More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- 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.
Among recent enforcement actions were SEC charges against a husband and wife who defrauded seniors who thought they were investing in a charity and the sentencing of an insider trading informant who managed to avoid prison time for his cooperation.
Husband and Wife Charged in Charity Investment Fraud Against Seniors
Richard Olive and Susan Olive, a husband and wife who raised millions of dollars selling investments for a purported charitable organization in Tallahassee, Fla., were charged by the SEC with defrauding senior citizens and significantly exaggerating the amount of contributions actually made to charity.
The Olives, according to the SEC’s complaint, were hired by We The People Inc., and subsequently raised $75 million from more than 400 naïve and elderly investors in Florida, Colorado and Texas, among more than 30 states across the country. They conned the investors into transferring assets to We The People and in exchange sold an investment product they described as a charitable gift annuity (CGA).
We The People claimed from June 2008 to April 2012 to be operating as a nonprofit. Far from it—We The People’s main purpose was to issue the CGAs and use the proceeds to pay the Olives, as well as third-party promoters and consultants. The Olives raked in more than $1.1 million in salary and commissions, in addition to investor funds that they managed to divert for their personal use.
We The People’s CGAs were far from legitimate. Not only was their main purpose to benefit the Olives and others, but only a small amount of the funds raised actually went to any charitable purpose. As an example, according to the organization’s public statements, it donated $21.8 million for the relief of AIDS orphans in Zambia. The truth was that the supplies for Zambia were donated by others, and We The People only donated a little cash to the third party that shipped the supplies.
We The People’s marketing materials were full of misrepresentations and omissions, and claimed the CGAs were worth the “full” accumulated value of the assets transferred by investors when they were not. The way We the People calculated the CGAs’ value always came in substantially lower than full value, because the organization skimmed off a large percentage of the value and kept it as a “charitable gift.”
We The People also claimed to hold in trust a 110% reserve of its liabilities, and to “reinsure” its products through “highly rated” commercial insurance companies. It did no such thing; it had no restricted-access trust accounts and thus no reserves, and it never reinsured anything.
The marketing materials also failed to disclose that the Olives had come in for previous indictments and regulatory sanctions for selling the same type of bogus products in the past, and neglected to mention the substantial commissions We The People paid to the Olives and others, to the tune of several million dollars.
The Olives are charged with violations, or aiding and abetting violations, of antifraud provisions of federal securities laws as well as violations of the securities and broker-dealer registration provisions of federal securities laws. The SEC seeks disgorgement of ill-gotten gains, plus pre- and post-judgment interest and financial penalties against the Olives.
The SEC also filed separate complaints against We The People and its in-house counsel, William Reeves. Both he and the organization agreed to settle the charges without admitting or denying the SEC’s allegations; the settlements are subject to court approval. We The People consented to a final judgment that will enable a receiver to protect the more than $60 million of investor assets it still holds; the judgment also provides for disgorgement of ill-gotten gains and provides injunctive relief. Reeves, who is expected to cooperate in the case against the Olives, faces suspension and a possible financial penalty as well.
Insider Trading Informant Pays Penalty, Avoids Jail
Being “a particularly impressive cooperator” won the insider trading informant Karl Motey freedom from jail time at his sentencing Monday.
Motey, a technology consultant and former top securities analyst in the semiconductor industry, began to pass on confidential information in 2007 from Marvell Technology Group Ltd. and other companies. In April of 2009, he was accosted by an FBI agent, and shortly thereafter began to cooperate with authorities.
In 2010 he pled guilty to conspiracy and securities fraud, but his cooperation in recording conversations in connection with government insider trading investigations has led to more than 20 convictions of other defendants, including former hedge fund manager Doug Whitman.
At his sentencing, Motey was described by U.S. District Judge Jed Rakoff as “a particularly impressive cooperator.” He was ordered to forfeit $40,000 and to serve a year of supervised release, for conspiracy and securities fraud.