More On Legal & Compliancefrom The Advisor's Professional Library
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Securities and Exchange Commission announced Tuesday its first deferred prosecution agreement with an individual — a former hedge fund administrator — who helped the agency take action against a hedge fund manager who stole investor assets.
DPAs encourage individuals and companies to provide the SEC with information about misconduct and assist with a subsequent investigation. In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.
According to the SEC’s agreement with Scott Herckis, he was the administrator for Connecticut-based Heppelwhite Fund LP, which was founded and managed by Berton M. Hochfeld. With voluntary and significant cooperation from Herckis, the SEC says that it filed an emergency enforcement action against Hochfeld in November 2012 for misappropriating more than $1.5 million from the hedge fund and overstating its performance to investors.
The SEC says its action halted the fraud and froze the hedge fund’s assets and Hochfeld’s personal assets, which are now being used to compensate defrauded investors. Last month, a federal court judge approved a $6 million distribution to harmed Heppelwhite investors.
“We’re committed to rewarding proactive cooperation that helps us protect investors, however the most useful cooperators often aren’t innocent bystanders,” said Scott Friestad, an associate director in the SEC’s Division of Enforcement, in a statement. “To balance these competing considerations, the DPA holds Herckis accountable for his misconduct but gives him significant credit for reporting the fraud and providing full cooperation without any assurances of leniency.”
Steve Crimmins, a partner with K&L Gates in Washington, who served for eight years as the SEC’s Deputy Chief Litigation Counsel, told ThinkAdvisor that DPAs were added to the SEC’s toolkit by former SEC Chairwoman Mary Schapiro, “but the SEC used them sparingly and only for entities.”
Tuesday’s use of a DPA for an individual “signals that the agency will be pushing harder to proactively encourage people to come forward with evidence that will give the SEC quick and solid wins,” Crimmins says.
DPAs, he continued, “are part of a bigger SEC picture that includes the $14 million it just paid to a whistleblower and its enhanced management of the numerous tips and complaints it receives. By working smarter in uncovering violations, the SEC conserves limited resources and gets better results for the investors and markets it protects.”
According to the DPA, Herckis served as the fund’s administrator from December 2010 to September 2012, when he resigned and contacted government authorities with his concerns about Hochfeld’s conduct and certain discrepancies in Heppelwhite’s accounting records. Herckis voluntarily produced voluminous documents and described to the SEC how Hochfeld was able to perpetrate his fraud. As a result, the SEC was able to file the emergency action within weeks.
Under the terms of the DPA, which states that Herckis aided and abetted Hochfeld’s securities law violations, Herckis must comply with certain prohibitions and undertakings.
The DPA requires Herckis to disgorge approximately $50,000 in fees he received for serving as the fund administrator, which will be added to the Fair Fund that has been created to help compensate Heppelwhite investors.
According to the SEC, a second round of distributions from the Fair Fund is expected after additional money is collected for harmed investors through the sale of Hochfeld’s personal assets, including a collection of antiques he paid for with stolen funds.
Check out FINRA Updates BrokerCheck to Include IARD Reports on ThinkAdvisor.