SEC charges hedge fund manager for alleged scheme involving the terminally ill

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One hedge fund manager is in hot water for allegedly paying terminally ill people to use their names on behalf of his firm.

The SEC alleges that Donald "Jay" Lathen of Eden Arc Capital Management identified patients with less than six months to live and paid at least 60 of these individuals $10,000 to use their names on joint brokerage accounts. These actions led to issuers paying $100 million in early redemptions, the SEC said.

"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," Andrew Calamari, director of the SEC's New York Regional Office, said 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," Calamari said.

The SEC alleges that Lathen violated the 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."

Harlan Protass, partner at Clayman & Rosenberg and legal representation for Lathen and Eden Arc, said in a statement, "We have no doubt that Mr. Lathen's investment strategy is entirely legitimate and violates no law, and we intend to vigorously defend him against the SEC's meritless charges."

Protass is already building his case. He pointed out that the agency recently dropped a similar case, SEC v. Staples.

"Indeed, it's bizarre that the SEC would have — just days ago — dropped fraud charges against another individual who engaged in the same basic investment strategy as Mr. Lathen, yet assert today that Mr. Lathen's investment strategy is fraudulent," Protass said.

"It's also noteworthy that the SEC is trying to game its case by filing administrative charges against Mr. Lathen in its own in-house court, the constitutionality of which is questionable," he said, referencing the case against Staples that was filed in U.S. District Court in South Carolina.

The SEC did not immediately respond to CNBC's request for comment.

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