More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
FINRA and the SEC recently acted on issues as diverse as the fleecing of 31 NFL players, including Terrell Owens, via high-risk casino securities, a registered representative who managed to conduct a Ponzi scheme under his firm’s nose, short sales that were not in compliance, and a China-based firm charged with reporting and disclosure failures.
Casino Deal Costs NFL Players; Broker Barre
Broker Jeffrey Rubin of Lighthouse Point, Fla., has been barred by FINRA from the securities industry for making unsuitable recommendations to his client, an unnamed NFL player, who ended up losing about $3 million. Thirty other NFL players joined in the scheme, believing that the illiquid, high-risk securities sold in connection with a casino that ended up going bankrupt would pay off. They did for Rubin, for a while, but not for anyone else.
Rubin’s company, Pro Sports Financial, provided financial-related "concierge" services to professional athletes for an annual fee. Between March 2006 and June 2008, while he was a registered broker at Lincoln Financial Advisors Corp. and Alterna Capital Corp., Rubin, 38, recommended that one of his NFL clients invest a total of $3.5 million, the majority of his liquid net worth, in four high-risk securities. Rubin recommended and facilitated the largest investment, $2 million, in the Alabama casino project without the knowledge or approval of his employer member firm.
Rubin referred other investors to the casino project while employed by Alterna Capital and International Assets Advisory, ]also without the firms' knowledge or approval. From approximately January 2008 through March 2011, 30 additional clients of Rubin's concierge firm, all NFL players, invested approximately $40 million in the casino project. Rubin received a 4% ownership stake and $500,000 from the project promoter for these referrals.
According to Yahoo Sports in a September report, some former and current players who lost money in Rubin's scheme include Owens, Plaxico Burress, Clinton Portis, Fred Taylor, Jevon Kearse, Kyle Orton, Santonio Holmes and Santana Moss.
Owens is suing Rubin over his losses connected to the casino, and Buffalo Bills wide receiver Roscoe Parrish won a judgment against Rubin last year over an incorporated entity he said he did not authorize, as well as for failure to repay an investment in the casino. Other football players have sued a law firm over the casino, and an investigation is under way into the relationship between Rubin and NFL agent Drew Rosenhaus. The National Football League Players Association is reviewing Rosenhaus’ role in facilitating Rubin’s interaction with the players; if Rosenhaus is found to have violated NFLPA’s agent regulations, he could find himself in trouble as well.
Rep’s Ponzi Scheme Gets Lincoln Financial a FINRA Fine
FINRA fined and censured Lincoln Financial for failing to prevent a Ponzi scheme operated by one of its registered representatives. The firm has already paid $5.63 million in restitution to investors, and now will pay an additional $175,000, although it neither admits nor denies the findings of supervisory failure that allowed the representative to set up and run the scheme.
The representative, already subject to an open regulatory body investigation, was accepted by the firm and allowed to operate a branch office. The office of supervisory jurisdiction manager was not informed of the inquiry, and the advertising review department, despite having qualms about proposed advertising for the representative’s approved outside business, also never raised the issue with the OSJ. There were other notable conflicts of interest as well.
The representative’s outside email was never checked, and other red flags were ignored, which allowed the representative to fraudulently solicit and sell investments in a purported bond fund.
Deutsche Bank Securities Censured, Fined by FINRA
Deutsche Bank Securities was censured and fined $175,000 by FINRA and ordered to pay restitution of $10,314.44, plus interest, to clients, on findings that it sold corporate bonds to those clients without setting a fair price for those bonds. The firm has neither admitted nor denied the findings, but has accepted the sanctions.
In addition, FINRA also found that sale reports included incorrect short interest positions, failures to designate price differences when sales were based on prior times than the current market, incorrect execution times and failures to designate transactions that used weighted prices, among other deficiencies. The firm also failed to repair many rejected submissions to OATS and failed to highlight those that were repaired when they were resubmitted.
FINRA Fines, Censures KBC Securities on Reporting Failures, Short Sales
KBC Securities USA, formerly known as KBC Financial Products USA, faced a fine of $157,500 and FINRA censure over short sales and failures in reporting. The firm neither admitted nor denied FINRA findings that it failed to transmit last sale reports of transactions in consolidated quotation system (CQS) securities and NMS securities to the FNTRF within 90 seconds after execution, and that it failed to mark some of those reports as late.
China-Based Company, CFO to Pay More Than $1 Million in Combined Settlement
Keyuan Petrochemicals and its former CFO, South Carolina-based Aichun Li, have agreed to pay more than $1 million combined to settle SEC charges of accounting and disclosure violations. Keyuan, which was formed through a reverse merger in April 2010, was charged with systematically withholding information from shareholders on numerous related party transactions between May 2010 and January 2011, and also on a secret off-balance sheet cash account used for illicit purposes.
The unreported transactions, which involved Keyuan’s CEO, controlling shareholders of the company, and entities that were controlled by management or its family members, spanned everything from sales of products and purchases of raw materials to loan guarantees and short-term financing.
The secret account paid for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and noncash gifts to Chinese government officials; it also meant that the company misstated in its financial statements cash, receivables, construction-in-progress, interest income, other income, and general and administrative expenses.
Li’s part in all this was to sign off on the company’s registration statements and quarterly reports, despite all the unreported goings-on. She simply ignored the red flags and information about the transactions although she was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations.
In addition to accepting other penalties, Keyuan agreed to pay $1 million and Li to pay $25,000 in settling the SEC’s charges; the settlement must be approved by the court. Neither one admits nor denies the charges, and the investigation is continuing.