More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- 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 enforcement actions taken by the SEC were a nonprosecution agreement with Ralph Lauren Corporation in a bribery case; a court action to secure the return of investor funds in the wake of an immigration scheme; charges against a former executive for insider trading; and charges against Capital One Financial Corp. and two executives for understating losses.
Ralph Lauren Corp. Gets Nonprosecution Agreement in Bribery Case
The SEC announced that Ralph Lauren Corp. has consented to a nonprosecution agreement (NPA) in connection with bribes paid by a company subsidiary to government officials in Argentina from 2005 to 2009. The agreement was reached, rather than charges being brought in connection with violations of the Foreign Corrupt Practices Act (FCPA), because the company swiftly reported the misconduct itself after discovering it in an internal review.
According to the SEC, the promptness of the company’s action in reporting the bribes, as well as the completeness of the information it provided and its extensive cooperation, resulted in the NPA rather than charges. The NPA is the first for the SEC that involves FCPA misconduct.
The NPA provides additional details on the occurrence, which it says took place before the company had meaningful anticorruption compliance and control mechanisms over its Argentine subsidiary, which paid bribes to government and customs officials to win importation of the company’s products into Argentina. The bribes were intended to avoid paperwork, inspection of prohibited products, and inspection by customs officials, and totaled $593,000 during a four-year period.
The company terminated employment and business arrangements with the parties involved in the bribery; it has since ceased operations in Argentina. It has also put in place compliance training and stronger internal controls and procedures for third-party due diligence, as well as conducting a worldwide risk assessment to uncover any other potential compliance issues.
The agreement specifies that the company will disgorge more than $700,000 in illicit profits and interest it received as a result of the bribes. A separate NPA with the Justice Department in parallel criminal proceedings will result in the company paying an additional penalty of $882,000.
Investors to Receive Return of Principal after Immigration Scheme Stopped
The SEC announced that a federal district court judge has ordered that all investors in a fraudulent investment scheme that offered foreign investors a way to become citizens will receive their money back.
Two months ago the SEC charged Anshoo Sethi, and two companies he created, with misleading Chinese investors on a scheme he devised to sell securities in a nonexistent hotel and conference center near O’Hare Airport in Chicago. Sethi sold more than $145 million to the investors, who had been told that with their investment they would be participating in the EB-5 Immigrant Investor Pilot Program, which offers a path to citizenship for foreign investors.
At the time, the SEC also got an emergency court order to freeze investor assets. Sethi consented to return the funds, which were being held in escrow, and on April 19 U.S. District Court Judge Amy St. Eve modified the asset freeze order to direct that the money be returned.
The SEC is not finished yet with Sethi; litigation is ongoing and additional penalties are being sought.
Former Exec Charged in Insider Trading on Info from Professional Group
The SEC has filed charges against Mark Begelman, a former corporate executive in south Florida, for insider trading based on information he received as a member of the World Presidents’ Organization (WPO), a global professional group of business leaders who are current or former executives at major companies.
Begelman, in violation of a specific WPO policy against disclosure of discussions of a confidential nature, bought stock in Bluegreen Corp. before BFC Financial Corp. announced publicly that it was acquiring the company. He made almost $15,000 in illicit profits on the deal.
Begelman had been a member of WPO since 1991, when he was president and COO at Office Depot. He went on to serve in other executive positions, as an officer at BankAtlantic Bancorp and as vice chairman of the board at Canyon Creek Food Co. Within WPO, Begelman was part of a small elite group of members called Forum 91, and got the merger information at the smaller group’s annual retreat in the Florida Keys from Nov. 1–Nov. 3, 2011. The information came from a fellow member who was a high-ranking executive at both Bluegreen and BFC.
Begelman emailed his broker on Nov. 2 to issue a buy order for 25,000 shares of Bluegreen stock. The two spoke by phone the next day, and within minutes of the call the broker had placed the buy order. News of the merger was made public on Nov. 14, when the stock rose almost 46%; at that point Begelman sold all 25,000 shares for profits of $14,949.34.
Begelman has agreed to settle with the SEC without admitting or denying the charges. He will pay $14,949.34 in disgorgement, as well as prejudgment interest of $377.22 and a penalty of $14,949.34.
Capital One Charged with Understating Auto Loan Losses
Capital One Financial Corp. and two senior executives, Chief Risk Officer Peter Schnall and former Divisional Credit Officer David LaGassa, have been charged by the SEC with understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis.
According to the SEC, Capital One’s Q2 and Q3 2007 financial reports did not account for higher losses than originally forecast when its car loan business losses rose more than anticipated. Its profits came primarily from subprime consumers, and as the credit markets deteriorated, loan loss expenses rose. However, Capital One failed to properly incorporate changes in its internal assessments and as a result understated its loan loss expenses by 18% in Q2 and 9% in Q3. It failed to report any of Capital One Auto Finance’s (COAF) “exogenous” losses—those driven by outside factors, such as the deterioration of the credit markets—in Q2, and only a third of them in Q3.
Schnall and LaGassa were found to have caused the understatements by failing to follow established policies and procedures. The former failed to properly document exogenous losses or communicate them adequately to the senior management committee in charge of ensuring that the company’s allowance was compliant with accounting requirements. The latter failed to incorporate exogenous losses into the COAF loan forecast and failed to ensure that exogenous treatment was documented according to policies and procedures.
Neither the company nor the executives admitted or denied the SEC’s findings, but agreed to settle the charges. Capital One agreed to pay $3.5 million; in addition, Schnall agreed to an $85,000 penalty and LaGassa a $50,000 penalty.
Read SEC Enforcement Roundup: Sister Charged With Illegally Tipping Off Brother on AdvisorOne.