More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Among recent actions taken by the SEC are the freezing of assets in a Swiss account that was used for insider trading ahead of the Heinz acquisition; charges and an asset freeze against an Illinois individual and two companies seeking to exploit an immigration program; and fraud related to “risk-free” investments in a purported clean energy company.
Swiss Account Assets Frozen on Heinz Acquisition Insider Trading Case
The SEC used an emergency court order to freeze assets in a trading account in Zurich, Switzerland, to safeguard more than $1.7 million in trading proceeds.
The money was made in advance of the public announcement that Berkshire Hathaway—the firm run by Warren Buffett—and 3G Capital had agreed to acquire H.J. Heinz Co. in a $28 billion deal. The agency’s investigation into the matter is continuing.
According to the SEC’s complaint, the day before the announcement, unknown traders bought call options, betting that Heinz’s price would rise. And it did; in the wake of the announcement, the stock gained almost 20% and trading volume soared more than 1,700% from the day before.
The SEC alleges that the unknown traders knew material nonpublic information about the upcoming acquisition when they bought out-of-the-money Heinz call options the day before the announcement. Both the timing and the size of the trades were very suspicious; the account used for trading hadn’t touched Heinz in the previous six months, and overall trading in call options for the company had been minimal for several days prior to the announcement.
In addition to freezing the account assets, the order prohibits destruction of any evidence. The unknown traders have been charged with securities violations and will have to explain their actions in court before their assets can be unfrozen. The SEC is also seeking disgorgement of ill-gotten gains with interest, imposition of financial penalties, and a permanent bar from future violations.
SEC Files Charges, Freezes Assets in Immigration Program Exploitation
The SEC announced that it has charged an individual living in Illinois, and has frozen his assets along with those of two companies in a scheme to exploit a federal visa program that seeks to provide foreign investors looking not just for profits, but also for a way to become legal residents of the U.S.
According to SEC allegations, Anshoo Sethi created A Chicago Convention Center (ACCC) and Intercontinental Regional Center Trust of Chicago (IRCTC), then raked in more than $145 million in fraudulent securities sales along with $11 million in administrative fees. The money came from more than 250 investors, primarily from China, who were told that their purchases would finance construction of the “world’s first zero carbon emission platinum LEED-certified” hotel and conference center near Chicago’s O’Hare Airport.
Not only would there be no such convention center, but Sethi’s lies about the scheme included claims to have signed on several major hotel chains, including Hyatt Hotels, which supposedly provided a comfort letter for the project; InterContinental Hotels Group; and Starwood Hotels. He also produced a fake backup financing letter from the Qatar Investment Authority. None of the documents were real, but were provided to the U.S. Citizenship and Immigration Services (USCIS), the federal agency that administers the EB-5 program, in an attempt to gain project approval and preliminary visas for his victims.
Sethi himself claimed to have “over 15 years of experience in real estate development and management, specifically in the lodging area” (he’s only 29) and that the project’s developer, Upgrowth LLC, had “more than 35 years of experience.” That’s tough to do when, according to corporate records in Illinois, Upgrowth was only organized in 2010. Sethi also said things were well under way—construction, according to the offering materials, began in 2012—and that occupancy of the first tower would be ready in 2014. In truth, the project had only gotten permits for a tent for a groundbreaking ceremony, some demolition, construction of a fence and for minor electrical wiring.
In the meantime, Sethi and his companies were busy spending the $11 million in supposedly 100% refundable administrative fees. Thanks to the freeze order, however, the other $145 million in investor funds has not been lost.
The SEC’s investigation is continuing; meanwhile, in addition to the temporary restraining order and asset freeze it has already gotten, it seeks permanent injunctions and investor relief.
Brokerage Firm Charged with Fraud over ‘Clean Energy’ Investments
New York-based brokerage firm Charles Vista LLC, its founder Gregg Lorenzo of Staten Island and investment banker Frank Lorenzo (unrelated) were charged with allegedly using misleading sales tactics to guide investors into risky investments in a purported clean energy company so the firm could earn lucrative commissions.
According to the SEC’s complaint, investors were solicited to purchase the convertible debentures of Waste2Energy Holdings in 2009 and 2010. Solicitations were made based on various false claims, such as Waste2Energy supposedly possessing the technology to convert waste into clean energy.
In addition, claims were made that Waste2Energy held “over $10 million in confirmed assets” to provide investors with protection against losses. The truth was that the company had written its assets down to less than $1 million; it eventually filed for bankruptcy.
The deal that was such a loser for investors was very profitable for Charles Vista, which was the exclusive placement agent for the issuance of the Waste2Energy securities at the heart of the matter. Documents attached to some of Waste2Energy’s SEC filings indicate that Charles Vista had arranged to receive a 10% “commission” on the gross proceeds of all debentures sales, a consulting fee of $10,000 per month for 12 months, and various other commissions and fees.
Administrative proceedings will determine what, if any, remedial action or financial penalties are appropriate in the public interest against Charles Vista and the Lorenzos.