More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- 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 were: a criminal indictment filed against SAC Capital for insider trading; charges by the Securities and Exchange Commission against the City of Miami and its former budget director over fraud in municipal bond offerings; and the agreement by the trustee of a defunct New York garment company’s pension plan to restore missing funds to the plan in settlement of a Department of Labor suit.
Cohen’s SAC Capital Faces Criminal Charges; Cohen May Also
While Steve Cohen faced SEC administrative charges last week for failing to prevent insider trading at the hedge fund firm he founded, SAC Capital Advisors, the firm itself was indicted on criminal charges filed Thursday. Unrivaled by any case since the charges against former Goldman Sachs director Rajat Gupta, the SAC controversy promises plenty of revelations, since according to the government it involves some 20 companies and spans 14 years, going back to 1999.
Although the SEC declined to file civil fraud charges against Cohen, federal prosecutors are reportedly continuing to explore their options against him. They had no such reservations about pursuing his company.
The result of a six-year-long crackdown on insider trading, the indictment of SAC Capital from a grand jury included four counts of securities fraud and one count of wire fraud.
The federal indictment could sound the death knell for the $15 billion hedge fund whether the government makes its case or not, since investor withdrawals from the fund have mounted along with the reputational damage to the firm, already facing criminal cases against two employees. In addition, in a parallel civil action, the government said that SAC must forfeit “all property, real and personal, which constitutes or is derived from proceeds traceable to the commission of those offenses.”
Cohen was charged by the SEC with failing to supervise employees and with failing to recognize “red flags” allegedly indicating insider trading by two of those employees, portfolio managers Michael Steinberg and Mathew Martoma. Both Steinberg and Martoma face criminal insider trading charges, and both have pleaded not guilty.
The SEC said: “On at least two separate occasions in 2008, [Steinberg and Martoma] provided information to Cohen indicating their potential access to inside information to support their trading. However, Cohen stood by on both occasions instead of ascertaining whether insider trading was taking place.” In fact, the agency added, “instead of scrutinizing their conduct, Cohen praised Steinberg for his role in the suspicious trading and rewarded Martoma with a $9 million bonus for his work.”
According to a Reuters report, a company spokesman said in a report that Cohen plans to vigorously defend the SEC’s failure to supervise charge.
SEC Charges City of Miami, Former Budget Director on Muni Bond Fraud
The SEC has announced charges against the City of Miami and its former budget director, Michael Boudreaux, for making materially false and misleading statements and omissions about some interfund transfers in three 2009 bond offerings totaling $153.5 million. They were also alleged to have provided false and misleading information in the city’s fiscal 2007 and 2008 comprehensive annual financial reports (CAFRs) received by investors, particularly those who have invested in previously issued city debt.
According to the SEC, Boudreaux initiated a transfer of approximately $37.5 million in city money between the funds, so that city bond offerings would get favorable credit ratings from rating agencies. The transfer was necessary so that Miamic ould meet, or come close to meeting, its own requirements for reserve levels in the general fund. The city was experiencing increasing deficits in its general fund, which is regarded as a major indicator of financial health. Boudreaux’s transfers of money from Miami’s capital improvement fund to the general fund masked the situation, and the city kept quiet about them, the SEC charges.
Miami allegedly never told its bondholders that that money included legally restricted dollars that, under city code, may not be commingled with any other funds or revenues of the city. It also apparently never revealed that the transferred funds were allocated to specific capital projects that still needed those funds as of the end of the fiscal year, or that in some instances had already spent that money.
Problems arose when Miami was forced to reverse most of the transfers after its Office of Independent Auditor General (OIAG) issued a report. The reversal meant the city could no longer meet statutorily mandated general fund levels, which led the city to declare a state of fiscal urgency. As might be expected, bond rating agencies then downgraded their ratings on the city’s debt.
The SEC charges the city with violating a cease-and-desist order that it issued in 2003 for similar misconduct. The agency seeks injunctive relief and financial penalties against Miami and Boudreaux, as well as an order commanding the city to comply with an SEC cease-and-desist order issued in 2003 for similar misconduct.
This is not the first time the SEC has alleged further wrongdoing by a municipality subject to an existing SEC cease-and-desist order, and it’s not the first municipality the SEC has gone after.
Other entities include:
- New Jersey, which broke new ground for the SEC when it was charged in 2010 with fraudulent municipal bond offerings;
- Illinois, charged over pension funding fraud, about which it misled municipal bond investors (the state settled without admitting wrongdoing);
- Victorville, Calif., which was charged with defrauding municipal bond investors;
- Harrisburg, Penn., charged with securities fraud for hiding its true financial situation from municipal bond investors;
- And, not to be left out, the city of South Miami, charged with defrauding bond investors concerning the tax-exempt financing eligibility of a mixed-use retail and parking structure.
Pension Funds to be Restored in Settlement of DOL Suit Against Trustee
The trustee of two defined benefit pension plans for Manhattan-based Sadimara Knitwear Inc. and Stallion Knits Ltd. has agreed to settle a Department of Labor lawsuit by restoring missing assets to the plans. She will also be barred permanently as a fiduciary.
Sadimara Knitwear Inc. and Stallion Knits Ltd. were garment companies headquartered in Manhattan. The companies, which are no longer in operation, sponsored the plans to provide pension benefits to their employees. Colette Mordo was the trustee and fiduciary to both plans.
After an investigation by the Employee Benefits Security Administration's (EBSA) New York regional office, the DOL alleged that she had authorized the pension plans to make improper loans and transfers of plan assets over several years to multiple recipients, including members of the Mordo family and International Design Concepts LLC and Apparel Group International LLC, two companies in which Mordo had an ownership interest.
In settlement of the suit, Mordo admitted to entering into $4.23 million in alleged unlawful plan transactions between 2002 and 2010.
According to the judgment, Mordo is removed from any and all fiduciary positions with respect to the plans, and is permanently barred from serving as a fiduciary to any ERISA-covered plan. The judgment also appoints David Lipkin of Metro Benefits Inc. as the independent fiduciary who will administer the plans, determine and pay out benefits to participants, and terminate the plans.
The Labor Department is also authorized to seek a contempt order if Mordo violates any terms of the judgment.