Monthly Archives: March 2014

On March 19, 2014, the SEC announced that they had charged a stockbroker and a managing clerk at a law firm with insider trading around more than a dozen mergers or other corporate transactions for illicit profits of $5.6 million during a four-year period.

The SEC alleged that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme. Metro, who worked at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system. Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal. The middleman tipped Eydelman, who was a registered representative at Oppenheimer and later at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol. After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers. The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information. Metro also personally traded in advance of at least two deals.

According to the SEC’s complaint, the insider trading scheme began in early February 2009 at a bar in New York City when Metro met the middleman and other friends for drinks. When Metro and the middleman separated from the rest of their friends and began discussing stocks, the middleman expressed concern about his holdings in Sirius XM Radio and his fear that the company may go bankrupt. Metro divulged that Liberty Media Corp. planned to invest more than $500 million in Sirius, and said he obtained this information by viewing documents at the law firm where he worked. As a result, the middleman later called Eydelman and told him to buy additional shares of Sirius. Eydelman expressed similar concern about Sirius’ struggling stock, but the middleman assured him that his reliable source was a friend who worked at a law firm. The middleman told Metro following the announcement that he had set aside approximately $7,000 for Metro as a “thank you” for the information. Instead of taking the money, Metro told the middleman to leave it in his brokerage account and invest it on Metro’s behalf based on confidential information that he planned to pass him in the future.

Also according to the SEC’s complaint, Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities. Metro shared confidential nonpublic information with the middleman by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction. Metro pointed to the names or ticker symbols to indicate which company was the acquirer and which was being acquired. Metro also conveyed the approximate price of the transaction and the approximate announcement date. The middleman then communicated to Eydelman that they should meet. Once at Grand Central Station, the middleman walked up to Eydelman and showed him the post-it note or napkin containing the ticker symbol of the company whose stock price was likely to increase as a result of the corporate transaction. Eydelman watched the middleman chew or eat the tip to destroy the evidence. Eydelman also learned from the middleman an approximate price of the transaction and an approximate announcement date.

The SEC alleged that Eydelman then returned to his office and typically gathered research about the target company. He eventually e-mailed the research to the middleman along with his purported thoughts about why buying the stock made sense. The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction.

According to the SEC’s complaint, Eydelman also traded on inside information in the accounts of more than 50 of his brokerage customers. Eydelman earned substantial commissions as a result of this trading, and received bonuses from his employers based on his performance driven in large part by the profits garnered through the insider trading scheme. The middleman’s agreement with Metro resulted in more than $168,000 being apportioned to Metro as his share of profits from the insider trading scheme in addition to his profits from personally trading in advance of at least two transactions.

The SEC’s complaint charged Metro and Eydelman with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 as well as Section 17(a) of the Securities Act of 1933. The complaint is seeking a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of these provisions of the federal securities laws.

On March 13, 2014, the SEC 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 alleged 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 alleged 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.

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 alleged 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.