Avoiding required registration will not long go unnoticed. Eventually, the state securities regulators or the feds will find you. Your risk goes up exponentially if an aggrieved client has lost money or a competitor raises eyebrows.
Although the SEC does not have criminal prosecution powers, it has the discretion to refer matters to the U.S. Attorney once it uncovers securities wrongdoing. If the DoJ can make a federal criminal case because of fraud or theft, an investment adviser can end up a guest of the state for several years.
OUR TAKE: Over the last several years, the state securities regulators have expanded examinations and enforcement along with the SEC and FINRA, making it much more difficult for any adviser or broker-dealer to avoid regulatory scrutiny. It’s worth noting that many state securities regulators have criminal enforcement authority.
OUR TAKE: Once a formal enforcement proceeding commences, any misstatements under oath can lead to criminal proceedings for perjury or lying to a regulator. It’s always wise to ensure that the lawyer defending the enforcement action has sensitivity to the possible criminal prosecution implications. An enforcement action may results in fines and industry bars, but criminal proceedings could result in jail time.
A private fund manager has pled guilty to obstruction of justice for misstatements made during an SEC administrative hearing. The SEC charges that the respondent misled investors about the use of funds and profitability of fund investments. During the ALJ hearing, the SEC alleges that the respondent lied under oath that he did not control a related company. The SEC asserts that the respondent set the company up in his son’s name because of the SEC investigation.
OUR TAKE: SEC investigations and hearings should not be taken lightly. Misstatements can lead to prison time.