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.
- 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.
Among recent enforcement actions, the SEC fined Rajat Gupta $13.9 million for illegally tipping Raj Rajaratnam with inside information.
Also, Barclays and four former traders have been assessed a combined $487.9 million in fines and penalties by the U.S. Federal Energy Regulatory Commission (FERC) for their role in the alleged manipulation of energy markets, and the SEC stepped in with an emergency asset freeze and charges against an unregistered money manager and his companies in Texas for engaging in an illegal foreign currency exchange trading scheme.
Gupta to Pay $13.9 Million for Illegal Tipping
The SEC announced that it has obtained a $13.9 million penalty against Rajat Gupta, who, as a former Goldman Sachs board member, illegally passed inside information to former hedge fund manager Raj Rajaratnam. The agency also said that Gupta is permanently barred from serving as an officer or director of a public company.
Gupta had passed along confidential information about Berkshire Hathaway’s $5 billion investment in Goldman Sachs, as well as nonpublic details about Goldman’s financial results for the second and fourth quarters of 2008, to Rajaratnam. The latter was penalized a record $92.8 million penalty for insider trading after making use of inside information.
In a parallel criminal case, Gupta was convicted in June 2012 of one count of conspiracy to commit securities fraud and three counts of securities fraud. He was sentenced to two years in prison followed by a year of supervised release, and also subject to a criminal fine of $5 million.
Barclays, Four Former Traders Fined in Energy Price Manipulation
FERC has announced that Barclays and four former traders must pay fines and penalties of a total of $487.9 million after they allegedly manipulated energy markets in the western U.S. from November 2006 to December 2008. The traders made transactions in fixed-price products, often at a loss, according to the agency, so that they could move an index to benefit the bank’s other bets on swaps.
Barclays is to pay $435 million in penalties; Scott Connelly, former head of its North American power-trading desk, must pay $15 million, and former Barclays traders Daniel Brin, Karen Levine and Ryan Smith have each been fined $1 million. The $453 million in civil penalties must be paid to the U.S. Treasury within 30 days, according to the order from FERC, and the bank must also fork out $34.9 million in profits, to be distributed to programs that help low-income homeowners pay energy bills in California, Arizona, Oregon and Washington.
Hazelton added that the bank regards the fine as without basis, and the FERC order to be a “one-sided document, and does not reflect a balanced and full description of the facts or the applicable legal standard.”
The agency, on the other hand, described the evidence as “demonstrate[ing] that the intentional amassing of the positions and trading to influence price were not based on normal supply and demand fundamentals, but rather on the intent to effect a scheme to manipulate the physical markets in order to benefit the financial swaps.”
Connelly has said that the size of the penalty poses a hardship to his personal financial situation, but the agency said that it, “while severe, is well short of what the statute allows,” and said that his participation in the “serious scheme to manipulate the nation’s wholesale power markets warrants the imposition of significant penalties.”
SEC Freezes Assets of Unregistered Money Manager in Forex Scheme
The SEC has obtained an emergency asset freeze order against Kevin White, an unregistered money manager, and his companies KGW Capital, Revelation Forex, and RFF, which is the general partner of Revelation Forex, in Plano, Texas, and has charged them with defrauding investors in a foreign currency exchange trading scheme.
According to the agency, White and his companies used websites, press releases and presentations to prospective investors that represented Revelation Forex as a $1 billion hedge fund with a sophisticated low-risk forex trading strategy that had achieved total returns of more than 393% since its January 2009 inception, and had earned a compound annual rate of return of more than 36%.
Instead, the fund actually got no investor funds, and did not begin to engage in forex trading, until September of 2011. Since then, it has incurred realized trading losses of more than $550,000 plus approximately $1.4 million in unrealized losses through May 31.
Meanwhile, White, who also misrepresented his own background and experience, raised more than $7.1 million from investors on the basis of his marketing materials, and has used more than $1.7 million of investor money to pay personal expenses, finance expensive trips, and fund other unrelated and undisclosed businesses and investments.
White’s claims of a “25-year Wall Street career” were false, as were his claims about his education. In reality, he actually spent only six years as a licensed securities professional in Houston before being barred by the New York Stock Exchange two decades ago.
The SEC has named two of White’s companies, a propane business and a business called KGW Real Estate, as relief defendants to seek disgorgement of investor funds. The agency is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, as well as preliminary and permanent injunctions.
Check out SEC, FINRA Enforcement: Radio Personality Fined Over ‘Buckets of Money’ on ThinkAdvisor.