More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
The SEC and FINRA took a number of enforcement actions recently, against both individuals and businesses for a range of offenses from insider trading to fraud and influence peddling. Among those finding themselves on the wrong end of an SEC action were a movie producer, a former mayor and a Shanghai-based auditing firm.
Former Detroit Mayor, Others Charged With Influence Peddling
The SEC also took action against former Detroit mayor Kwame M. Kilpatrick, former city treasurer Jeffrey W. Beasley and the investment adviser to the city’s public pension funds, and charged them with involvement in a secret exchange of lavish gifts to peddle influence over the funds’ investment process.
Kilpatrick and Beasley, who were trustees to the pension funds, are alleged to have solicited and received $125,000 worth of private jet travel and other perks paid for by MayfieldGentry Realty Advisors LLC, an investment adviser whose CEO, Chauncey Mayfield, was recommending to the trustees that the pension funds invest approximately $117 million in a REIT controlled by the firm.
The complaint alleges that, despite their fiduciary duties, neither Kilpatrick and Beasley nor Mayfield and his firm informed the boards of trustees about these trips and the conflicts of interest they presented. Some of the trips were presented as business travel, but no business was done and despite the fact that Mayfield knew this, he never questioned the arrangement. Other trips were for destinations such as Las Vegas, Tallahassee and Bermuda. The funds ultimately voted to approve the REIT investment, and MayfieldGentry received millions of dollars in management fees.
The SEC seeks disgorgement of ill-gotten gains, penalties and permanent injunctions, including an injunction against Kilpatrick and Beasley to prohibit them from participating in any decisions involving investments in securities by public pensions.
Movie Producer Charged by SEC
In another SEC action, a Hollywood movie producer, his brother, cousin, and three others among his friends and business partners were charged for insider trading in the stock of a company for which he served on the board of directors.
The producer, Mohammed Mark Amin, and five others agreed to settle the SEC’s charges by collectively paying nearly $2 million.
Amin, who is credited as either the producer or the executive producer for more than 75 movies, including Frida, Eve’s Bayou and four films in the Leprechaun series, is alleged by the SEC to have gained confidential information before a board meeting of DuPont Fabros Technology, which develops and manages highly specialized and secure facilities that, through long-term leases, maintain large computer servers for technology companies.
Amin provided nonpublic details to his brother Robert Reza Amin, his cousin Michael Mahmood Amin, and longtime friend and business manager Sam Saeed Pirnazar about three new leases DuPont Fabros was negotiating and three loans it was obtaining to develop new facilities.
The Amins and Pirnazar illegally traded on that information, and Reza Amin also gave the information to his friends and business associates Mary Coley and Ali Tashakori, who also illegally traded. After an earnings release that highlighted the development of these facilities, DuPont Fabros stock rose 36% and the five individuals together made more than $618,000 in insider trading profits.
They also have agreed to the entry of a final judgment permanently enjoining them from violating Section 10(b) of the Exchange Act and Rule 10b-5. Mark Amin has additionally agreed to a bar from serving as an officer or director of a public company for 10 years. The settlement is subject to court approval.
SEC, British Financial Services Authority Fine Scotland-Based Fund Management Group $14 Million
A Scotland-based fund management group was charged by the SEC with fraudulently using one of its U.S. fund clients to rescue another client, a China-focused hedge fund suffering from the global financial crisis.
Without admitting or denying the SEC’s findings, Martin Currie agreed to settle the SEC’s charges by paying a total of nearly $14 million to the SEC and the U.K.’s Financial Services Authority (FSA)—a penalty of $8.3 million to the SEC, and acceptance of censures and cease-and-desist orders against future violations, and a penalty of £3.5 million ($5.6 million) to settle the FSA’s action.
The SEC charged Martin Currie with violations of the antifraud, affiliated transaction, reporting and compliance provisions of the Investment Advisers Act of 1940 and the Investment Company Act of 1940, and alleged that it steered a U.S. publicly traded fund called The China Fund Inc. into an investment to bolster the hedge fund.
The hedge fund had acquired a significant and largely illiquid exposure to a single Chinese company. Martin Currie directly alleviated the hedge fund’s liquidity problems by deciding to use the China Fund—to the detriment of the fund and its shareholders—in a bond transaction that reduced the hedge fund’s exposure.
FINRA Hearing Officer Expels BD
During a recent hearing, a FINRA hearing officer found that Pinnacle Partners Financial Corp., a broker-dealer based in San Antonio, Texas, and its president, Brian Alfaro, conducted fraudulent sales of oil and gas private placements and unregistered securities. Alfaro was also found to have used customer funds for personal and business expenses.
Already under a temporary cease and desist order from FINRA that had been issued January 21, 2011, Pinnacle and Alfaro were indefinitely suspended by FINRA in April of that year for failing to comply with the order’s terms prohibiting their fraudulent misrepresentations.
The hearing officer expelled Pinnacle and barred Alfaro for conducting a boiler room operation that raised more than $10 million from more than 100 investors. In addition, Pinnacle and Alfaro have been ordered to offer as restitution to investors who were sold fraudulent offerings rescission of those offerings, and to refund all sales commissions to those customers who do not request rescission.
Alfaro and Pinnacle Partners failed to appear before the hearing panel, and the hearing officer as a result issued a default decision.
First Foreign Audit Firm Charged by SEC
Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. was the target of an enforcement action by the SEC for its refusal to provide the agency with audit work papers related to a China-based company under investigation for potential accounting fraud against U.S. investors.
According to the SEC’s order instituting administrative proceedings against D&T Shanghai, the agency has tried extensively for more than two years to obtain documents related to the D&T Shanghai’s work for the company, which issues U.S. securities registered with the SEC. The firm is charged with violating the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide audit work papers concerning U.S. issuers to the SEC upon request. D&T Shanghai has nonetheless failed to provide the documents, citing Chinese law as the reason for its refusal.
This isn’t the first time D&T Shanghai has been the object of an enforcement action. Last year in another matter, the SEC filed a subpoena enforcement action against the firm in federal court after it failed to produce documents in response to a subpoena related to an SEC investigation into possible fraud by one of its longtime clients, Longtop Financial Technologies Ltd. The SEC later filed charges against Longtop for alleged reporting failures.
This is, however, the first time the SEC has brought an enforcement action against a foreign audit firm for failing to comply with a Section 106 request.
SEC Charges Daughter and Father on Insider Trading
In an SEC action, a former paralegal at a Kalispell, Mont.-based semiconductor company and her father were charged with insider trading on confidential information about the 2009 acquisition of the company. They have agreed to settle the SEC’s charges without admitting or denying the allegations by paying more than $175,000.
The SEC alleges that Angela Milliard wired money to her boyfriend’s brokerage account so she could illegally trade on nonpublic details she learned while working as a legal assistant on Semitool’s then-secret deal with a Silicon Valley company, Applied Materials.
She also provided the information to her father, Kenneth Milliard, that Applied Materials would make a tender offer in mid-November at a nearly 30% premium over Semitool’s then-trading price. Kenneth Milliard not only also bought shares of Semitool but gave the information to his sons, who did the same. The Milliards sold their shares on the morning the acquisition was announced and reaped illicit profits of more than $67,000.
Manhattan Man Charged With Market Manipulation
The agency also charged a Manhattan resident, David Blech, with carrying out a complex market manipulation scheme in biopharmaceutical stocks after he was kicked out of the brokerage industry for fraud.
Apparently unwilling to take “no” for an answer, David Blech is alleged to have established more than 50 brokerage accounts in the names of family members, friends and even a private religious institution, Central Yeshiva Beth Joseph, managed by a cousin.
He used those accounts, according to the SEC charge, to buy and sell significant amounts of stock in two biopharmaceutical companies, Pluristem Therapeutics and Intellect Neurosciences, in order to create the artificial appearance of activity in their securities so he could maintain their market price and use it to his own financial advantage.
Blech, previously convicted of securities fraud, also solicited investments for biopharmaceutical companies—including the two companies whose stock he manipulated—despite being barred by the SEC from acting as a broker-dealer.
In addition, the SEC further alleges that Blech and his wife Margaret Chassman, who also is charged in the case, flouted federal securities laws when they repeatedly made unregistered sales of securities and failed to disclose their transactions in the various brokerage accounts.
The SEC’s complaint seeks a final judgment ordering Blech and Chassman to disgorge their ill-gotten gains plus prejudgment interest, pay financial penalties, and be permanently enjoined from future violations of the provisions of the federal securities laws they violated. It also seeks orders requiring Blech to comply with a prior SEC order barring him from association with a broker or dealer, and prohibiting him from various other stock activities.
Blech has also been criminally charged in a parallel action by the U.S. Attorney’s Office for the Southern District of New York.