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.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
Recent actions by the SEC include shutting down two Ponzi schemes, one that brought in $100 million and another that collected $42 million and actually paid out some of its profits—both focused on real estate; charging a Malaysian advisor firm with breach of duty and the founder of an equity research firm with insider trading; and charging a Long Island software company in connection with bribery.
$100 Million Real Estate Ponzi Scheme Halted
A Utah man who told investors that their money was “completely secure” and that his company had a “perfect record” of payments in a real estate-based Ponzi scheme was the target of a temporary restraining order and an asset freeze by the SEC, after being charged with bilking investors across the country of $100 million.
The SEC’s complaint, filed in U.S. District Court for the District of Utah, names Wayne L. Palmer and his firm, National Note of Utah, both of West Jordan, Utah. In the complaint, the SEC alleged that Palmer told investors that their money would be used to buy mortgage notes and real estate assets, or to make real estate loans, and that more than 600 individuals invested, lured by promises of annual returns of 12%.
National Note and Palmer are charged with violating the antifraud and securities registration provisions of U.S. securities laws. Palmer also faces charges that he operated as an unregistered broker-dealer.
National Note, the SEC alleged, used most of the money it took in from new investors to pay earlier investors, making it a classic Ponzi scheme. The agency said that since 2009, National Note would not have been able to survive without new investor funds coming in, and that in October investor payouts had all but stopped. Despite that, said the SEC’s complaint, Palmer reassured investors that they would be paid while he continued to solicit new investors in National Note without telling them that the company was delinquent in its payments to existing investors.
Malaysia Advisory Firm Sued for Not Advising
The SEC sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment advisor, alleging that for more than 10 years, AMC charged U.S.-registered Malaysia Fund Inc. for advisory services that AMC did not provide, and that by doing so, AMC breached its fiduciary duty with respect to compensation under the Investment Company Act of 1940. Without admitting or denying the allegations, AMC agreed to pay $1.6 million to settle the SEC’s charges.
Kuala Lumpur-based AMC served as a subadvisor to the Malaysia Fund, which is a closed-end fund that invests in Malaysian companies and whose principal investment adviser is Morgan Stanley Investment Management (MSIM).
MSIM was charged in November with violating securities laws in a fee arrangement that repeatedly charged a fund and its investors for advisory services they weren’t actually receiving from a third party, and agreed to pay more than $3.3 million to settle those charges. Both cases are part of an inquiry into the investment advisory contract renewal process by the SEC Enforcement Division’s asset management unit.
Chad Alan Earnst, assistant regional director of the asset management unit, said in an interview, “In this case, the advisor and subadvisor had a complete disconnect.”
The SEC alleged that AMC submitted a report to the Malaysia Fund’s board of directors each year falsely claiming that AMC was providing specific advice, research, and assistance to MSIM for the benefit of the fund, when AMC’s actual services were limited to providing two monthly reports based on publicly available information that MSIM did not request or use.
“The whole ability of the board to function as an independent check upon the advisor is really dependent on full and fair information flowing from advisor to board,” Earnst said. “Attention has to be paid to be sure this kind of conduct doesn’t happen.”
'Too-Good-to-Be-True' Returns Promised
The SEC got an emergency court order to halt an alleged Ponzi-like scheme operated by California-based Small Business Capital Corp. and its principal Mark Feathers, who raised $42 million by selling securities issued by Investors Prime Fund and SBC Portfolio Fund, two mortgage investment funds they controlled. A hearing has been scheduled for a preliminary injunction.
According to the SEC, Feathers drew in more than 400 investors with promises of returns that were too good to be true—annual returns of 7.5% or more. When he couldn’t deliver on those promises, he allegedly used both investor money and the actual fund profits to pay investors.
The SEC alleges that from 2009 to early 2012, Feathers improperly transferred more than $6 million from the funds to Small Business Capital to pay its expenses, including substantial payments to Feathers—and had the funds account for the transfers in a way that disguised depletion of fund assets.
Insight Research Owner Charged With Insider Trading
Tai Nguyen, owner of California-based equity research firm Insight Research, was charged by the SEC with insider trading. The charges stem from the agency’s ongoing investigation of insider trading involving so-called “expert networks” that provide specialized information to investment firms.
Nguyen is charged with violating the antifraud provisions of U.S. securities laws; the SEC seeks a final judgment ordering him to disgorge his ill-gotten gains, with interest, and pay financial penalties, and permanently barring him from future violations.
According to the complaint, from 2006 through 2009, Nguyen regularly obtained material nonpublic information about Abaxis Inc.’s quarterly earnings—including revenues, gross profit margins and earnings per share—from a relative who worked in Abaxis’ finance department. He used the information to trade Abaxis securities in his own account and reaped approximately $145,000 in illicit trading profits.
Software Firm Charged With Bribing JPMorgan Unit
FalconStor Software, Inc., a Long Island, N.Y., data storage company, was charged by the SEC with misleading investors about bribes it paid to obtain business with a subsidiary of JPMorgan Chase & Co. FalconStor admitted to the bribery scheme, agreed to pay a $2.9 million penalty and to institute enhanced compliance measures to settle the SEC’s civil lawsuit, filed in U.S. District Court for the Eastern District of New York. The settlement is subject to court approval.
FalconStor will pay an additional $2.9 million as part of a deferred prosecution agreement with the U.S. Attorney’s Office for the EDNY, which filed a related criminal case against the company.
According to the SEC, FalconStor’s now-deceased co-founder, chairman and former chief executive ordered the bribes, which were paid to three executives of the subsidiary, JPMorgan Chase Bank, National Association, and their relatives, starting in October 2007. Lavish entertainment at casinos, and payments in cash, traveler’s checks, gift cards, and grants of FalconStor options and restricted stock helped FalconStor secure a multimillion dollar contract with the JPMorgan Chase subsidiary, the SEC said.
FalconStor capitalized on the fact that the subsidiary became one of its largest customers, but never disclosed to anyone that it had provided bribes, instead recording the payments as “compensation,” “sales promotion” or “entertainment” expenses.