More On Legal & Compliancefrom The Advisor's Professional Library
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The Securities and Exchange Commission on Wednesday charged a San Francisco-area investment advisor with fraud for lying to clients about how brokerage commission rebates, or “soft dollars,” were being used and producing phony documents to cover up the fraud during an SEC examination.
The SEC alleges that Kurt Hovan of Hovan Capital Management misappropriated more than $178,000 he claimed to be using to pay for legitimate investment research on his clients’ behalf. In reality, the SEC says Hovan was secretly funneling the money for such undisclosed uses as office rent, computer hardware and his brother’s salary.
When SEC examination staff asked Hovan to provide documentation to back up his claims, the SEC says he created phony research reports.
The SEC also charged his wife, Lisa Hovan, and his brother Edward Hovan for their roles in the fraudulent scheme. The U.S. Attorney’s Office for the Northern District of California filed criminal charges against Kurt Hovan on Wednesday as well.
“The SEC’s ability to review the records of investment professionals is a cornerstone of our investor protection mission,” said Marc Fagel, director of the SEC’s San Francisco Regional Office, in a statement. “We take a particularly dim view of those who compound their fraud on investors by providing false information to our examiners.”
As the SEC explains, soft dollars are credits or rebates from brokerage firms on commissions paid by clients for trades executed in the client accounts of an investment advisor. If appropriately disclosed, an investment advisor may retain the soft dollar credits to pay for a limited category of brokerage and research services that benefit clients.
According to the SEC’s complaint filed in federal court in San Francisco, Kurt and Lisa Hovan falsely disclosed to clients that HCM would use soft dollars only for certain research services. Instead, they used $166,667 in soft dollars to pay Edward Hovan’s salary over a 10-month period in 2008 and 2009.
To cover up these payments, the three Hovans created a shell company–“Bolton Research”–secretly controlled by Edward Hovan, the SEC states. "Through this
The SEC further alleges that Kurt and Lisa Hovan instructed a research provider paid with soft dollars to pad its invoices by $12,000 and kick back this amount to help HCM pay for a new computer server.
The SEC says that during a January 2010 examination of HCM, the SEC staff asked HCM to provide copies of the research reports prepared by Bolton Research in exchange for the soft dollar payments. In response, the SEC says that Kurt Hovan "quickly drafted numerous research reports and doctored materials to make them appear as if they had been prepared by Bolton. Hovan provided these phony documents to SEC examiners."