The US Securities and Exchange Commission issued cease-and-desist proceedings against Michael A. Horowitz and Moshe Marc Cohen from as the result of 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.
The Scheme
Michael A. Horowitz, age 39, the scheme architect, resides in Los Angeles, California. Horowitz was a registered representative at Kovack Securities Inc. at 9301 Wilshire Boulevard, Suite 613, Beverly Hills, California 90210. Moshe Marc Cohen, age 38, was also a registered representative and resides in Brooklyn, New York. Cohen was terminated by his firm after he refused to cooperate with his Broker-Dealer’s internal review of Cohen’s variable annuity sales at issue.
The scheme was orchestrated by Horowitz, to obtain the personal health and identifying information 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.
Variable Annuities
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 benefits.
The typical variable annuity death benefit provides for a payment to the beneficiary at the contract annuitant’s death equal to either the value of the underlying investment portfolio or the purchase price of the annuity less any withdrawals, whichever is greater. This death benefit option allows an investor to profit from positive investment performance as part of the death benefit while providing a hedge against losses in the portfolio’s value by providing for a payout equal to at least the amount invested in the annuity less any withdrawals. In the typical variable annuity, the contract owner is also the contract “annuitant.”
However, in the scheme, hospice and nursing home patients unrelated to the contract owners were designated as the annuitants.
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.
How Horowitz Exploited These Benefits
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.
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.
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.
Bogus Charity to Obtain Patient Information
One Annuitant Finder created a website for a bogus charity stating that it 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 that helps patients who have chosen hospice care and are at home or in a facility.
In reality, the charity 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.
Horowitz & Cohen Collect from the Dead
Once the individuals were identified, Horowitz met with these individuals and their families under the pretext that they would be recipients of the charities. Horowitz’s true purpose in visiting patients was to confirm that they were in fact dying, and, therefore, that they were suitable annuitants.
Horowitz also asked to be kept informed of the health status of each patient whom he had visited, falsely stating that his “donors” wanted to remain apprised of each patient’s story. In reality, Horowitz wanted this information so he would know when each patient died so that Horowitz could timely file annuity death benefit claims for his customers, who then stood to receive pay outs on their variable annuity investments.
Horowitz and Cohen received in excess of $1 million in upfront commissions on more than $80 million in stranger-owned annuity contracts they sold.
Guiliano Law Group
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