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Investment Adviser Sentenced to Over 7 Years in Prison

A financial adviser was sentenced to more than 7 years in prison and ordered to pay over $3 Million in restitution for misappropriating client funds by forging client signatures and altering account statements.  The SEC alleged that the defendant made 56 unauthorized withdrawals from client account over a five-year period.  The SEC also charged that the defendant lied to her firm and provided fake documentation to hide her activities.  The SEC charged her with violating the Advisers Act and with securities fraud.  The prison sentence arose from parallel criminal proceedings brought by the U.S. Attorney for the District of Massachusetts for wire fraud, investment adviser fraud, and aggravated identity theft.

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. 

Compliance Officer Charged with Securities Fraud

The SEC charged a compliance officer with securities fraud and aiding and abetting his employer’s violations by “adding an aura of legitimacy” to an oil and gas offering fraud.  The SEC accuses the compliance officer with ignoring misstatements in offering documents and client communications and with failing to conduct required investor eligibility due diligence. The SEC also charges the compliance officer with filing false Form Ds with the Commission.

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.

 

Fund Manager Created On-Line Aliases and Marketed False Performance

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.

https://www.sec.gov/litigation/admin/2018/33-10461.pdf

Fund Administrator Pays for Client’s Fraud

A fund administrator agreed to pay over $560,000 to settle charges that it caused its client’s violations of the Advisers Act’s antifraud provisions.  The client defrauded clients (and ultimately went to prison) for misappropriating client assets by creating fake loans in which the fund invested.  The fund’s custodian declined to book the fake loans because they lacked sufficient backup documentation.  Regardless, the administrator included the loans in the fund’s NAV even though, according to the SEC, it knew that the custodian excluded the loans.  The SEC faults the administrator for failing to further investigate, notify the board or shareholders, or exclude the loans from the NAV calculation.

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.

 

Operations Manager Charged with Aiding/Abetting Securities Fraud

The SEC accused the operations manager of a state registered investment adviser of aiding and abetting her boss’s fraud by impersonating clients to gain online account access.  The SEC maintains that the operations manager, under the direction and the supervision of the firm’s principal, telephoned a broker and impersonated a client to create on-line access to client funds that the principal ultimately misappropriated as part of a broader scheme involving almost $400,000 in client funds.  The principal, also a defendant in the enforcement action, has left the United States.  The SEC charges that the operations manager “knew or recklessly disregarded” that her boss’s conduct “was improper and knowingly rendered…substantial assistance.”

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.

 

CCO Used Position to Aid/Abet Brothers’ Securities Fraud Scheme

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.

https://www.sec.gov/litigation/admin/2017/33-10327.pdf