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.
- 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.
Conflict of interest charges against a former SEC enforcement official, charges of deceiving investors against a Miami-based hedge fund advisor and fraud charges against a Phoenix investment advisor and his firm were among the enforcement actions taken recently by the SEC.
SEC Enforcer Barred Due to Allen Stanford Ties
A former enforcement official was barred for a year from appearing and practicing before the SEC on charges of conflict of interest, after previously having agreed to pay a civil fine of $50,000 to the U.S. Justice Department for the same conduct. He consented to the action without admitting or denying the charges.
Spencer Barasch was associate district director for the division of enforcement in the SEC’s Fort Worth office from June 1998 to April 2005. During that time, Barasch took part “personally and substantially,” according to the SEC, in decisions involving allegations of securities law violations by entities associated with Robert Allen Stanford, including Stanford Group Co.
When he joined a private law firm in 2005, Barasch contacted the ethics office about representing Stanford Group Co., and was told at the time that he was permanently barred from representing the firm with respect to any matters on which he had participated while at the SEC. According to the order, he did decline to represent the company then, but in 2006 accepted work that had to do with Stanford matters on which he had worked while at the SEC.
In connection with this work, he tried to gain information about the SEC’s Stanford investigation from the Fort Worth office, but was unsuccessful, and was told to contact the ethics office. When he did, he was once again told he could not represent Stanford on matters in which he had been involved while at the SEC. He did terminate the arrangement, but had billed the company for 12 hours of legal work in connection with the matter.
Before Barasch can resume appearing and practicing before the SEC, the agency must determine that he has truthfully sworn that he has satisfied several conditions that reflect on his character and fitness to practice before it.
Investor Deception Charged
A hedge fund advisor based in Miami agreed to pay more than $3.1 million in total disgorgement and penalties to settle charges that it deceived investors, without admitting or denying findings.
According to the SEC, Quantek Asset Management made various misrepresentations about fund managers having “skin in the game” along with investors in the $1 billion Quantek Opportunity Fund. However, Quantek executives never invested their own money.
In addition, the SEC found that Quantek misled investors about the investment process of the funds it managed, as well as certain related-party transactions involving its lead executive, Javier Guerra, and its former parent company, Bulltick Capital Markets Holdings.
The fund made related-party loans to affiliates of Guerra and Bulltick that were not properly documented or secured. To soothe nervous investors about the loans, employees later re-created the missing related-party loan documents, but misstated key terms of the loans and backdated the materials so that it would look as if the loans had been sufficiently documented and secured at all times. Quantek and Guerra then provided the phony documents to investors.
Bulltick, Guerra, and former Quantek operations director Ralph Patino were all charged along with Quantek in the enforcement action. In addition to the financial penalties, Guerra and Patino agreed to securities industry bars.
Quantek and Guerra agreed jointly to pay more than $2.2 million in disgorgement and pre-judgment interest, and to pay financial penalties of $375,000 and $150,000, respectively. Bulltick agreed to pay a penalty of $300,000, and Patino agreed to a penalty of $50,000. Guerra consented to a five-year securities industry bar, and Patino consented to a one-year bar. Quantek and Bulltick agreed to censures.
They all consented to orders that they cease and desist from committing or causing violations of certain antifraud, compliance, and recordkeeping provisions of the Investment Advisers Act of 1940 and the Securities Act of 1933.
Advisor, Firm Charged with Fraud
An SEC order instituting administrative proceedings against the Phoenix-based investment advisor Walter J. Clarke and his firm Oxford Investment Partners alleges that Clarke advised clients of his firm to invest in two businesses without disclosing the conflicts of interest that he co-owned one of them and had financial ties to the owners of the other. Both investments later failed. And when Clarke’s own financial problems prompted him to sell a stake inOxfordto a client, he fraudulently inflated the value of his firm by at least $1.5 million to make the client overpay by at least $112,000.
The SEC charged that Clarke convinced three clients in late 2007 and early 2008 to fund more than $300,000 in loans originated by Cornerstone Funding Group, a company co-owned by Clarke. Clarke, however, never told the clients that he was a co-owner and would personally profit from successfully originated loans. Within months of the loans being funded, the underlying borrowers defaulted, causing the clients to lose their investments.
In November 2008, Clarke persuaded four clients to invest approximately $40,000 in HotStix, a privately held company—again without telling them that the owners of HotStix were also co-owners and paid consultants of Oxford. Shortly after the clients made these investments, HotStix sought bankruptcy protection and the clients lost their money.
The SEC investigation also found that in March 2008, when Clarke was having financial trouble, he sold a client 7.5% of his ownership interest in Oxford. Clarke inflated the value of the firm to $10 million by several different means, and the client paid $750,000 based on that valuation.
The SEC’s litigation will be led by Paris Wynn and David Van Havermaat.