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.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The Securities and Exchange Commission (SEC) on Thursday charged a broker and his company based in Danbury, Conn., with stealing at least $600,000 from clients and using the money to pay for his mortgage, grocery bills and other personal expenses.
The SEC alleges that Stephen B. Blankenship persuaded about a dozen clients—including some retirees and others he met at church—to withdraw money from their brokerage accounts he managed at other firms and instead invest with him directly. As part of his scheme, he assured them they could obtain a greater rate of return on their money by transferring it to his firm, Deer Hill Financial Group.
According to the SEC, Blankenship claimed he was investing their money in established securities such as publicly traded mutual funds. But in reality he made no investments and merely transferred customer money to his own bank account, and he misused it to pay his mortgage, travel and grocery bills among other personal expenses. Blankenship also paid some business expenses and made Ponzi-like payments to other customers who requested a return of all or part of their investment.
In a parallel action, the U.S. Attorney’s Office for the District of Connecticut on Thursday announced criminal charges against Blankenship.
“Blankenship took advantage of fellow churchgoers and senior citizens who relied on their savings for retirement and placed their trust in him,” said David P. Bergers, director of the SEC’s Boston Regional Office, in a statement. “He betrayed that trust by using their money to make personal credit card payments and home improvements.”
According to the SEC’s complaint filed in the U.S. District Court for the District of Connecticut, most of the investors deceived by Blankenship became his brokerage customers at Santa Monica-based Syndicated Capital and later at Melville, N.Y.-based Vanderbilt Securities. Some had been his customers for as long as two decades. Beginning in at least 2002, Blankenship took advantage of those longstanding relationships and began persuading customers to withdraw money from their brokerage accounts at those firms with promises that he could achieve a greater rate of return for them directly by investing their money through Deer Hill.
The SEC alleges that in order to conceal his scheme, "Blankenship often created fake account statements that falsely represented that he had invested their money in a variety of investments. The purported account statements were printed on Deer Hill letterhead and provided to customers." In all instances, the investments described on the account statements did not exist, the SEC says.
The SEC’s complaint alleges that Deer Hill and Blankenship violated the antifraud provisions of the federal securities laws and acted as unregistered brokers. The complaint seeks disgorgement of ill-gotten gains plus prejudgment interest, monetary penalties, and the entry of a permanent injunction against Deer Hill and Blankenship, who lives in New Fairfield, Conn.
Based on the same misconduct, the U.S. Attorney’s Office for the District of Connecticut charged Blankenship with criminal violations. The Connecticut Department of Banking's Securities Division has obtained, by consent, a revocation of Blankenship’s registration and has barred Blankenship and Deer Hill from operating in Connecticut.