More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
Among recent enforcement actions by the SEC were charges against an Indiana resident and his company engaged in a Ponzi scheme targeting retirement savings and a stop order against the initial public offering of a Los Angeles company that had issued a registration statement filled with false and misleading information. In addition, a former JPMorgan Chase employee involved in the “London Whale” case was arrested in Spain after turning himself in.
SEC Halts Retirement Savings Ponzi Scheme
After halting his operations with a temporary restraining order and an asset freeze, the SEC charged John Marcum, a Noblesville, Ind., resident, and his company, Guaranty Reserves Trust, with defrauding investors after he diverted their retirement funds to pay for his own lavish lifestyle and foot the bill for startup companies.
When the scheme ran dry, Marcum offered to repay three of his clients by making them beneficiaries on life insurance policies and then killing himself, the SEC said.
Marcum represented himself as a successful trader and asset manager, and brought in more than $6 million through promissory notes issued by his company. Beginning in 2010, Marcum helped investors set up self-directed IRA accounts, promising them hefty returns on the promissory notes by day-trading in stocks while guaranteeing the safety of their principal investment.
Investors surrendered control of their assets to Marcum, either by rolling their existing IRA accounts into the new self-directed IRA accounts or by transferring their taxable assets directly to brokerage accounts that he controlled. Then he and certain investors cosigned the promissory notes, and Marcum placed the signed notes in the IRA accounts.
He didn’t actually do much trading, which was a good thing since he nearly always lost money when he did—to the tune of more than $900,000. Instead of doing more trading, he used some of the money as collateral for a $3 million line of credit at the brokerage firm where he used to work. He took numerous advances from the line of credit to fund such startup ventures as a bridal store, a bounty hunter reality television show, and a soul food restaurant owned and operated by the bounty hunters—none of which ventures appear to be making a profit.
Not only were Marcum’s investors unaware that they were paying for these ventures—as well as nearly $1.4 million in payments made directly to the startup ventures and other companies and more than a half a million for Marcum’s personal expenses on his credit card that included airline tickets, luxury car payments, hotel stays, sports and event tickets, and tabs at a Hollywood nightclub—but they were equally deceived as to the rate of return Marcum promised them. After promising annual returns of 10%–20%, he issued false statements showing annual returns that topped 20%. He also “guaranteed” the safety of their principal.
The whole scheme started to collapse when he did not have the funds needed to honor investor redemption requests. His “recovery plan” — which he actually provided to some of his investors — consisted at first of bringing in new clients with more money so that he could pay the old clients.
When he finally admitted to three of those old clients that he’d used their money, and that of others, for his own purposes, he tried to sell them on giving him more time. If he failed to bring in enough to pay them off, he said, he would name them as beneficiaries on life insurance policies and, after the purported two-year “suicide clause” on the policies was satisfied, would repay their funds by killing himself so that they could collect.
The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains and financial penalties from Marcum and Guaranty Reserves Trust, and disgorgement of ill-gotten gains from Marcum Companies LLC, which is named as a relief defendant.
IPO Stalled with Stop Order from SEC
The SEC issued a stop order against Counseling International to halt its IPO after its registration statement was found to contain false and misleading information.
The Los Angeles-area company’s statement, among other things, fails to disclose the identity of the company’s control persons and promoters as required under the securities laws. It also falsely describes the circumstances surrounding the departure of its former CEO.
Counseling International first filed a registration statement in August of 2012 for an IPO of 764,000 shares of common stock, but has amended its registration statement four times since then. The company agreed to the issuance of the order instituting the stop order proceeding, and also agreed not to engage or participate in any unregistered offering of securities conducted in reliance on Rule 506 of Regulation D for a period of five years from the issuance of the order.
Meanwhile, the SEC’s investigation is continuing.
Javier Martin-Artajo, one of the two former JPMorgan Chase employees against whom the U.S. government has announced charges, was arrested in Spain after he turned himself in to local authorities. The extradition process to bring him to the U.S. is expected to be long and complex.
Meanwhile, word is that JPMorgan Chase is in talks with a group of regulators to settle for an amount that could be as high as $600 million. Not just the SEC, but also Britain’s Financial Conduct Authority are involved in the talks, and it is said that prosecutors from the U.S. Attorney’s office are also included.
Martin-Artajo and Julien Grout were charged on Aug. 14 with hiding trading losses of more than $6 billion in the “London Whale” case. Bruno Iksil, nicknamed the “whale” because of the size of his trades, was not charged, after he agreed to cooperate against his former colleagues. Specifically, Martin-Artajo and Grout have been charged with wire fraud, falsifying bank records, contributing to false regulatory filings and conspiracy.
British authorities went to arrest Martin-Artajo at his London home, only to find him gone. His lawyers said that he had simply taken an already planned vacation and was not aware of charges having been filed against him. However, both he and Grout had previously indicated that they were open to being extradited to the U.S., provided prosecutors recommend bail.
Grout is no longer in London, either, having returned to his native France. His home country does not usually extradite its citizens.
The SEC has filed parallel civil charges against the two.
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