More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Securities and Exchange Commission announced a settlement and made two charges in three separate fraud cases over the past week.
In the first of the cases, the SEC announced on April 9 that it had settled a case against Benedict Van, a San Jose, Calif., man who had fraudulently raised nearly $7 million from investors for an IPO in two companies that he claimed would become the “next Google.” Van had promised those investors that they would receive “millions in quick returns” when he took public two Silicon Valley web-based startups, hereUare Inc. and eCity Inc. He fraudulently presented himself as a venture capitalist to prospective investors, primarily in their homes in Sacramento and Stockton, Calif., and also falsely claimed that he had retained Goldman Sachs as an advisor for the IPO.
In fact, the SEC said in a statement, Van had “no plans to take the companies public and relied solely on investor funds to stay in business.” When those investor funds ran out by the end of 2008, Van was forced to shut down operations.
The moral of the story, said Marc Fagel, director of the SEC’s San Francisco Regional Office, is that “Investors should be wary of pitches promising IPO riches from companies with minimal operations and track records.”
The SEC said Van, hereUare and eCity agreed to settle the charges against them without admitting or denying the SEC’s allegations and have consented to permanent injunctions. Van also consented to a court order that permanently bars him from serving as a public company officer or director, and hereUare consented to an administrative proceeding order deregistering its stock with the SEC.
While the judgment in Federal District Court for the Northern District of California in San Francisco ordered Van to pay civil penalties and to “disgorge his ill-gotten gains,” the SEC waived any financial payment against Van based, the Commission said, on his “demonstrated inability to pay.”
In the second fraud case, in U.S. District Court in Massachusetts, the SEC charged a China-based company, AutoChina Intl. Ltd., and 11 individuals with conducting a market manipulation scheme that was meant to fraudulently create a “liquid and active market” for AutoChina’s stock, which traded on Nasdaq until October 2011 under the ticker AUTC (since its delisting then, the stock has traded on OTC Link under the ticker AUTCF.PK).
The complaint, part of an ongoing investigation, charges that beginning in late 2010, the defendants’ scheme artificially raised trading volume in AUTC, “enhancing the company’s ability to get much-needed financing.”
Further, the SEC complaint says that beginning in late 2010, the”defendants and others opened 26 brokerage accounts at E*Trade Financial,” depositing more than $60 million into those accounts over four months, despite that the size of the deposits to the accounts, and the volume of their trading, “was well beyond what [the defendants’] self-described means (as set out on their E*Trade Account applications) would indicate was possible for them.”
Using those accounts, through the same computer network and in some instances “even the same computer,” the defendants allegedly “bought and sold millions of shares of AutoChina stock from October 2010 through February 2012," the complaint said. “They traded only in AutoChina stock.”
The scheme worked; average daily trading balance of AUTC rose from about 18,000 shares per day in that time period to 139,000 shares per day in the period, and the SEC says that nearly 70% of that trading volume came from the defendants in the case.
The SEC said it has been assisted in its ongoing investigation by FINRA and the Hong Kong Securities and Futures Commission.
In the third fraud case, on April 6 the SEC charged George Elia, who the commission called an “investment manager” who most recently lived in Oakland Park, Fla., but who the SEC now believes to be living in Cyprus, and his firm, International Consultants & Investment Group Ltd. Corp., with fraudulently raising $11 million from investors by “falsely claiming annual returns as high as 26%.” Elia is accused of transferring more than $2.5 million of those funds to two other entities he controlled, Elia Realty, Inc., and 212 Entertainment Club, Inc.
The SEC said Elia told investors that he had “extensive experience" in day trading stocks and ETFs, but his trading "resulted in losses or only marginal gains, and the quarterly account statements he sent to clients overstated their returns.”
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of Florida, Elia typically pitched prospective investors over meals at expensive restaurants in and around Fort Lauderdale, Fla. The SEC said his clients typically came to him through word-of-mouth referrals among friends and relatives, and that a “significant number of the victims of his scheme were members of the gay community in Wilton Manors, Fla.”
In a parallel criminal case, the U.S. Attorney for the Southern District of Florida announced that Elia was indicted on April 5 on one count of wire fraud.
The SEC’s complaint charges that Elia and ICIG violated antifraud provisions of U.S. securities laws and that Elia aided and abetted violations by the firms. As part of the ongoing investigation, the SEC is seeking permanent injunctions against Elia and ICIG, disgorgement of ill-gotten gains plus pre-judgment interest, and civil penalties.