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- 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.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
FINRA banned a Virginia financial advisor to NFL and NBA players after he failed to show up for a disciplinary hearing for a firm he worked for, which was accused of defrauding pro athletes and other clients out of $18 million.
Meanwhile, the SEC went after an inside trader at a hedge fund and charged two Tampa-based advisors with fraud.
FINRA Ejects Advisor to Pro Athletes for Skipping Fraud Hearing
FINRA has banned a former financial advisor who handled investments for the likes of Brandon Knight, a Detroit Pistons guard, and Joe Haden, a cornerback for the Cleveland Browns, after he failed to show up for a disciplinary hearing regarding charges of fraud against Success Trade Securities, a firm he was working with.
Jinesh “Hodge” Brahmbhatt of Virginia-based Jade Private Wealth Management, who formerly advised players in the NBA and NFL, had sold Success Trade's promissory notes to the players and former players — some 58 people altogether, including non-sports figures — who had been promised returns ranging from 11% to 26%.
The former advisor, who was registered with the NFL Players Association’s financial advisor program, advised his clients in late April that he was not sure whether they’d be able to reclaim their principal. In May the players’ union suspended Brahmbhatt’s registration and notified players’ agents of the action.
The players' money was going to finance the personal expenses of Success Trade CEO Fuad Ahmed and to make principal payments to earlier investors in the scheme, which operated in Ponzi fashion. Ahmed used nearly $800,000 in investor money to pay the lease on a Range Rover and make payments on credit cards, buy clothing and make interest-free loans to his brother.
Brahmbhatt, whose firm used to manage money for more than 70 different professional athletes, was supposed to show up to testify at an August disciplinary hearing called by FINRA to investigate the Success Trade situation. He never showed, and instead on Nov. 4 signed a letter of acceptance, waiver and consent.
SEC Charges Another Tipper in Galleon Insider Trading Scheme
The Securities and Exchange Commission charged a former employee at a Silicon Valley-based semiconductor company for his role tipping nonpublic information used in connection with Raj Rajaratnam’s massive insider trading scheme.
The SEC alleges that Sam Miri, who worked in the communications division at Marvell Technology Group, tipped off former Galleon Management portfolio manager Ali Far. He used the nonpublic information provided by Miri to trade Marvell securities on behalf of hedge funds that he founded after leaving Galleon. Far and Spherix Capital, who were among those earlier charged by the SEC in the Galleon matter, earned hundreds of thousands of dollars in illicit profits based on Miri’s tips. In exchange for the illegal tips, Far arranged four quarterly payments to Miri totaling approximately $10,000.
Miri, who lives in Palo Alto, Calif., has agreed to settle the SEC’s charges by paying more than $60,000 and being barred from serving as an officer or director of a public company.
“Miri finds himself playing the role of defendant because he chose to violate his duty to protect his employer’s confidential information by selling it to a hedge fund manager in exchange for quarterly payments,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office, in a statement. “A total of 35 firms and individuals have now been held accountable for their varying roles in the Galleon scheme.”
Miri agreed to pay $10,000 in disgorgement, $1,842.90 in prejudgment interest and a $50,000 penalty. Miri also agreed to be barred from serving as an officer or director of a public company for five years. Without admitting or denying the charges, Miri agreed to be permanently enjoined from future violations of these provisions of the federal securities laws. The settlement is subject to court approval.
SEC Charges Hedgie With Insider Trading on Tips on Baby-Clothes Giant
While other kinds of companies may seem to offer more excitement than kiddie clothier Carter’s, a hedge fund trader with an inside track on the company was so eager to trade on hot tips that he often traded Carter's shares while still on the phone with his source, according to the SEC.
Just a month after he joined hedge fund Level Global Investors L.P. as head of its consumer sector in August of 2009, Mark Megalli signed an agreement with the consulting firm of Eric Martin, a former vice president of investor relations at Carter’s. Martin, who had kept in touch with at least one insider at Carter’s after he left, was previously charged by the SEC for using the confidential information he received to pass along to others.
Thanks to Megalli’s agreement with Martin, Level Global was able to avoid approximately $2.4 million in losses and make $853,655 in illicit profits by trading shares ahead of positive or negative news. In fact, Martin started supplying Megalli with information the very day the agreement was inked.
Among other tidbits of vital information, Martin tipped Megalli to advance information on positive earnings data; an accounting issue that caused the stock to fall—but not until after Megalli had sold off the hedge fund’s entire position in the company—and low earnings coupled with negative future guidance in another earnings report. By means of advance purchases in the first instance, the selloff in the second and accumulating short positions to cover the third, Megalli won not just profits for his firm but congratulations from his colleagues at Level Global.
The U.S. Attorney’s Office for the Northern District of Georgia has also announced a parallel criminal case against Megalli. The SEC’s investigation is continuing.
Two Florida Advisors Charged by SEC in Kickback Scheme
Gregory Adams and Larry Grossman, advisors in the Tampa, Fla., area have been charged by the SEC with fraud for failing to truthfully inform clients about compensation received from offshore funds they were recommending as safe investments — even though those funds sent up red flags and presented substantial risks.
They are also charged with contributing to violations of the “custody rule” that requires investment advisory firms to establish specific procedures to safeguard and account for client assets.
According to the SEC, Adams and Grossman solicited and directed clients of their investment firm, Sovereign International Asset Management, to invest almost exclusively in funds controlled by an asset manager named Nikolai Battoo. Battoo was charged by the SEC last year in a separate action.
The two never told their clients about the conflict of interest those recommendations presented — Battoo was paying the pair millions in compensation for steering investors to his funds. Grossman got approximately $3.3 million and Adams received $1 million in compensation arrangements they never told their clients about.
Both Grossman and Adams promoted the investments as safe, diversified, independently administered and audited, and suitable for the investment objectives and risk profiles of their clients — many of whom were retirees. But none of this was true; Battoo’s funds were risky, lacked diversification, and did not have independent administrators and auditors.
The two also failed to investigate, and in some cases completely ignored, numerous red flags surrounding Battoo and his funds. Not only that, but Grossman and Adams aided and abetted Sovereign’s violations of the custody rule when they told their clients to transfer their investment funds to a bank account controlled by a related entity. The two pooled clients’ money in this account before investing it in Battoo’s offshore funds.
Check out 8 of the Worst Financial Meltdowns by Athletes on ThinkAdvisor.