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.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Recent actions announced by the SEC or that will come before FINRA include charges of insider trading, violation of the Foreign Corrupt Practices Act (FCPA) and a suit filed by an investment company against breakaway brokers.
Physicians Charged in Insider Trading
Five physicians charged by the SEC with insider trading in the securities of an East Lansing, Mich.-based holding company for a medical professional liability insurer agreed to pay a combined total of more than $1.9 million to settle the charges.
Without admitting or denying the charges, Apparao Mukkamala, Suresh Anne, Jitendra Prasad Katneni and Rao A.K. Yalamanchili, as well as Mukkamala’s brother-in-law Mallikarjunarao Anne agreed to pay disgorgement, prejudgment interest and financial penalties. Mukkamala further agreed to be barred from acting as an officer or director of a public company.
Mukkamala, a resident of GrandBlanc, Mich., served as a board member for American Physicians Capital (ACAP) since the company's formation in July 2000. He became its chairman in May 2007. The SEC alleged that Mukkamala learned confidential information from board meetings and other communications about the anticipated acquisition of ACAP by another insurance company, which he then shared with the other four.
All five subsequently bought stock in ACAP, prior to a public announcement of the sale. Mukkamala also made trades in the account of Chinmaya Mission West, a charitable organization for which he was then serving as president. Once the sale was announced, they collectively made more than $623,000 in illegal profits on their ACAP stock.
The settlement is subject to court approval.
Medical Devices Company Charged with Violation of FCPA for Bribery
The SEC charged the Texas-based medical device company Orthofix International with violating the Foreign Corrupt Practices Act (FCPA) when a Mexican subsidiary paid routine bribes referred to as “chocolates” to Mexican officials in order to obtain lucrative sales contracts with government hospitals. Settling the charges could cost the company $5.2 million in disgorgement and prejudgment interest if the settlement is approved.
According to the SEC’s complaint, filed in U.S. District Court for the Eastern District of Texas, Orthofix’s Mexican subsidiary, Promeca S.A. de C.V., bribed officials at Mexico’s government-owned health care and social services institution, Instituto Mexicano del Seguro Social (IMSS). The bribery scheme, which began in 2003 and continued until 2010, yielded nearly $5 million in illegal profits for the Orthofix subsidiary.
The bribes, called “chocolates,” came in the form of cash, laptop computers, televisions and appliances provided directly to Mexican government officials or indirectly through front companies that the officials owned.
Initially, Promeca falsely recorded the bribes as cash advances and falsified its invoices to support the expenditures. Later, when the bribes got much larger, Promeca falsely recorded them as promotional and training costs. This made Promeca’s training and promotional expenses significantly over budget. While Orthofix did launch an inquiry, it did very little to investigate or diminish the excessive spending.
Orthofix also disclosed in an 8-K filing that it has reached an agreement with the U.S. Department of Justice to pay a $2.22 million penalty in a related action.
Breakaway Brokers Charged with Misappropriating Trade Secrets, More
In a case destined to go before FINRA, CCO Investment Services, an affiliate of Citizen’s Bank, was granted a temporary restraining order against several former Connecticut brokers and against Wells Fargo Advisors for misappropriating trade secret information, breach of contract and unfair competition.
According to the TRO motion, filed June 5 in U.S. District Court in Connecticut, financial consultants James Oliver, James Venditti and Della Hicks left CCO on June 1 and immediately joined Wells Fargo, where they used what CCO deemed to be confidential information about former clients. While CCO is not a member of the Broker Protocol, which limits the client information a broker can take to another firm, it has its own rules written into broker contracts. Those rules prohibit any client information from being utilized for any purpose other than CCO’s.
The company claims that Oliver and Venditti generated commissions for CCO “[exceeding] $1.2 million, making them among the largest producers in the company.” Of that, “CCO estimates that approximately 70% to 90% of its customer relationships are not generated by the financial consultants themselves,” thereby claiming that CCO, not the brokers, accumulated most of the clients.
The motion, was granted by U.S. District Judge Stefan R. Underhill, but since both parties are members of FINRA, further proceedings will be handled there.