More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- 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 an emergency freeze order in a Ponzi scheme that involved companies in the U.S. and New Zealand, charges against a municipal issuer and others in the Wenatchee, Wash., area for misleading investors on a bond offering and an asset freeze to shut down a California-based real estate investment scam.
SEC Charges Royal Bank of Scotland Subsidiary for Misleading Investors
The SEC charged RBS Securities Inc., a subsidiary of the Royal Bank of Scotland plc, with misleading investors in a 2007 subprime residential mortgage-backed security (RMBS) offering. RBS agreed to settle the matter and pay more than $150 million, which the SEC will use to compensate investors for harm suffered as a result of RBS’ conduct.
RBS, without admitting or denying the SEC’s allegations, has agreed to a final judgment that orders it to disgorge $80.3 million, plus prejudgment interest of $25.2 million, and pay a civil penalty of $48.2 million.
The SEC alleges that RBS said the loans backing the offering “generally” met the lender’s underwriting guidelines even though nearly 30% fell so short of the guidelines that RBS should have excluded them from the offering. Stamford, Conn.-based RBS, then known as Greenwich Capital Markets, quickly reviewed a very small portion of the loans and was paid approximately $4.4 million for its work as the lead underwriter on the transaction, the SEC said in a complaint filed in federal court in Connecticut.
“In its rush to meet a deadline set by the seller of these loans, RBS cut corners and failed to complete adequate due diligence, with predictable results,” said George Canellos, co-director of the SEC’s Division of Enforcement.
In its complaint, the SEC said RBS gave investors a misleading impression of the quality of the loans backing the offering and the likelihood of their repayment.
SEC Freezes Assets in Ponzi Scheme Reaching from U.S. to New Zealand
An emergency asset freeze helped the SEC put a stop to a Ponzi scheme that stretched to the other side of the globe, involving companies in the U.S. and New Zealand that offered phony investments in everything from a bank trading program to kidney dialysis clinics.
According to the agency, Christopher Pedras, who has residences in Turlock, Calif., and New Zealand, misled his initial investors into believing they were investing in a profitable trading platform in which his company served as an intermediary between global banks. He promised them returns of 4%–8% monthly.
Pedras brought in more than $5.6 million from at least 50 investors in the U.S. since July 2010 by selling securities in two phases. Pedras, his business partner Sylvester Gray II and lead sales representative Alicia Bryan first solicited investors for their Maxum Gold Small Cap Trade Program, in which Pedras’s company Maxum Gold supposedly serves as the intermediary between banks that can’t legally trade directly with one another.
Maxum Gold’s trade platform was supposed to provide an intermediary means for them to do business and was also supposed to share portions of the trading profits with investors.
However, when his companies had trouble delivering a return to investors, they began steering those investors to a different investment program that was supposed to increase the value of their investment by 80% by funding kidney dialysis clinics in New Zealand.
That was the FMP Renal Program, which was characterized as an investment in a New Zealand company called FMP Medical Services Ltd. that would be publicly traded and operate kidney dialysis clinics in New Zealand. Maxum Gold investors who bit and converted their investment into the FMP Renal Program were supposed to instantly realize an 80% increase in the value of their investment.
Gray and Alicia Bryan helped Pedras solicit investors for that scheme, too, but of course nobody ever invested the money they got. Instead, they paid earlier investors with $2.4 million out of later proceeds, with Pedras stealing more than $2 million for cash withdrawals, car and retail purchases, and spending another $1.2 million on commissions to sales agents who sold the scheme to U.S. investors.
Pedras, Gray, Bryan and the Maxum Gold and FMP entities have all been charged by the SEC.
SEC Fines Municipal Issuer for Misleading Bond Investors
A municipal issuer in Washington State has been charged by the SEC with misleading investors in a bond offering that financed the construction of a regional events center and ice hockey arena. The underwriter and outside developer of the project and three individuals involved in the offering have also been charged.
The Greater Wenatchee Regional Events Center Public Facilities District is a municipal corporation formed by nine Washington cities and counties in 2006 to fund the Town Toyota Center, located in the city of Wenatchee. The primary disclosure document, the “official statement” that accompanied the issuer’s offering of bond anticipation notes in 2008, stated there had been no independent reviews of the financial projections for the events center.
That wasn’t true. An independent consultant twice examined the projections and raised questions about the center’s economic viability. The official statement also failed to disclose that financial projections had been revised upward based in part upon optimistic assurances by civic leaders that the community would support the project. In addition, the document also omitted key information about the possibility that the city of Wenatchee’s remaining debt capacity of $19.3 million would limit its ability to support any future long-term bonds.
The Greater Wenatchee Regional Events Center Public Facilities District issued $41.77 million in bond anticipation notes in 2008 and defaulted on its principal payments in December 2011.
The developer Global Entertainment and its then-president and CEO, Richard Kozuback; the underwriter Piper Jaffray & Co. and its lead investment banker Jane Towery; and Allison Williams, a senior staff member for the Greater Wenatchee Regional Events Center Public Facilities District who certified the accuracy of the official statement, were charged along with the issuer.
While the respondents neither admitted nor denied the charges, Piper Jaffray and Towery agreed to be censured and pay penalties of $300,000 and $25,000 respectively as part of the settlement. Global Entertainment and Kozuback each agreed to pay penalties of $10,000. Williams consented to a cease-and-desist order, and the issuer agreed to pay $20,000 and take remedial actions, including training for personnel involved in the offering and disclosure process. This is the first time the SEC has imposed a financial penalty on a municipal issuer.
The issuer also agreed to adopt written policies for disclosures in municipal offerings and continuing disclosure obligations, and to designate an individual responsible for ensuring compliance with those obligations. The SEC also imposed additional conditions.
A group of Pasadena, Calif.-based companies at the center of an ongoing real estate investment scheme saw their assets frozen by an emergency order obtained by the SEC and face fraud charges brought by the agency.
Yin Nan (Michael) Wang and Wendy Ko, according to the SEC, have raised more than $150 million from approximately 2,000 investors by selling promissory notes issued through Velocity Investment Group, which manages a series of investment funds, the Bio Profit Series. The money has been coming in to Wang and Velocity, of which he is the sole owner, since at least 2005.
Wang and Ko, who both control the Bio Profit Series fund accounts, told investors that each of the Bio Profit Series funds is primarily in the business of making real estate-related loans in California, but the pair instead, in Ponzi style, used newer investor money to pay quarterly interest to earlier investors. Wang admitted as much.
Not only did the pair deceive investors, but Wang also instructed one of the Bio Profit Series funds to provide its outside accountant with inaccurate financial information. Otherwise, it would be obvious that the fund would never get the accrued interest on more than $9.8 million of mortgage loan income shown in its financial statements, and Wang told the accounting manager that investors would run the other way if the truth were known, preventing him from raising more money.
Another strategy used by Wang and Ko was the use of transactions between the Bio Profit Series funds and another company, Rockwell Realty Management, that was also charged in the complaint. The whole purpose of the transactions was apparently to hide the fraud by obscuring the number of transfers among the funds.
The temporary asset freeze is against Velocity, Bio Profit Series I, Bio Profit Series II, Bio Profit Series III, Bio Profit Series V and Rockwell Realty Management.
Check out SEC’s White: ‘Unnoticed’ Enforcement Actions Can Have Big Impact on ThinkAdvisor.