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  • L.A. Bikur Cholim head’s role revealed in annuities scheme

    September 25, 2014 by Jared Sichel

    <em>U.S. Securities and Exchange Commission headquarters in Washington, D.C. Image via Wikipedia</em>

    U.S. Securities and Exchange Commission headquarters in Washington, D.C. Image via Wikipedia

    Although the final legal shoe appears to have dropped in an $850,000 settlement between broker Michael Horowitz and the Securities and Exchange Commission (SEC) in an illegal $80 million variable annuities scheme, the effects of the fraud are still being felt in Los Angeles. A spokesman for Cedars-Sinai Medical Center wrote in an email that it has cut ties with a major Jewish social service group in L.A., Bikur Cholim, due to the central role of its founder and president, Rabbi Harold “Hershy” Ten, in Horowitz’s scheme.

    Ten, as reported by the Journal in March and described in detail in a July 31 SEC report, assisted Horowitz in identifying, meeting with and obtaining personal information from terminally ill Jews, with whom he likely came into contact through his role at Bikur Cholim. The scheme, according to the SEC, took place between July 2007 and February 2008.

    Horowitz also enlisted the help of a New York securities broker, Moshe Marc Cohen, in finding more annuitants and identifying investment firms who would issue the variable annuities.

    As of press time on Sept. 22, Ten had not responded to repeated telephone calls or emails. He settled with the SEC for about $200,000 in March but, because the agency had not then settled with Horowitz, many now-public details of the case were kept private at that time.

    According to the SEC, Horowitz, the scheme’s architect, duped insurance companies into issuing variable annuities to terminally ill people. Variable annuities are typically long-term investment products that pay variable periodic payments to the annuitant (the person in whose name the policy is issued) and a guaranteed death benefit to the annuitant’s beneficiary. Money is paid upfront, and more can be invested over time in stocks, bonds and mutual funds. Variable annuities are typically drawn upon during retirement or designated as death benefits for heirs.

    Particularly attractive for individuals is the money-back guaranteed death benefit, which ensures that even if the market tanks on an initial $2 million investment, for example, the deceased’s heirs still will receive $2 million.

    But when issued to terminally ill people, it is a guaranteed losing proposition for the issuing companies and a risk-free, sure winner for the beneficiaries. In the scheme, some of the beneficiaries included Horowitz’s close relatives, who made more than $900,000 in profits, and Horowitz himself, who made $317,724 in commissions, according to the SEC.

    Greg Yaris, Horowitz’s attorney, characterized his client’s violation as a record-keeping error, which he also said when interviewed by the Journal in March.

    “All that the SEC could come up with against him is that somebody in an office made a mistake on one question on an application,” Yaris said of the first section of the SEC’s report, which consists of their detailed findings and to which Horowitz did not sign his name and “neither admitted nor denied anything.”

    “The facts that someone might see as salacious in the front half [of the SEC report] are just the SEC’s spin,” Yaris said. In an annex to the report, however, Horowitz admitted to listing terminally ill people as annuitants on 14 contracts and violating federal securities law.

    The scheme operated as follows: Around May 2007, the SEC says, Horowitz found out how to “exploit” certain weaknesses in the structure of variable annuities.

    For one, the issuers (insurance companies) did not require that annuitants receive physical examinations, and, second, when annuitants died, even if only a day after the policy was issued, the beneficiary would receive the death payout.

    Horowitz sought a way to get insurance companies to sell him variable annuities on terminally ill people (some died within days or weeks after the policies were issued), so that the short time horizon of the guaranteed profitable investment could make him and the beneficiaries substantial amounts of money.

    The insurance companies that issued these policies require that the investor intends to hold them for a minimum period of time and that the purchaser not be a stranger to the annuitant. The SEC says Horowitz dishonestly said that the annuities would be held for 20 to 40 years and that the purchasers had a “partner” relationship with the annuitants. Had Horowitz named as beneficiaries friends or family members of the terminally ill annuitants, it is possible that those relatives would have realized Horowitz’s plan and would not have agreed to provide him with their signatures or information he would have needed to list them as annuitants.

    David Thetford, a securities compliance analyst in Chicago for Wolters Kluwer Financial Services, a multibillion-dollar consulting firm, explained that insurance companies that issue variable annuities like the ones offered by Horowitz have expenses that require time to be recouped.

    “This is a long-term investment,” said Thetford, a former auditor for the National Association of Securities Dealers, now known as FINRA. “It’s not designed to be traded or bought and then immediately sold. It’s a long-term investment for retirement.”

    To make good on his plan, Horowitz needed three things: investors with enough cash to purchase large policies, terminally ill people, and someone who could both identify and meet with them — and the last in this list is where Ten came in.

    As founder and president of Bikur Cholim in Los Angeles, Ten continues to work daily with sick patients, some of whom are terminally ill. The SEC found that Ten helped find dying people and obtained their personal identification information and “health data” to confirm that they were in fact nearing death.

    The SEC’s report says that in May 2007, after a “series of closed-door meetings between Horowitz and Ten” at the Bikur Cholim office, Ten created a fictitious charity called “Raphael Health” — the sole purpose of which was to obtain the Social Security numbers, dates of birth and official medical information from terminally ill patients. Raphael Health, the SEC says, would donate $250 to $500 to each patient on the condition that they meet with Ten, provide their name and address, date of birth, Social Security number, medical diagnosis and confirmation of hospice care.

    Between July and December 2007, Ten “met with multiple hospice patients” at their homes. The SEC says Horowitz attended many of those appointments. A social worker who attended one of the home visits told the SEC that Ten lied, saying Raphael Health’s donors wanted to learn the stories of the people they were supporting, which required Ten meeting them face-to-face.

    “Horowitz’s true purpose in visiting patients was to confirm that they were in fact dying, and, therefore, that they were suitable annuitants,” the report reads, adding that between July and December 2007, at least six patients identified by Ten were listed as annuitants in at least 18 annuities sold by Horowitz. Ten received at least $130,000 in payments from Horowitz.

    “Jane Doe 1,” as identified by the SEC, was one terminally ill patient identified by Ten that Horowitz used in a $1.7 million variable annuity. When Jane Doe 1’s husband, John Doe 1, approached Ten in July 2007 for assistance with his wife, who was dying of colon cancer and needed round-the-clock nursing, Ten soon thereafter came to the family’s house with Horowitz “under the pretense of providing charitable assistance.”

    According to Scott Sobel, the family’s attorney, while at the home Ten spoke with John Doe 1 about the family’s financial needs while Horowitz went into another room with Jane Doe 1 to “get her feeble signature on documents that she could not possibly have read or understood, given her condition and medications.”

    Both the SEC and Sobel say that neither Ten nor Horowitz mentioned variable annuities in their meeting with Jane Doe 1 and her husband. After the meeting, Ten emailed to Horowitz Jane Doe 1’s name, Social Security number and birthdate. On July 31, 2007, Horowitz sold a variable annuity contract worth $1.7 million to his “close family member” — in that contract, Jane Doe 1 was the annuitant, unbeknown to her and her husband. Horowitz earned $28,500 in commissions on the sale, according to the SEC.

    Six days later, on Aug. 5, Jane Doe 1 died. Her husband emailed Ten asking for about $1,200, half the cost of home-nursing care since Ten’s visit, which the husband presumed Ten would pay. When Ten did not respond by Aug. 21, John Doe 1 wrote to Ten again asking him to “use the money for someone else that is more in need.”

    Ten, without John Doe 1’s knowledge, retrieved a copy of Jane Doe 1’s death certificate and sent it to Horowitz, who in turn used it in his death benefit claim that he submitted to the insurance company. On Oct. 19, 2007, the investor on Jane Doe 1’s policy received just over $2 million on his $1.7 million purchase, a 17.7 percent rate of return in less than three months.

    In a subsequent case in November 2007 involving “Jane Doe 2,” a woman dying of stomach cancer, Ten’s Raphael Health paid $405 to fulfill her wish of going with her children to Disneyland. That support, though, was conditioned on Jane Doe 2 providing personal information and meeting with Ten and Horowitz.

    This time, Ten purchased a $1 million policy with Jane Doe 2 as the annuitant and immediately received $50,000 from the company as a 5 percent bonus for investing a minimum of $1 million.

    In forms filed with the insurance company, Horowitz falsely stated that Ten intended to hold the annuity for 27 years. On Dec. 20, less than a month after Ten purchased the policy, Jane Doe 2 died. Ten sent Horowitz her death certificate. Horowitz sent a claim to the insurance company. The company sent Ten $1,050,322.60 for the three-week investment.

    In response to a query from the Journal, a spokesperson for Cedars-Sinai wrote in an email that the hospital has “never provided Rabbi Ten or his team with any protected health information” and that “Cedars-Sinai no longer permits Bikur Cholim to provide services at the hospital.” The hospital, one of the city’s top health providers for the Jewish community, cut ties with the group after the SEC released its allegations against Ten in March.

    A hospital spokesperson wrote in an email that “there has been no fall-off in services” to Jewish patients, because the hospital is using more of its own resources and working with other community organizations to assist Jewish patients with their religious needs, including Chai Lifeline.

    A spokesperson for the UCLA health system wrote in an email that Ronald Reagan UCLA Medical Center has never provided Ten or Bikur Cholim with patient data, but that the group makes a weekly challah donation for Jewish patients in the hospital during Shabbat. The spokesperson added that after Rosh Hashanah, UCLA will rely instead on another donor to provide the challahs. Asked whether that had anything to do with the SEC’s findings on Ten, the spokesperson did not respond as of press time.

    In all, the SEC determined Horowitz received more than $317,000 in sales commissions and at least $30,000 from close relatives when they profited from the annuities. The SEC stripped Horowitz of his broker license and fined him a total of $850,749.21. Ten, according to a March 13 SEC press release, paid back $181,147.64 in illegitimate profits, as well as interest of $20,858.80 and a penalty of $90,000.

    Horowitz’s and Ten’s scheme is not without precedent; insurance companies are constantly on the watch for people who attempt to game the system.

    Joseph Caramadre, a Rhode Island attorney, was sentenced to six years in federal prison in 2013 after pleading guilty to fraud and conspiracy for running a variable annuities scheme similar to Horowitz’s. Caramadre argued, though, he was only taking advantage of a gap created by the insurance industry and he was sharing his profits with families that needed money to assist dying loved ones.

    With Horowitz, though, neither criminal nor civil court was an option, as the SEC opted to keep the case in its own administrative court, where defendants like Horowitz lack many of the protections afforded to defendants in a jury trial.

    The SEC’s administrative law judge, following SEC procedural rules, can limit the discovery period and uses the “preponderance of the evidence” standard rather than the “beyond a reasonable doubt” standard that is afforded to criminal defendants. Following reforms initiated by the 2010 Dodd-Frank law, the SEC now has an easier time prosecuting potential lawbreakers in-house instead of in court — and in a shorter time frame. The time that elapsed between the SEC charging and settling with Horowitz was only about four months. Yaris said that reaching a settlement made sense for his client, because “the cost of fighting and the risk of fighting in their forum was too great.”

    When asked why the SEC opted to keep the case in its own administrative court instead of filing a civil lawsuit against Horowitz, an agency spokesperson declined comment.

    Originally Posted at Jewish Journal on September 24, 2014 by Jared Sichel.

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