More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Recent actions taken by the SEC include charges against a hedge fund manager for running a $37 million Ponzi scheme; a former director in a compensation scheme that netted hundreds of thousands of dollars in undisclosed income; co-founders of a Chicago-area investment firm over misleading investors and supervisory failures that resulted in penalties of more than $1 million; and a private fund manager and his investment advisory firm over more than $17 million in losses in a Ponzi-like scheme.
Hedge Fund Manager Charged for $37 Million Ponzi Scheme
The SEC filed fraud charges against Jusaf Jawed, a Portland, Ore.-based investment adviser, who perpetrated a long-running Ponzi scheme that raised over $37 million from more than 100 investors in the Pacific Northwest and across the country.
The SEC alleges that Jawed used false marketing materials that boasted double-digit returns to lure people to invest their money into several hedge funds he managed. He then improperly redirected their money into accounts he personally controlled.
As part of the scheme, Jawed created phony assets, sent bogus account statements to investors, and manufactured a sham buyout of the funds to make investors think their hedge fund interests would soon be redeemed. He misused investor money to pay off earlier investors, pay his own expenses and travel, and create the overall illusion of success and achievement to impress investors.
According to the SEC’s complaint filed in federal court in Portland, Jawed managed a number of hedge funds through at least two companies he controlled: Grifphon Asset Management and Grifphon Holdings. Jawed’s marketing materials claimed that the Grifphon funds earned double-digit returns year after year, even as the S&P 500 Index declined. For certain funds, Jawed also falsely claimed they would invest in publicly traded securities and that their assets were maintained at reputable financial institutions.
The SEC alleges that Jawed instead invested very little of the more than $37 million that he raised. For one fund, 70% of the money raised was either paid in redemptions to investors in other funds, paid to finders, or merely transferred to accounts belonging to Grifphon Asset Management or other entities that he controlled. Jawed concealed the fraud by telling Grifphon’s bookkeepers that the money transfers represented purchases of offshore bonds, although the “investment” was actually a sham entity that was supposedly managed by Jawed’s unemployed aunt, who lives in Bangladesh.
According to the SEC’s complaint, Jawed further deceived investors as the funds were collapsing by telling them that independent third parties were buying the Grifphon funds’ alleged assets at a premium. In truth, the so-called third parties were more sham entities, originally formed by Grifphon and Jawed, and contained no assets, no income, and no ability to pay for the funds’ alleged assets.
The SEC’s complaint against Jawed additionally charges Robert Custis, an attorney hired by Jawed to assist him in the fraud. Custis sent false and misleading statements to investors about the status of the purported purchase of the Grifphon funds’ assets. Custis consistently misrepresented that this purchase was imminent and would result in investors’ investments being repaid at a profit.
The SEC filed separate complaints against two others connected to the scheme. One complaint alleges that Jacques Nichols, a Portland-based attorney, falsely claimed to investors that an independent third party would pay tens of millions of dollars to buy the hedge funds’ alleged assets at a premium; the second alleges that Jawed’s associate, Lyman Bruhn, of Vancouver, Wash., ran a separate Ponzi scheme and induced investments through false claims he was investing in blue-chip stocks.
Nichols and Bruhn agreed to settle the SEC’s charges without admitting or denying the allegations by consenting to entry of permanent injunctions against violations of the antifraud provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 and other relief. The SEC’s litigation continues against Jawed, the two Grifphon entities, and Custis, alleging multiple violations of the antifraud provisions of the federal securities laws.
The SEC’s investigation is continuing.
The SEC charged a former director at Port Washington, N.Y.-based consumer electronics retailer Systemax, Gilbert Fiorentino, for fraudulently bringing in hundreds of thousands of dollars in undisclosed compensation over a five-year period.
The SEC alleges that Fiorentino, who in addition to serving on the board was the former chief executive of Systemax’s technology products group in Miami, obtained more than $400,000 in extra compensation directly from firms that conducted business with the firm, and also stole several hundred thousand dollars’ worth of company merchandise that was used to market its products. According to the SEC’s complaint filed in federal court in Miami, this occurred from January 2006 to December 2010.
Systemax sells personal computers and other consumer electronics through its websites, retail stores and direct mail catalogs. Fiorentino arranged the extra compensation as he dealt directly with external service providers, manufacturer representatives and others that conducted business with Systemax. For example, he demanded and received $5,000 to $10,000 monthly from an entity that supplied materials to Systemax’s subsidiaries for use in retail and mail order operations.
The SEC also alleges that through his executive position at Systemax, Fiorentino had access to company merchandise used to market Systemax products in mail order catalogs and online, and routinely misappropriated some of this merchandise and failed to disclose it to Systemax and its auditors.
Because Fiorentino was one of Systemax’s highest-paid executives, the company was required by U.S. securities laws to disclose all compensation, perks and other personal benefits he received each year. However, he failed to disclose his extra compensation and perks to Systemax or its auditors, and the amounts reported to shareholders were understated. Fiorentino reviewed and signed each Systemax Form 10-K from fiscal years 2006 to 2010 while knowing that it failed to make the required disclosures. He also routinely signed management representation letters to Systemax’s independent auditors stating that he did not know of any fraud or suspected fraud involving Systemax’s management.
Systemax placed Fiorentino on administrative leave in April 2011. After the SEC began investigating the conduct, Fiorentino agreed to resign from all of his positions with Systemax, surrender stock and stock options valued at approximately $9.1 million, and repay his 2010 annual bonus of $480,000.
He has agreed to settle the SEC’s charges without admitting or denying the allegations, and has also agreed to pay an additional $65,000 penalty and consent to a permanent bar from serving as an officer or director of any publicly held company. The settlement is subject to court approval.
The SEC charged a co-founder of a Chicago-based investment firm with misleading investors in two private equity offerings, and charged the other co-founder with supervisory failures related to the offerings.
Advanced Equities, a broker-dealer and investment advisory firm, and co-founders Dwight Badger and Keith Daubenspeck were charged in connection with private offerings in 2009 and 2010 on behalf of an alternative energy company in Silicon Valley, which was not identified by name in the SEC’s administrative proceeding.
Daubenspeck co-founded Advanced Equities with Badger, was the former chief executive of its parent company and is the chairman of the parent company’s board. Badger, who led the sales effort for the offerings, made misstatements about the energy company’s finances that Daubenspeck did not correct, thus failing to reasonably supervise Badger, according to the SEC.
According to the SEC’s order, Badger said in the 2009 offering that the energy company had more than $2 billion of order backlogs when the backlog never exceeded $42 million. He also said it had a $1 billion order from a national grocery store chain, even though the store had only placed a $2 million order and signed a nonbinding letter of intent for future purchases. Badger said the company had been granted a U.S. Department of Energy loan exceeding $250 million when it had applied for a $96.8 million loan, and he again misstated the information about the loan application during the follow-up offering in 2010.
According to the SEC’s order, Daubenspeck participated in at least two internal sales calls with Advanced Equities brokers during the 2009 offering and remained silent after he heard Badger make misstatements about the company’s order backlog, grocery store order, and Department of Energy loan application. Despite the red flags raised by the misstatements and the obvious risk that false information would be repeated to investors, Daubenspeck did not take reasonable steps to correct the misstatements.
Badger, Daubenspeck and their firm agreed to settle the SEC’s charges. Advanced Equities agreed to pay a $1 million penalty, and agreed to be censured and to cease and desist from committing or causing any future violations of the securities laws it was found to have violated. The firm also agreed to numerous undertakings including hiring an independent consultant to review its sales policies and procedures.
Badger agreed to pay a $100,000 penalty and be barred for one year from association with any broker, dealer, investment adviser, municipal securities dealer or transfer agent. Daubenspeck agreed to pay a $50,000 penalty and a one-year supervisory suspension. Advanced Equities, Badger and Daubenspeck consented to the entry of the cease-and-desist order without admitting or denying the SEC’s charges.
The SEC is seeking an emergency court order to freeze the assets of private fund manager Angelo A. Alleca and his Atlanta-based investment advisory firm, Summit Wealth Management, to prevent further investor losses, estimated to be $17 million among approximately 200 clients.
The agency has also announced charges against Alleca and his firm for defrauding investors in a purported “fund of funds,” and then trying to hide trading losses by creating new private funds to make money to pay back the original fund investors in Ponzi-like fashion.
After receiving a tip, the SEC initiated an examination of Summit Wealth. As SEC examiners noticed something was amiss at the firm, they immediately coordinated with SEC enforcement attorneys to gather and assess evidence.
According to the SEC’s complaint filed in federal court in Atlanta, Alleca and Summit Wealth Management offered and sold interests in Summit Fund, which they told their clients was operating as a fund of funds—meaning they were investing their money in other funds and investment products rather than directly in stocks and other securities. The fund-of-funds investment strategy is intended to diversify investor money and minimize exposure to risks.
However, Alleca instead engaged in active securities trading with his clients’ money and incurred substantial losses. He concealed the Summit Fund trading losses from investors and provided them false account statements.
The SEC alleges that to meet redemption requests from Summit Fund investors, Alleca created at least two hedge funds to raise money from Summit Wealth clients: Private Credit Opportunities Fund LLC and Asset Diversification Fund LP. Alleca’s plan was to cover up the losses he had incurred in Summit Fund by illegally transferring profits from the new funds in a Ponzi-like fashion in order to meet earlier redemption requests.
However, Alleca’s plan backfired when those successive funds incurred further trading losses. He continued to issue false account statements to investors in Summit Fund as well as the additional funds in order to hide the actual losses on their investments. The SEC’s complaint charges Alleca, Summit Wealth Management and the three funds with violations of the antifraud provisions of the federal securities laws.