“The Long Short” – Nope the Dead Undead

It is the most macabre investment premise that one can contemplate: INVESTING ON IMMINENT DEATH

LostMessiah, April 15, 2016

“The Long Short” is the story about investment in the failure of the housing market and ultimately a ripple effect into the global economy. Those who saw that coming made millions as that story illustrates. In that story, FrontPoint Partners bet that the asset class (mortgages) would sink (imminently) and set up an investment vehicle that allowed them to make a market on a complete and total housing failure. The investors foresaw the imminent death of the housing market and profited. It was all completely legal and was incredibly savvy. Anyone who has either seen the movie or knows investments understands that these men placed a gamble on the state of the market as a “future” and that it would fail and ultimately that financial markets would destabilize as a result. They saw it coming.

While many may condemn those who bet on imminent failure (of our housing market), what about betting on imminent death – of not housing, but people.

We note two important points related to previous stories and the Seabrook/Rechnitz connection:

1. The first is that these investments were unconventional, at best, and illegal insofar as the success of the investment required “inside information” into the private health status of terminally ill patients, notwithstanding the HIPAA violations involved. That raises question 1: If bonuses were paid out on the death of the patient, what was to stop the nursing home from accelerating the process?
2. Our Second comment relates to the second point regarding “red flags.” Seabrook, as previously mentioned was introduced to Platinum and apparently enticed by the returns. However, as noted below, “Those are the kinds of red flags you can see from outer space.” That raises the question of whether or not Seabrook did his due diligence or relied solely on the words and praises of Mr. Philanthropy, Rechnitz. If he did not do his due diligence, at the very least, beyond being accountable for a $12M loss in the union funds he invested and all of the corresponding associated crimes, it should be clear that he breached his fiduciary duty to the Corrections Officers whose money he invested. And, they should likely be out for blood (or diamonds, platinum, booze…)

Returning to Platinum and the death schemes, onOctober 21, 2015, Bloomburg reported on these schemes, which in investment parlance is called “event driven investing;” and in our view editorialized to some extent on the extent that Mark Nordlicht will got to make money. We have highlighted the relevant comments in red:

“The investment connected with terminally ill patients shows the lengths Platinum will go to find a can’t-miss bet. Insurance companies were offering variable annuities — a type of guaranteed investment contract — with bonuses that only applied when the investor died. A broker approached Platinum in 2007 with an idea, according to the U.S. Securities and Exchange Commission: Find people who were near death and buy contracts with their names using the fund’s money. With the bonuses, the fund could earn 5 percent, risk-free, as soon as each person died.

 Platinum set up a company called BDL Group to invest in the annuities, eventually putting up more than $56 million, and Nordlicht brought in a friend to oversee the process, the SEC said in an administrative order. A rabbi in Los Angeles found the hospice patients and tricked them into providing their personal information so that BDL could take out annuities with their names, according to the SEC.

Nordlicht’s friend, the rabbi and BDL agreed last year to pay about $4 million in settlements with the SEC, without admitting doing anything wrong. Neither Platinum nor Nordlicht were accused of wrongdoing.

“We definitely were exploiting a loophole, but it was fully vetted by legal counsel,” Nordlicht said. “A principal-protected piece of paper backed by an A credit with an expected annualized return of 30 percent proved too difficult to resist for a risk-adjusted return hawk.”

‘Red Flags’

Nathan Anderson, founder of hedge-fund researcher ClaritySpring Inc., was asked last year by potential investors to look into Platinum. He said that while returns were about the steadiest he’d seen, the rest of what he found raised questions.

“When you see nearly flawless returns, it’s intriguing, but also potentially worrying,” Anderson said. “Even cursory due diligence showed that a number of their dealings ended in death, litigation or handcuffs. Those are the kinds of red flags you can see from outer space.” [Think Norman Seabrook and Jona Rechnitz]

Nordlicht said the research couldn’t have been thorough, because he doesn’t remember Anderson contacting Platinum.

The oil company that’s now facing criminal charges, Houston-based Black Elk Energy, was Platinum’s biggest investment as of March 2014, worth as much as $186 million, according to a Platinum valuation report. Black Elk is now in bankruptcy, two months after prosecutors in Louisiana accused it of negligence in the explosion, which occurred on an oil platform in the Gulf of Mexico. In a lawsuit brought by an injured worker, the company blamed outside contractors and said it wasn’t responsible. Matt Chester, a lawyer for Black Elk, declined to comment.

The valuation report, dated March 2014, shows that illiquid, hard-to-value assets make up much of Platinum’s portfolio. The second-biggest holding is a group of oil fields in California. The valuation agent, Murray Grenville, didn’t respond to requests for comment. The fund’s auditor, CohnReznick LLP, a New York-based accounting firm with 2,500 employees, declined to comment.”

We will be looking at Black Elk Energy and Huberfed in future posts.

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In March of 2014, FailedMessiah reported:

International President Of Haredi Kiruv Organization Aish HaTorah, Other Orthodox Jews, Caught In Illegal Scam Exploiting Elderly Ill Patients

The Securities and Exchange Commission today announced enforcement actions against a pair of brokers, an investment advisory firm, and several others involved in a variable annuities scheme to profit from the imminent deaths of terminally ill patients in nursing homes and hospice care.

In 2014 the SEC put out a press release which was posted in the FailedMessiah article and is again posted here, the explanation of the investment strategy highlighted in red:

SEC Announces Charges Against Brokers, Adviser, and Others Involved in Variable Annuities Scheme to Profit From Terminally Ill

FOR IMMEDIATE RELEASE
2014-50

 

Washington D.C., March 13, 2014 — 

The Securities and Exchange Commission today announced enforcement actions against a pair of brokers, an investment advisory firm, and several others involved in a variable annuities scheme to profit from the imminent deaths of terminally ill patients in nursing homes and hospice care.

Variable annuities are designed to serve as long-term investment vehicles, typically to provide income at retirement.  Common features are a death benefit paid to the annuity’s beneficiary (typically a spouse or child) if the annuitant dies, and a bonus credit that the annuity issuer adds to the contract value based on a specified percentage of purchase payments.  The SEC Enforcement Division alleges that Michael A. Horowitz, a broker who lives in Los Angeles, developed an illicit strategy to exploit these benefits.  He recruited others to help him obtain personal health and identifying information of terminally ill patients in southern California and Chicago.  Anticipating they would soon die, Horowitz sold variable annuities contracts with death benefit and bonus credit features to wealthy investors, and he designated the patients as annuitants whose death would trigger a benefit payout.  Horowitz marketed these annuities as opportunities for investors to reap short-term investment gains.  When the annuitants died, the investors collected death benefit payouts. 

The SEC Enforcement Division alleges that Horowitz enlisted another broker Moshe Marc Cohen of Brooklyn, N.Y., and they each deceived their own brokerage firms to obtain the approvals they needed to sell the annuities.  They falsified various broker-dealer forms used by firms to conduct investment suitability reviews.  As a result of the fraudulent practices used in the scheme, some insurance companies unwittingly issued variable annuities that they would not otherwise have sold.  Horowitz and Cohen, meanwhile, generated more than $1 million in sales commissions.

Agreeing to settle the SEC’s charges are four non-brokers and a New York-based investment advisory firm recruited into the scheme.  Also agreeing to settlements are two other brokers who are charged with causing books-and-records violations related to annuities sold through the scheme.  A combined total of more than $4.5 million will be paid in the settlements.  The SEC’s litigation continues against Horowitz and Cohen.

“This was a calculated fraud exploiting terminally ill patients,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Michael Horowitz and others stole their most private information for personal monetary gain.”

According to the SEC’s orders instituting administrative proceedings, the scheme began in 2007 and continued into 2008.  Horowitz agreed to compensate Harold Ten of Los Angeles and Menachem “Mark” Berger of Chicago for identifying terminally ill patients to be used as annuitants.  Berger, in turn, recruited Debra Flowers of Chicago into the scheme and compensated her directly.  Through the use of a purported charity and other forms of deception, Ten, Berger, and Flowers obtained confidential health data about patients for Horowitz. 

According to the SEC’s orders, after selling millions of dollars in variable annuities to individual investors, Horowitz still desired to generate greater capital into the scheme.  Searching for a large source of financing, he began pitching his scheme to institutional investors.  A pooled investment vehicle and its adviser BDL Manager LLC were created in late 2007 in order to facilitate institutional investment in variable annuities through the use of nominees.  Commodities trader Howard Feder, who lives in Woodmere, N.Y., became each firm’s sole principal.  Feder and BDL Manager fraudulently secured broker-dealer approvals of more than $56 million in annuities sold through Horowitz’s scheme.  Feder furnished the brokers with blank forms signed by the nominees enabling the brokers to complete the forms with false statements indicating that the nominees did not intend to access their investments for many years.  Feder understood that the purpose of Horowitz’s scheme was to designate terminally ill patients as annuitants in the expectation that their deaths would result in short-term lucrative payouts.  BDL Group received more than $1.5 million in proceeds from its investment in the annuities.

The order against Horowitz and Cohen alleges that they willfully violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and they willfully aided and abetted and caused violations of the Exchange Act’s books-and-records provisions.  Horowitz also acted as an unregistered broker.

Ten, Berger, Flowers, Feder, and BDL Manager consented to SEC orders finding that they willfully violated Section 10(b) of the Exchange Act and Rule 10b-5.  They neither admitted nor denied the findings and agreed to cease and desist from future violations.  The individuals agreed to securities industry or penny stock bars as well as the following monetary sanctions: 

• Ten agreed to pay disgorgement of $181,147.64, prejudgment interest of $20,858.80, and a penalty of $90,000.
• Berger agreed to pay disgorgement of $119,000, prejudgment interest of $11,579.61, and a penalty of $100,000.
• Feder agreed to pay a penalty of $130,000.
• BDL Manager agreed to pay disgorgement of $1,550,565.55, prejudgment interest of $196,608.97, and a penalty of $1,550,565.55.

The SEC’s order against Richard Horowitz and Marc Firestone finds that they negligently allowed point-of-sale forms for 12 annuities in the scheme to be submitted to their firm with inaccurately overstated answers to the form’s question asking how soon the customer intended to access his or her investment.  These inaccurate answers led to each annuity’s issuance, and Horowitz and Firestone were each paid commissions. 

Richard Horowitz and Firestone consented to the order finding that they caused their firm to violate Section 17(a) of the Exchange Act and Rule 17a-3.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing future violations of those provisions as well as the following monetary sanctions:

• Horowitz agreed to pay disgorgement of $292,767.89, prejudgment interest of $36,512.20, and a penalty of $40,800.
• Firestone agreed to pay disgorgement of $127,853.20, prejudgment interest of $17,140.89, and a penalty of $40,800. 

The SEC’s investigation was conducted by Marilyn Ampolsk, Peter Haggerty, Jeremiah Williams, and Anthony Kelly of the Enforcement Division’s Asset Management Unit along with Christopher Mathews and J. Lee Buck II.  The SEC’s litigation will be led by Dean M. Conway.

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Read also:

The top-performing hedge fund manager that’s too hot for big money to handle

Reuters Investigates, April 13, 2016, Lawrence Delvingne

“In an episode that attracted media attention in 2014, the U.S. Securities and Exchange Commission found that Platinum subsidiary BDL Group invested more than $56 million in a scheme operated by two brokers at other firms who exploited the terminally ill.

Patients in nursing homes and hospice care were gulled into providing personal information in order to receive a box of candy or a $250 gift; that information was used by the brokers to purchase long-term variable annuities that paid benefits to investors like BDL when the patient died soon after, according to the SEC.

BDL paid a combined $3.29 million profit disgorgement and penalty on the grounds that it made money on an illegal scheme. The two brokers at the heart of the operation were forced to repay their profits; one’s case is on appeal with the SEC.

Nordlicht’s friend and former colleague, Howard Feder, ran BDL and worked with the brokers to fund their strategy, according to the SEC. In a 2014 settlement with the agency, Feder was barred from the securities industry and paid a penalty of $130,000. At the time, the agency said Feder “understood the key components of the investment strategy.””

“Among institutional investors that have considered putting money with Platinum but ultimately chose not to are the endowment of Yeshiva University, which is the alma mater of several Platinum employees, and large hedge fund allocator GAM, according to people familiar with the institutions.

One institutional investor that did get in is New York City’s Correction Officers’ Benevolent Association, according to two people familiar with the situation. The New York Times reported in June last year that Norman Seabrook, the union’s leader, was under investigation by the U.S. Department of Justice for potentially using his position to enrich himself. A broad subpoena from prosecutors requested that the union supply information related to Platinum, but the connection was not clear, according to the report.

A spokesman for the union declined to comment. The Justice Department and Seabrook did not respond to requests for comment.

PUBLIC FACE: ING Investment Management veteran Uri Landesman was hired in 2010 as part of an effort to burnish Platinum’s image and woo institutional investors. REUTERS/Mark Hartman

CashCall, one of Platinum’s investments, has faced legal actions from multiple states and the federal government for aggressive marketing practices and charging excessive interest rates.

Nordlicht has tried to polish Platinum’s image. In 2010, he hired ING Investment Management veteran Uri Landesman, who as president of the firm courts big investors and serves as its public face. Platinum declined to make Landesman available for an interview.”