SEC charges hedge fund manager over plot involving dying patients

The SEC has brought fraud charges against a hedge fund manager for a scheme involving terminally ill patients.

Donald Lathen and his firm stand accused of paying dying people to use their names on purportedly joint brokerage accounts so Lathen could purchase investments on behalf of his hedge fund and redeem them early by invoking a survivor’s option.

An SEC examination of investment advisory firm Eden Arc Capital Management uncovered the scheme alleged by the SEC Enforcement Division in an order instituted Monday. Lathen, of New York City, allegedly used contacts at nursing homes and hospices to identify patients with less than six months to live, and he successfully recruited at least 60 of them by paying $10,000 apiece to use their names on accounts.

When a patient died, Lathen allegedly redeemed investments in the accounts by falsely telling issuers that he and the terminally ill individuals were joint owners. The SEC says Lathen’s hedge fund was the true owner of the survivor’s option investments. Issuers paid out more than $100 million in early redemptions as a result of the alleged misrepresentations and omissions by Lathen and Eden Arc Capital.

The SEC Enforcement Division further alleges that Lathen violated the custody rule by failing to properly place the hedge fund’s cash and securities in an account under the fund’s name or in an account containing only clients’ funds and securities, under the investment adviser’s name as agent or trustee for the client.

“We allege that Lathen deceived issuers by falsely claiming that he and the deceased jointly owned the bonds when the hedge fund was the true owner of the investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office, in a statement. “Lathen allegedly put hedge fund client assets at risk by keeping them in accounts in his and the terminally ill individuals’ names rather than following the custody rule.”

The matter will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate.

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