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.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
Among recent enforcement actions on behalf of investors were the Labor Department’s settlement for more than $43 million for Madoff victims; SEC charges against two Connecticut-based hedge fund managers and their firms for fraud, and against a Virgin Islands-based advisor, also for fraud; and a censure and fine by FINRA of a firm for numerous reporting failures.
Labor Department Recovers $43 Million for Madoff Victims
Workers and retirees whose employee benefit plans had invested in funds managed by Austin Capital Management may have been shocked to learn that those plans’ investment losses were tied to Bernard Madoff’s Ponzi scheme.
However, they will receive some restitution in the form of a settlement reached by the Labor Department with Austin Capital Management Ltd. and its general partner, Austin Capital Management GP Corp. Under the terms of the settlement, $34,363,636 will be placed into a settlement fund for plan investors, which, together with an earlier settlement of $9,090,909 from Austin Capital’s parent company, KeyCorp, will be distributed to the plans by an independent fiduciary selected by the department.
After an investigation by the Dallas regional office of the Employee Benefits Security Administration (EBSA), the Labor Department said Austin Capital violated ERISA by investing the assets of ERISA-covered plans with Madoff via the Rye Select Broad Market Prime Fund, offered by Tremont Partners and known as the “BMP Fund.” The BMP Fund, in turn, was 100% invested with Madoff.
The funds invested in the BMP Fund were the Austin Safe Harbor ERISA Dedicated Fund, Safe Harbor Portable Alpha Offshore Fund One, Safe Harbor Portable Alpha Offshore Fund Two, Safe Harbor Offshore Fund, All Seasons Qualified Purchaser Fund, All Seasons Offshore Fund and the Balanced Offshore Fund.
The two settlements together total $43,454,545. In addition, Austin Capital Management is on the hook for a civil penalty of $4,345,455.
SEC Charges Hedge Fund Managers with Fraud
Two Connecticut-based hedge fund managers and their advisory firm were charged with fraud by the SEC for lying to investors. David Bryson and Bart Gutekunst, co-owners of New Stream Capital, are alleged to have secretly reorganized the fund’s capital structure prior to its failure during the financial crisis. They changed the fund to give priority to its largest investor, Gottex Fund Management, in the event of the fund’s liquidation, but continued to market the fund as if all investors were of equal standing.
Two others were charged: David Bryson’s sister, Tara Bryson, former head of investor relations for the firm, and Richard Pereira, former chief financial officer. The firm’s Cayman Islands affiliate was also charged; it allowed the managers to raise almost $50 million and sock away large fees while the fund’s investors were left holding the bag when it went bankrupt.
The $750 million hedge fund was focused on illiquid investments in asset-based lending. In March 2008, Gottex threatened to pull its whole investment from the fund—almost $300 million. A few months before this, New Stream had restructured its fund, creating two new feeder funds that wiped out the preferential liquidation rights Gottex had held via the feeder fund through which it had invested. After Gottex’s threat, however, Bryson and Gutekunst changed the capital structure to once again favor Gottex.
The pair did not disclose the change to investors, nor did they let anyone know—except privately, within the firm—that should Gottex decide to redeem its investments, the fund would “tank,” in Bryson’s opinion. Instead, investors were reassured as to redemption levels holding steady—when they were actually mounting—and were told nothing of liquidity problems.
In September of that year, however, the firm had to stop redemptions and cease raising new funds when redemption requests hit $545 million. It tried several times to restructure, but to no avail, and in March of 2011 it and its affiliates filed for bankruptcy.
Bryson, Gutekunst, and Pereira face a range of charges, in addition to the SEC seeking a variety of sanctions and relief that include injunctions, disgorgement of ill-gotten gains with prejudgment interest, and penalties. Tara Bryson has agreed to settle with the SEC, with the settlement awaiting court approval.
James Tagliaferri was charged by the SEC with defrauding clients of his St. Thomas-based firm TAG Virgin Islands, and also faces criminal charges from the U.S. Attorney’s Office for the Southern District of New York over the same actions, after he withheld information on kickbacks he received and then used client funds in a Ponzi-type scheme.
Some time around 2007, according to the SEC, Tagliaferri abandoned an earlier strategy of investing TAG client funds primarily in conservative and liquid investments that included municipal bonds and blue chips. He turned instead to highly illiquid securities that included promissory notes issued by a few closely held private companies that turned out to be holding companies through which an individual and his family effected personal and business transactions. He also sank at least $40 million in client funds into the notes of International Equine Acquisitions Holdings, a private horse-racing company.
Using his discretionary authority over client accounts, Tagliaferri bought these securities in exchange for more than $3.35 million in cash and approximately 500,000 shares of stock of a microcap company. He never disclosed this arrangement to clients, despite its conflict of interest, and when promissory notes came due and clients wanted their money, he would use funds from other clients to pay them by investing their funds in microcap and other thinly traded public companies. He raised at least $80 million this way, so that he could pay the interest or principal due to other clients on some of the notes.
He also spelled out the scheme in e-mails he sent in April of 2010 to the individual behind the holding companies in which he had invested his clients’ funds. The clients, of course, knew nothing of this. The SEC’s investigation is continuing.
Lightspeed Trading Censured, Fined $200,000 by FINRA
FINRA censured and fined New York-based Lightspeed Trading $200,000 for failure to submit new order reports and route reports to the Order Audit Trail System (OATS). The firm neither admitted nor denied the findings, but consented to FINRA’s actions; it will also be required to revise its WSPs regarding complete and accurate OATS reporting of the firm’s orders routed to its affiliates.
Lightspeed’s customer orders were directly placed into its affiliate’s order routing, execution and technology platform, and data on these orders was reported to OATS immediately by other member firms. Lightspeed mistakenly believed, according to the findings, that reports were not required for orders routed to its affiliate. The firm’s supervisory system, including WSPs, were built around this error. In addition, there were other failures in reporting and compliance.