More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- 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.
Among recent enforcement actions taken by the SEC were charges against a woman for illegally tipping her brother about quarterly earnings data from the firm she worked for; against a Chicago-based investment advisor for defrauding CalPERS, among other clients; against a Denver-based businessman for insider trading; against a Canada-based investment banker, also for insider trading; and against two Arizona-based brokers for defrauding investors.
Sister Charged With Illegally Tipping Off Brother
ThanhHa Bao, a former employee at Abaxis, a California-based medical device manufacturer, was charged by the SEC with illegally tipping her brother, Tai Nguyen, with insider information she had obtained from her position in the company’s finance department.
From 2006 to 2009, Bao made a practice of providing her brother with quarterly earnings data from Abaxis. He used the information for his own benefit, but also passed it along to the hedge fund managers Barai Capital Management and Sonar Capital Management, clients of his equity research firm, Insight Research. The fund managers then also used the information to make more than $7.2 million for their hedge funds.
Nguyen was charged last year for his actions, both by the SEC and in a separate criminal proceeding. The trades made him $144,910; the criminal proceeding cost him a forfeiture of $400,000. Those at the hedge funds who took advantage of the information were charged in 2011.
The SEC’s investigation is continuing.
Advisor Charged in CalPERS Fraud
Mesh Tandon, CEO of the Chicago-based investment advisory firm Simran Capital Management, has been charged by the SEC with lying to the California Public Employers’ Retirement System (CalPERS), and to other current and potential clients of his firm, about the amount of money the firm managed.
While trying to win its business, Tandon falsely told CalPERS that his firm satisfied its minimum AUM requirements—a metric often used by institutional investors to gauge prospective investment advisors. In May of 2008, knowing that his firm did not meet CalPERS’s minimum requirements for AUM, he specifically told CalPERS that Simran not only met explicit AUM requirements but also managed at least $200 million as of Dec. 31, 2007. Simran’s AUM fell considerably short of that figure, coming in at approximately $80 million at the time. The ruse worked, and Tandon won the business from CalPERS, thanks to his lies, according to the SEC.
With CalPERS under Simran’s belt, Tandon then went after other prospective clients with an inflated AUM figure. From 2008 to 2011, he also cited the firm’s relationship with CalPERS as an additional selling point, and instructed the firm’s employees to do likewise. He went on to report an inflated AUM in his firm’s SEC filings, multiple times, then later attempted to mislead SEC examiners during a routine examination of Simran.
Simran ceased operations after withdrawing its advisor registration in February 2012. Tandon, now living in Texas, has agreed to settle the SEC’s charges, although he has neither admitted nor denied the findings. Part of the settlement includes disgorgement of $20,018, prejudgment interest of $1,680, and a penalty of $100,000.
Scott Reiman, founder and president of the Denver-based investment firm Hexagon has been charged by the SEC with insider trading based on information he received from Roger Parker, then CEO of Delta Petroleum.
Delta had secured a $684 million investment from private investment firm Tracinda, and before it made the news public, Parker passed along information about the deal to Reiman, who proceeded to take advantage of it by buying Delta Petroleum stock or highly speculative options on three separate occasions. Once the announcement was officially made, Delta stock gained almost 20%, and Reiman made a hefty profit.
While he neither admitted nor denied the charges, Reiman has agreed to pay disgorgement of $398,000 plus prejudgment interest of $93,567 and a penalty of $398,000, as well as submit to other penalties.
Parker was previously charged for his own actions, as was insurance executive Michael Van Gilder, who also took advantage of information passed along by Parker to trade for his own gain.
Toronto Investment Banker Charged with Insider Trading
Richard Bruce Moore, a former investment banker at the Canadian Imperial Bank of Commerce (CIBC) in Toronto, was charged by the SEC with insider trading after he used information he had obtained through his job to make more than $163,000 in illicit profits.
Moore was pitching investment ideas to the Canada Pension Plan Investment Board (CPPIB), one of his top clients at CIBC; his chief contact there was a CPPIB managing director who was responsible for taking public companies private. As Moore worked with the CPPIB, he found out that it had a large transaction in the U.K. in the works. Putting together pieces of nonpublic information, Moore concluded that the CPPIB intended to make an acquisition offer to the U.K.-based engineering and manufacturing company Tomkins.
In the weeks before the offer was announced,Moore acted on that information to buy Tomkins American depositary receipts (ADRs), which trade on the New York Stock Exchange. He sank about a third of his net worth into the ADRs, which he bought through an account in the Channel Islands, and into common stock shares, which he purchased through another account on the London Stock Exchange. Once the offer was public, Tomkins ADRs’ closing price rose 27%, and Moore made more than $163,000 on the deal.
While the settlement is subject to court approval, Moore has agreed to pay $163,293 in disgorgement, $14,905 in prejudgment interest and a $163,293 penalty. He also faces a related action against him by the Ontario Securities Commission for insider trading in Tomkins common stock.
Arizona Brokers Charged with Fraud Over Tankless Water Heater Venture
Former brokers Jeffrey Stebbins of Mesa, Ariz., and Corbin Jones of Gilbert, Ariz., have been charged by the SEC with stealing investments in a project to develop tankless water heaters.
According to the SEC, the two touted the tankless water heater project over a three-year period by offering securities through a variety of companies. Tankless water heaters, instead of maintaining a reservoir of hot water, heat the water instantly as it passes through pipes. They are typically used in residences.
Stebbins and Jones personally told investors that all the money they raised would be used to develop the tankless water heater venture. Instead, the two diverted almost 30% of the money they raised—at least $1.8 million—for various lavish personal expenses, including luxury car leases, and for unrelated business expenses. In addition, the pair also fraudulently obtained more than $6 million in stock for themselves to the detriment of investors.
Stebbins and Jones fraudulently duped certain shareholders in one of the companies through which they offered the securities, Noble Systems, to swap their private shares for publicly traded shares in another company, Noble Innovations. However, it was a fraudulent stock swap that left Stebbins and Jones with more than $6 million in Noble Innovations stock and the targeted shareholders with nothing.
The pair also deprived early investors in the water heater venture of more than $1 million of Noble Innovations stock that rightfully belonged to them. During much of this period, the two also traded Noble Innovations stock by using 28 accounts in 18 different names with 14 separate brokers to ultimately profit by more than $557,000. In addition, Stebbins and Jones simply ignored securities laws that required them to report their significant holdings in Noble Innovations.
The two are charged with numerous violations, and the SEC is seeking disgorgement of ill-gotten gains and prejudgment interest, financial penalties, injunctions, and penny stock bars. The agency also issued a separate order to revoke the registration of Noble Innovations securities due to the company’s failure to make required periodic filings.
Read SEC, FINRA Enforcement Roundup: SAC Inquiry Nabs Sigma Portfolio Manager on AdvisorOne.