The SEC censured an investment adviser and ordered it to pay $1.7 Million in fines, disgorgement, and interest for failing to implement a compliance program that would detect and prevent the looting of client accounts. Two firm principals ultimate went to prison for using their positions as fiduciaries over trust accounts to steal funds. The SEC faults the firm for (i) failing to adopt legitimate policies and procedures, (ii) neglecting to obtain the required surprise examinations, and (iii) preparing misleading Form ADVs. In addition to charging violations of the Advisers Act fiduciary, custody and compliance rules, the SEC also cites violations of Section 10(b) and Rule 10b-5, which prohibit fraudulent conduct in the offer or sale of securities, presumably for misleading statements made in Form ADV.
OUR TAKE: Just because the principal wrongdoers went to jail doesn’t mean the firm is off the hook. The SEC holds the adviser accountable for allowing the conduct to continue. It is also significant that the SEC uses 10b-5 as a charge, which opens the door to more significant civil and criminal penalties.