More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- 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.
Among recent enforcement actions by the SEC were charges against a former portfolio manager at Oppenheimer & Co. for misleading investors about fund returns, and against an investment advisory firm and its former owner for misleading the board of an investment fund. In addition, the trustees of the pension plan, annuity fund and vacation fund of a union local agreed in a consent judgment to restore more than $2.3 million after a court action brought by the Department of Labor.
Former Oppenheimer Portfolio Manager Misled Investors: SEC
Brian Williamson, formerly a portfolio manager at Oppenheimer & Co., was charged by the SEC with misleading investors about the returns on a fund of funds that he managed.
Oppenheimer & Co. is not affiliated with OppenheimerFunds.
Williamson, who was an Oppenheimer employee from 2005 to 2011, marketed Oppenheimer Global Resource Private Equity Fund I, a fund of funds, to pensions, foundations, endowments and HNW individuals and families. However, in doing so, he provided investors with misleading information about the fund’s valuation and performance.
From September to October 2009, he used marketing materials that omitted fees and expenses in the internal rate of return cited for the fund. In October of that year, he also boosted the reported value of the fund’s biggest investment, Cartesian Investors-A, from $6 million to approximately $9 million — a far cry from the underlying manager’s estimated valuation — and claimed in the marketing materials that that valuation came from the underlying manager.
Other misrepresentations made by Williamson created the impression that the Oppenheimer fund’s increased internal rate of return was due to increased performance or third-party valuations, when instead it was Williamson’s revised valuation of Cartesian that caused the fund’s performance to appear to increase. For example, for the quarter ended June 30, 2009, Williamson’s markup of Cartesian raised the reported internal rate of return from approximately 3.8% to 38.3%.
Oppenheimer agreed earlier in the year to pay $2.8 million to settle related charges.
Investment Advisor, Former Owner Charged by SEC with Misleading Board
North Carolina-based Chariot Advisors and Elliott Shifman, its former owner, were charged by the SEC with misleading an investment fund’s board of directors about the firm’s ability to conduct algorithmic currency trading so they would approve the firm’s contract to manage the fund.
In two presentations that he made to the board of the Chariot Absolute Return Currency Portfolio, a fund that was formerly within the Northern Lights Variable Trust fund complex, one in December of 2008 and another in May of 2009, Shifman told directors that his firm would implement the fund’s investment strategy by using a portion of the fund’s assets to engage in algorithmic currency trading.The Chariot fund’s initial investment objective was to achieve absolute positive returns in all market cycles by investing approximately 80% of its assets under management in short-term fixed income securities, and using the remaining 20% of the assets under management to engage in algorithmic currency trading. But Chariot could provide no such thing, and instead, once the firm had the contract, it hired an individual trader who was allowed to use discretion on trade selection and execution.
Shifman had interviewed the trader before he hired her, and knew that she used a technical analysis, rules-based approach for trading that combined market indicators with her own intuition. She traded currencies for the fund until Sept. 30, 2009, when she was terminated for poor trading performance. After that, Chariot brought in a third party who did use algorithmic trading.
The SEC said that the false claims by Chariot and Shifman defrauded the fund by causing misrepresentations and omissions in its registration statement and prospectus that were filed with the SEC and viewed by investors.
After a lawsuit brought by the U.S. Department of Labor against the trustees of the pension plan, annuity fund and vacation fund of Exhibition Employees Local 829 of the International Association of Theatrical Stage Employees in New York, a consent judgment has brought about repayment from those trustees of $2,256,817, with an additional $50,000 scheduled to be paid.
The DOL filed suit in February 2012, alleging that the trustees had engaged in numerous violations of the Employee Retirement Income Security Act (ERISA). These included improperly transferring assets from the Local 829 pension plan to the union’s annuity, vacation, hiring hall and general funds, as well as improperly transferring at least $240,000 from the pension plan and annuity fund to service providers.
Under the terms of the consent agreement, defendants Kevin Dunphy, Manuel Farina, John Hall, Michele Sullivan and John Walsh have repaid $1,975,209 to the pension plan, $219,467 to the annuity fund and $112,141 to the vacation fund. They have also placed $268,181.82 in an escrow fund to pay civil money penalties, and further agreed to forfeit up to $325,000 of their annuity fund balances.
The defendants also agreed to resign as trustees and to be permanently barred from serving in a fiduciary or service provider capacity for these or any other ERISA-covered benefit plans.
DOL Says San Francisco’s California Pacific Bank, Four Directors Mismanaged Plan Assets
The Department of Labor has filed a lawsuit against San Francisco’s California Pacific Bank and four of its directors alleging that the bank, its CEO and three additional fiduciaries of the bank’s Employee Stock Ownership Plan mismanaged plan assets resulting in potential plan losses totaling approximately $1.4 million.
The suit asks the court to require the fiduciaries to restore all losses they caused to the plan.
The department alleges that after terminating the ESOP in 2010, the fiduciaries violated the Employee Retirement Income Security Act by failing to liquidate and distribute plan assets in cash to plan participants as required. Because the bank is not a publicly traded company, participants were left with shares of the company’s stock they could not easily liquidate for cash, if at all, DOL said.
Agency investigators said they determined that the participants would have received approximately $1.24 million if the plan’s 97,237 shares had been liquidated and distributed in cash at their assessed December 2009 value. The lawsuit also alleges that in 2011, $81,407 was improperly diverted to the bank, and in 2012, the fiduciaries improperly transferred nearly $70,000 in plan assets to the bank. Finally it is alleged that the bank also held plan assets in non-interest bearing accounts, making assets available for bank use without charge and without accruing interest on the funds for the benefit of the plan.
The complaint names California Pacific Bank CEO and board member Richard Chi, who served as the plan administrator and a plan trustee. Also named are board members and trustees Akila Chen, Kent Chen, and William Mo. The suit asks the court to permanently remove all four as plan fiduciaries and to appoint an independent fiduciary with control over the plan and its assets.
The independent fiduciary would administer the liquidation and termination of the plan, DOL says. The complaint also seeks to permanently enjoin the defendants from ever serving, directly or indirectly, as a fiduciary or service provider with respect to any employee benefit plan subject to ERISA, and to require them to disgorge to the plan any financial benefits they realized as a result of their violations.
Check out SEC, FINRA Enforcement: 2 JPMorgan Traders Charged With Fraud Over London Whale Losses on ThinkAdvisor.