep concerning the annuity and
that the Signing Rep did not consider Annuitant Finder 1 his customer.
86. Based on Horowitz’s and the Signing Rep’s false representations, a Broker-Dealer 2 principal approved Annuitant Finder 1’s variable annuity purchase, and the variable annuity application was submitted to the issuer.
87. On or about November 26, 2007, the issuer unwittingly issued a strangerowned deferred variable annuity contract to Annuitant Finder 1 in which Jane Doe 2 was the designated annuitant. Because he invested his $1 million in a “bonus” annuity, Annuitant Finder 1’s account was credited with $50,000.
88. On December 20, 2007, Jane Doe 2 died. Annuitant Finder 1 obtained a copy of her death certificate and provided it to Horowitz. Horowitz used the death certificate to prepare a death benefit claim on Annuitant Finder 1’s “Jane Doe 2” annuity,
which was then submitted to the issuer.
89. Annuitant Finder 1 subsequently received death claim payouts from the issuer totaling $1,050,322.60, realizing a net profit of over $50,000 on his initial $1 million investment.
90. By early Fall 2007, Horowitz had sold over $20 million of the strangerowned variable annuities to individual investors but desired to pump greater capital into the scheme. Searching for a large source of financing, Horowitz began pitching his scheme to
91. On or about October 25, 2007, Horowitz met with the principals of two affiliated hedge funds in New York City. As a result of the meeting, the principals decided to establish an affiliated entity, Institutional Investor 1, to facilitate the funds’ joint investment in Horowitz’s annuity scheme.
92. In December 2007, a certain variable annuity issuer terminated Horowitz’s and the Signing Rep’s appointments to sell its variable annuity products after determining that Horowitz and the Signing Rep had been selling stranger-owned annuities. Another variable annuity issuer subsequently terminated Horowitz’s appointment to sell its annuities as well.
93. Unable to sell annuities through Broker-Dealer 1 or through the Signing Rep, Horowitz sought out a new broker through whom he could perpetuate his scheme.
94. In December 2007, Horowitz met with Cohen in Las Vegas and described his stranger-owned annuities investment strategy to him. At the time, Cohen was a registered representative with Broker-Dealer 3.
95. Horowitz told Cohen that he had a “hedge fund” client, who wanted to invest in stranger-owned variable annuities on a short-term basis. Horowitz told Cohen that Horowitz or his associates would supply Cohen with the customers and the hospice
patient annuitants, while Cohen would serve as the registered representative on the additional tranche of stranger-owned variable annuities sales. In exchange, Cohen would pay Horowitz’s associates a “consulting fee.” Cohen agreed to the arrangement.
96. Between January and February 2008, Cohen, while an associated person of Broker-Dealer 3, sold at least 28 deferred variable annuities contracts to nominees of Institutional Investor 1, utilizing the deferred variable annuity products of at least 7
different insurance companies. Collectively, these nominees purchased approximately $40 million in variable annuities.
97. In each of the annuities he sold, Cohen designated a hospice or nursing home patient as the contract annuitant, utilizing patient ID and Health Data supplied to Cohen by Horowitz’s associates (who, in turn, had received the data from Annuitant Finders 2 and 3). Accordingly, Cohen knew that the annuities were being purchased with the intention of using them as vehicles for short-term investment.
98. As was the case at Broker-Dealers 1 and 2, variable annuities sales at Broker-Dealer 3 were subject to principal review to ensure that the proposed sale was suitable and that the investment was being used for its intended purpose. With respect to each annuity contract that he sold, Cohen was required to complete a “variable annuity point of sale” form. Among other information, Cohen was required to state when his customers intended to begin accessing their annuity investment, and whether they intended to do so during the surrender charge period.
99. As part of the principal review, Broker-Dealer 3 principals scrutinized the investment access information that Cohen provided on behalf of his customers to ensure that that each customer would not need access to their investment during the surrender charge period in the annuity being purchased. Each of the variable annuity products that Cohen sold had a surrender charge period of at least 7 years.
100. Knowing that Broker-Dealer 3 would not approve his variable annuity sales if he provided truthful investment access information for his customers, Cohen provided false information regarding how soon the customers intended to access the investment (i.e., not before “11 to 15 years”) on each of the 28 Broker-Dealer 3 Annuity-Point of Sale” forms that he completed.
101. By providing false investment access information for the nominees of Institutional Investor 1, and by failing to disclose that they intended to access their annuities well within the surrender charge period, Cohen was able to fraudulently obtain
principal approval of his stranger-owned annuities sales. As a result of Cohen’s fraudulent acts and practices, the insurance companies whose variable annuities Cohen sold unwittingly issued stranger-owned variable annuities to Cohen’s customers, and paid out substantial upfront sales commissions to Cohen.
102. Horowitz and Cohen earned lucrative upfront commissions on each stranger-owned variable annuity they sold. These commissions were paid by the insurance companies that unwittingly issued the stranger-owned annuities to the representatives’ customers. The Signing Rep was also paid commissions on the stranger-owned variable annuities he purported to sell through Broker-Dealer 2. As alleged above, those sales were, in fact, facilitated by Horowitz. The Signing Rep kept only 10% of those commissions and paid the balance over to Broker-Dealer 2’s affiliate, which was managed by the Senior Rep, who received more than 20% of the aforementioned commissions.
103. The table below shows the total number of annuities sold by each representative, the total value of the annuities each representative sold, and the total commissions they received on their stranger-owned variable annuity sales.
Total # of Variable
Investment Value of
Horowitz 14 over $20,000,000 over $300,000
Signing Rep 12 $28,000,000 over $127,000
Cohen 28 over $35,000,000 over $700,000
104. The registered representatives collectively received in excess of $1 million in upfront commissions on more than $80 million in stranger-owned annuity contracts they sold.
105. These commissions were obtained only through the fraudulent and deceptive conduct described herein.
106. As a result of the conduct described above, Horowitz and Cohen each willfully violated Sections 17(a)(1) and 17(a)(2) of the Securities Act, which make it unlawful for any person, in the offer or sale of any securities, directly or indirectly, (1) to employ devices, schemes or artifices to defraud, or (2) to obtain money or property by means of any materially false statement or materially misleading omission.
107. As a result of the conduct described above, Horowitz and Cohen each willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which make it unlawful for any person, directly or indirectly, in connection with the purchase or sale of a security, to (a) employ devices, schemes, or artifices to defraud, (b) make untrue statements of material fact or omit to state a material fact necessary in order to make statements made, in light of the circumstances under which they were made, not misleading, or (c) engage in acts, practices or courses of business which operate or would operate as a fraud or deceit upon persons.
108. As a result of the conduct described above, Horowitz willfully violated Section 15(a) of the Exchange Act, which makes it unlawful for any person, directly or indirectly, while acting as a broker or dealer, to effect transactions in, or to induce or attempt to induce the purchase or sale of, securities when they are not registered with the Commission as a broker or dealer or associated with any entity registered with the Commission as a broker or dealer.
109. As a result of the conduct described above, Horowitz willfully aided and abetted and caused Broker-Dealer 1’s violations of Section 17(a) of the Exchange Act and Rule 17a-3(a)(6) thereunder, and Cohen willfully aided and abetted and caused Broker-Dealer 3’s violations of the same provisions. Section 17(a) of the Exchange Act and Rule 17a-3(a)(6) thereunder require that every registered broker or dealer make and keep a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of securities. Implicit in these provisions is the requirement that information contained in a required record or report be accurate.
110. As a result of the conduct described above, Horowitz willfully aided and abetted and caused Broker-Dealer 1’s and Broker-Dealer 2’s violations of Section 17(a) of the Exchange Act and Rule 17a-3(a)(17) thereunder. Section 17(a) of the Exchange Act and Rule 17a-3(a)(17) thereunder require that every registered broker or dealer, and for each account with a natural person as a customer or owner, make and keep an account record, including, among other required information, the account owner’s name, tax identification number, address, annual income, net worth, and the account’s investment objectives. Implicit in these provisions is the requirement that information contained in a required record or report be accurate.
In view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate in the public interest that public administrative and cease-and-desist proceedings be instituted to determine:
A. Whether the allegations set forth in Section II hereof are true and, in connection therewith, to afford Respondents an opportunity to establish any defenses to such allegations;
B. What, if any, remedial action is appropriate in the public interest against Respondents pursuant to Section 15(b) of the Exchange Act including, but not limited to, disgorgement and civil penalties pursuant to Section 21B of the Exchange Act;
C. What, if any, remedial action is appropriate in the public interest against
Respondents pursuant to Section 203(f) of the Advisers Act including, but not limited to, disgorgement and civil penalties pursuant to Section 203 of the Advisers Act;
D. What, if any, remedial action is appropriate in the public interest against Respondents pursuant to Section 9(b) of the Investment Company Act including, but not limited to, disgorgement and civil penalties pursuant to Section 9 of the Investment
E. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act Respondent Horowitz should be ordered to cease and desist from committing or causing violations of and any future violations of Section 17(a) of the Securities Act and Sections 10(b), 15(a) and 17(a) of the Exchange Act and Rules 10b-5 and 17a-3 thereunder; whether Horowitz should be ordered to pay a civil penalty pursuant to Section 8A(g) of the Securities Act, Section 21B(a) of the Exchange Act, Section 203(i) of the Advisers Act, and Section 9(d) of the Investment Company Act; and whether Horowitz should be ordered to pay disgorgement pursuant to Section 8A(e) of the Securities Act, Sections 21B(e) and 21C(e) of the Exchange Act, Section 203 of the Advisers Act, and Section 9 of the Investment Company Act; and F. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act Respondent Cohen should be ordered to cease and desist from committing or causing violations of and any future violations of Section 17(a) of the Securities Act and Sections 10(b) and 17(a) of the Exchange Act and Rules 10b-5 and 17a-3 thereunder; whether Cohen should be ordered to pay a civil penalty pursuant to Section 8A(g) of the Securities Act, Section 21B(a) of the Exchange Act, and Section 9(d) of the Investment Company Act; and whether Cohen should be ordered to pay disgorgement pursuant to Section 8A(e) of the Securities Act, Sections 21B(e) and 21C(e) of the Exchange Act and Section 9 of the Investment Company Act.
IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed, and before an Administrative Law Judge to be designated by further order as provided by Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. § 201.110.