More On Legal & Compliancefrom The Advisor's Professional Library
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- 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.
The Securities and Exchange Commission announced Friday charges against a San Diego-based investment advisory firm and its president for allegedly steering winning trades to favored clients and misusing soft dollars.
The SEC’s Enforcement Division alleges that J.S. Oliver Capital Management and Ian O. Mausner engaged in a cherry-picking scheme that awarded more profitable trades to hedge funds in which Mausner and his family had invested.
Meanwhile, the SEC says that Mausner and his firm “doled out less profitable trades to other clients,” including a widow and a charitable foundation. The disfavored clients suffered approximately $10.7 million in harm.
The SEC’s Enforcement Division further alleges that Mausner and J.S. Oliver misused soft dollars, which, as the SEC explains, are credits or rebates from a brokerage firm on commissions paid by clients for trades executed in the investment advisor’s client accounts.
“If appropriately disclosed, an investment advisor may retain the soft dollar credits to pay for expenses, including a limited category of brokerage and research services that benefit clients,” the SEC says. “However, Mausner and J.S. Oliver misappropriated more than $1.1 million in soft dollars for undisclosed purposes that in no way benefited clients, such as a payment to Mausner’s ex-wife related to their divorce.”
Marshall Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement that “Mausner’s fraudulent schemes were a one-two punch that betrayed his clients and cost them millions of dollars. Investment advisors must allocate trades and use soft dollars consistent with their fiduciary duty to put client interests first.”
The SEC also charged Douglas Drennan, a portfolio manager at J.S. Oliver, for his role in the soft dollar scheme.
According to the SEC’s order instituting administrative proceedings, Mausner engaged in the cherry-picking scheme from June 2008 to November 2009 by generally waiting to allocate trades until after the close of trading or the next day. “This allowed Mausner to see which securities had appreciated or declined in value, and he gave the more favorably priced securities to the accounts of four J.S. Oliver hedge funds that contained investments from Mausner and his family,” the SEC says.
Mausner profited by more than $200,000 in fees earned from one of the hedge funds based on the boost in its performance from the winning trades he allocated, the SEC says, and also marketed that same hedge fund to investors by touting the fund’s positive returns when in reality those returns merely resulted from the cherry-picking scheme.
According to the SEC’s order, the soft dollar scheme occurred from January 2009 to November 2011. Mausner and J.S. Oliver failed to disclose the following uses of soft dollars:
- More than $300,000 that Mausner owed his ex-wife under their divorce agreement.
- More than $300,000 in “rent” for J.S. Oliver to conduct business at Mausner’s home. Most of this amount was funneled to Mausner’s personal bank account.
- Approximately $480,000 to Drennan’s company for outside research and analysis when in reality Drennan was an employee at J.S. Oliver.
- Nearly $40,000 in maintenance and other fees on Mausner’s personal timeshare in New York City.
According to the SEC’s order, Drennan participated in the soft dollar scheme by submitting false information to support the misuse of soft dollar credits and approving some of the soft dollar payments to his own company.
Check out SEC Enforcement: Scheme Loots IRAs to Fund Bounty Hunter TV Show, Bridal Shop on ThinkAdvisor.