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.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The SEC this week announced several enforcement actions, which included charges brought against a ratings company and its owner and president and against a mortgage company, as well as a settlement reached in an insider trading case.
On Tuesday the SEC announced it had charged Egan-Jones Ratings Co. (EJR), and its owner and president, Sean Egan, for what it said were material misrepresentations and omissions in the company’s July 2008 application to register as a Nationally Recognized Statistical Rating Organization (NRSRO) for issuers of asset-backed securities (ABS) and government securities.
Both the company and the man are also charged with material misrepresentations in other submissions furnished to the SEC and violations of record-keeping and conflict-of-interest provisions governing NRSROs.
The SEC’s Division of Enforcement alleges that Haverford, Pa.-based EJR in its application stated falsely that it had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings, as well as claiming that it had been issuing credit ratings in the ABS and government categories as a credit rating agency on a continuous basis since 1995. None of these statements, says the SEC, were true.
It also alleges that Egan not only provided the false information but failed to avoid conflicts of interest and to comply with recordkeeping requirements. In so doing, the SEC says, Egan violated a laundry list of provisions of the Exchange Act.
H&R Block Subsidiary to Pay $28.2 Million
In the case of the mortgage company, the SEC charged H&R Block subsidiary Option One Mortgage Corp. with misleading investors in several offerings of subprime residential mortgage-backed securities (RMBS) by failing to disclose that its financial condition was significantly deteriorating.
In its action, the SEC said that Option One promised investors in more than $4 billion worth of RMBS offerings it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties. However, it failed to tell investors that its financial condition was deteriorating and that it was relying on its parent company, H&R Block, to provide funds for it to meet its obligations. H&R Block was under no obligation to do so.
According to the filing, Option One was one of the country’s biggest subprime mortgage lenders with originations of $40 billion in its 2006 fiscal year. However, the meltdown in the mortgage market resulted in a decline in revenues and significant losses, and hundreds of millions of dollars in margin calls from its creditors.
Option One, now known as Sand Canyon Corporation, agreed to pay $28.2 million to settle the SEC’s charges, without admitting or denying the SEC’s allegations. It consented to the entry of an order permanently enjoining it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and requiring it to pay disgorgement of $14,25 milion, prejudgment interest of $4 million, and a penalty of $10 million. The proposed settlement is subject to court approval.
$32 Million Settlement Reached in Insider Trading Case
In the third matter, the SEC reached a settlement in a $32 million insider trading case it filed last year against a corporate attorney and a Wall Street trader. The SEC alleged that the insider trading occurred prior to at least 11 merger and acquisition announcements involving clients of the law firm where the attorney, Matthew H. Kluger, worked.
Kluger and the trader, Garrett D. Bauer, worked through a mutual friend identified as Kenneth T. Robinson; Robinson acted as a middleman to facilitate the illegal tips and trades. To avoid being caught, Kluger and Bauer used public telephones and prepaid disposable mobile phones for their operations. Robinson, now also charged, cooperated in the SEC’s investigation.
Under the consent agreements with the SEC, Bauer, Kluger, and Robinson each agreed to give up their ill-gotten gains plus interest in order to settle the SEC’s charges: approximately $31.6 million for Bauer, $516,000 for Kluger, and $845,000 for Robinson. In parallel criminal actions brought by the U.S. Attorney’s Office for the District of New Jersey, Bauer, Kluger and Robinson have all pleaded guilty and are scheduled to be sentenced on June 4.