A very strange scandal

  @FortuneMagazine November 21, 2013: 7:18 AM ET
FIO09 scandal check illo

In mid-September the Securities and Exchange Commission said it had foiled what sounded like the most heinous financial crime since Bernie Madoff's. A father and son in Lexington, S.C., had run a scheme that, according to the SEC, targeted the financially strapped terminally ill, netting the pair $6.5 million from 44 individuals, milking them all the way to the grave. On the day the charges were announced, Kenneth Israel, a regional director at the SEC, said the Stapleses, both named Ben, "turned the misfortune of others into a profit-making enterprise for themselves." But, bizarrely, others were benefiting from the Stapleses' scheme -- the very people the SEC alleges the pair were ripping off: the terminally ill and their heirs.

The reason the Stapleses could pull off a scheme that seemingly benefits everyone begins with corporate bond offerings and a little-known provision called a survivor's option. If you buy a bond and die, your heirs are allowed to cash in the bond at face value immediately rather than having to wait until it matures. The survivor's option is meant for estate planning purposes. On Wall Street some call it a death put. Issuers have used the provision to attract elderly couples -- a key debt-buying demographic.

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