The Phaserl


Wall Street’s Death Puts: Here’s What the SEC Didn’t Tell You

by Pam Martens and Russ Martens, Wall Street On Parade:

On Monday, the Securities and Exchange Commission released the details of an enforcement action it plans to bring before one of its own Administrative Law Judges against Donald (Jay) Lathen, Eden Arc Capital Management, LLC and a related hedge fund, Eden Arc Capital Advisors, LLC.

Lathen is charged with using terminally ill patients in nursing homes, who were expected to die within six months, to reap profits from issuers of bonds or Certificates of Deposits (CDs) that had a death put feature (also known as a Survivor Option or SO). The bonds or CDs can be purchased in joint name and redeemed at the full face amount if one of the owners of the joint account dies. Lathen was racking up profits by buying the bonds or CDs at a discount from the full face amount.

Naturally, the issuers of the bonds and CDs expected buyers to constitute a random pool of investors, not a ginned up pool created by a hedge fund of people slated to die within six months. (This has a familiar ring to Goldman Sachs and hedge fund titan, John Paulson, creating Abacus with bonds expected to experience negative credit events so Paulson could make $1 billion on his short bets while unknowing investors lost the same amount. Paulson skated without being charged by the SEC.)

To induce the terminally ill patients (who, let’s face it, are not always thinking clearly and may potentially be on judgment-impairing pain killers) to loan out their name, social security number, date of birth, etc. to set up joint accounts with right of survivorship, Lathen paid the patients $10,000. Lathen listed himself as the other joint owner on the accounts, even though the money actually belonged to investors in his hedge fund. (That was one of the issues the SEC nailed him on; violating the custody rule for hedge fund money.) According to the SEC, no hedge fund money was pilfered.

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