The SEC charged Donald F. (“Jay”) Lathen, Jr., a hedge fund manager, and his firm Aug. 15 with fraud for paying terminally ill individuals to use their names on purportedly joint brokerage accounts. Lathen allegedly recruited dying patients so that he could purchase investments on behalf of his hedge fund and redeem them early by invoking a survivor option.
According to the SEC, Lathen used contacts at nursing homes and hospices to identify patients with less than six months to live, and successfully recruited at least 60 of them by paying $10,000 apiece to use their names on accounts. When a patient died, Lathen redeemed investments in the accounts by falsely representing to issuers that he and the terminally-ill individuals were joint owners of the accounts.
It is not unlawful, or unusual, for corporate bonds to include a survivor option, which allows the heirs of a deceased bond owner to redeem the notes at par value rather than selling them on the secondary market. Despite the rather macabre name, “death puts,” survivor options have become popular among older investors. In addition to avoiding the costs and inconvenience of accessing the secondary market, the survivor option eliminates the risk of selling the bonds at a significant discount to par in a market with rising interest rates.
The SEC claimed that Lathen and his fund went far beyond a typical death put arrangement. As alleged, Lathen’s scheme ran afoul of the law because his hedge fund, and not the terminally-ill patients, was the true owner of the survivor option investments. The individuals recruited by Lathen allowed him to use their names in exchange for cash, and had no ownership interests in the investments. Issuers paid out more than $100 million in early redemptions as a result of the alleged misrepresentations and omissions by Lathen and his firm.
An SEC Administrative Law Judge will conduct a public hearing on the charges.
In the Matter of Donald F. (“Jay”) Lathen, Jr., Eden Arc Capital Management, LLC, and Eden Arc Capital Advisors, LLC, SEC Release No. 33-10120 (Aug. 15, 2016).
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