More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
In a busy day for fraud investigators at the SEC, on Monday the Commission announced a settlement with a Boston-based father and son who the SEC said misled investors about the investment strategies and past performance of their funds.
Gabriel and Marco Bitran raised up to $500 million for eight hedge funds and managed accounts over three years for their companies, GMB Capital Management LLC (now known as Clearstream Investments LLC) and GMB Capital Partners LLC. In marketing the funds, the SEC said GMB and the Bitrans created performance figures for the funds and told investors those figures were based on “actual trading with real money.” However, the SEC said the Bitrans “knew their representations were false and the track records were based on hypothetical historical investments.”
For example, the settlement says that company's marketing materials for one of the hedge funds using a “Global Alpha” strategy described the hedge fund’s pre-inception returns as “actual performance” in “managed accounts.” However, the settlement reads that the Global Alpha pre-inception track records “were not based on actual trades but were back-tested hypothetical simulations” and that GMB Management and the two men “knew that their representations regarding the pre-inception performance were false.”
In addition, the SEC said the Bitrans provided false information to SEC examiners at an unannounced examination.
In the words of David Bergers, director of the SEC’s Boston regional office, “The Bitrans solicited investors by touting an impressive track record and a unique investment strategy, and they lied about both.”
Under the cease-and-desist offer, the Bitrans neither admitted nor denied the SEC’s findings, but will pay $4.3 million to the commission by the end of October 2012, a total of $500,000 in civil penalties, will not be able to accept any fees from investors for 60 days and will be barred from the securities industry.
Since the Bitrans were actually investing in other hedge funds rather than following their own strategies, when a fraud at the hedge fund Petters Group Worldwide was reported in late September 2008, two of the Bitrans’ funds that were entirely invested in the Petters Group became illiquid, the SEC said. Two GMB funds also suffered “significant losses in hedge funds that had invested with Bernard Madoff,” according to the settlement. The investments with the Petters Group and Madoff (left) “were made contrary to what GMB investors were told.”
Read Fraudulent Families, Pt. 2: SEC Charges U.K. Twins in Pump-n-Dump Scheme at AdvisorOne.