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: This is what we call “voodoo compliance” i.e. using purported compliance as a tool to further securities law violations. The SEC has become wise to firms that implement sham compliance programs.
The SEC barred a private fund manager and ordered him to pay nearly $3 Million in disgorgement for creating fake identities and performance track record. The SEC alleges that the respondent created on-line doppelgangers and hired an internet-based search engine manipulator to fabricate search results to make it appear that his firm was managed by several legitimate investment management professionals. Instead, the respondent, who had a criminal background, was the sole owner/operator. The SEC also accused the fund manager of supplying Morningstar with false performance data and history so that the fund could secure a 5-star rating. In addition to the SEC penalties, the fund manager is serving a 60-month prison sentence.
OUR TAKE: If you are an investor or an adviser that recommends third party managers, you need to conduct significant due diligence, which necessarily goes beyond a web search and a Morningstar rating. As this case shows, a fraudster can manipulate internet results and fool databases.
OUR TAKE: Although it may be a legal stretch to assert that a fund administrator caused a fraudulent client’s illegal conduct, the SEC will hold securities markets gatekeepers accountable for their client’s behavior. Service providers must conduct due diligence before accepting a client or risk being found guilty by association.
OUR TAKE: Don’t help your boss commit securities fraud. There is no “dutiful assistant” or “just following orders” defense whether or not the SEC can show you personally benefitted. In this case, the trusty assistant was left holding the liability bag when her boss fled the country.
The Chief Compliance Officer of a broker-dealer was barred from the industry for mis-using his position to assist his brothers’ securities fraud scheme. According to the SEC, the brothers engaged in a long-running securities fraud to fleece foreign investors with phony offerings, fake names and bogus fees. The SEC charges that the respondent used his privileged position as a broker-dealer’s chief compliance officer to create accounts and move funds without supervision. The SEC asserts that he created “house” accounts and mis-labeled wires to hide the scheme. The SEC charges that the CCO thereby aided and abetted violations of the anti-fraud, reporting, and books and records rules. The SEC waived the disgorgement order but ordered a permanent bar based on his conduct and his incarceration on related criminal charges.
OUR TAKE: It is the CCO’s job to monitor others to prevent misconduct, but who watches the CCO? With unfettered access and knowledge, a CCO has a higher duty to follow and enforce the securities laws. Firms should also ensure that somebody reviews the CCOs personal dealings.