More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
Recent enforcement actions by the SEC include charges against a former Morgan Stanley executive for violation of the Foreign Corrupt Practices Act (FCPA) as well as securities laws for investment advisors; a mother and daughter and their attorney in a penny stock scheme; UBS Puerto Rico for defrauding fund customers; and a Florida man and 10 cohorts in two stock-selling schemes, one of which was focused on Haiti.
Former Morgan Stanley Exec Violated FCPA, SEC Says
The former Morgan Stanley executive, Garth R. Peterson, was accused of secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to Morgan Stanley’s funds. He agreed to a settlement.
According to SEC allegations, Peterson, who was a managing director in Morgan Stanley’s real estate investment and fund advisory business, had a personal friendship and secret business relationship with the former chairman of Yongye Enterprise (Group) Co., a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai.
The SEC said Peterson secretly arranged to have at least $1.8 million paid to himself and the Chinese official; he disguised the money as finder’s fees that Morgan Stanley’s funds owed to third parties. He also secretly arranged for himself, the Chinese official, and an attorney to acquire a valuable Shanghai real estate interest from a Morgan Stanley fund—and at the same time he negotiated both sides of the transaction. In exchange, the Chinese official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments.
Peterson agreed to a settlement in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the Shanghai real estate (currently valued at approximately $3.4 million). The Department of Justice has filed a related criminal case against him.
In the mother-and-daughter case, Christel Scucci and her mother Karen Beach, who live in Florida, are alleged to have used alter ego companies (Protégé Enterprises LLC and Capital Edge Enterprises LLC) to make more than $1.5 million from selling approximately 3.3 billion shares of purportedly unrestricted stock that they acquired in so-called debt conversion “wraparound” transactions.
Under the wraparound agreements, affiliates or others purportedly owed money by certain microcap issuers for more than one year assigned from the issuers to Protégé or Capital Edge the right to collect the debts. The wraparound agreements also purported to amend the initial debt agreements, thereby allowing Protégé and Capital Edge to convert the money owed to them by the issuers into shares of the issuers’ common stock at a deep discount (usually 50%) to the prevailing market price. Protégé and Capital Edge almost always elected to receive stock from the issuers shortly after execution of the wraparound agreements. None of the transactions were registered with the SEC.
They were able to sell most of this stock, the SEC said, only because Florida-based attorney Cameron H. Linton issued baseless legal opinions for them stating that the stock could be issued without restrictive legends and that their resales were exempt from the registration requirements of the federal securities laws.
The SEC’s complaint alleges that Protégé, Capital Edge, Scucci and Beach violated Section 5 of the Securities Act, and further alleges that Linton violated, or aided and abetted the violation of, Section 5 of the Securities Act. The agency seeks disgorgement, penalties, injunctions, and penny stock bars against the defendants.
UBS and Two of its Execs Charged
UBS Financial Services Inc. of Puerto Rico and two executives were charged with making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds. UBS Puerto Rico agreed to pay $26.6 million.
According to the SEC’s order instituting settled administrative proceedings against UBS Puerto Rico, the firm knew about a significant “supply and demand imbalance” and discussed the “weak secondary market” internally. However, it misled investors and failed to disclose that it controlled the secondary market.
The firm significantly increased its inventory holdings in the closed-end funds in order to prop up market prices, bolster liquidity, and promote the appearance of a stable market. However, it later withdrew its market price and liquidity support in order to sell 75% of its closed-end fund inventory to unsuspecting investors.
UBS Puerto Rico agreed to settle the SEC’s charges by paying $26.6 million that will be placed into a fund for harmed investors. In addition, the SEC has instituted contested administrative proceedings against UBS Puerto Rico’s vice chairman and former CEO Miguel A. Ferrer and its head of capital markets Carlos J. Ortiz.
In the Florida case, the SEC alleges that Kevin Sepe of Miami masterminded stock schemes involving two microcap companies, Recycle Tech and HydroGenetics, with the help of three licensed attorneys and several others who collectively reaped illegal profits of more than $3.5 million. Aventura, Fla.-based attorney Ronny Halperin assisted Sepe in both schemes.
Six of the 11 individuals involved have agreed to settlements ordering them and companies they own to collectively pay more than $3.2 million.
The Recycle Tech scheme involved a promotional campaign to pump the price and volume of the purported home container building company’s stock in the wake of theHaitiearthquake. The HydroGenetics scheme took millions of unregistered shares of the company—purportedly in the business of acquiring emerging alternative energy companies—and improperly converted its debt into free-trading shares that were dumped on the investing public.
Others involved in the schemes include Ryan Gonzalez, Anthony Thompson, Jay Fung, David Rees, Melissa Rice, Luz Rodriguez, Howard Ettelman, Seth Eber and Charles Hansen III.