More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Among recent enforcement actions taken by the SEC were charges against a Colorado man who called himself an institutional trader after allegedly defrauding elderly investors in a phony investment scheme; a penny stock financier and his firms for failing to register billions of shares of microcap companies that they bought and then resold; an advisory firm and portfolio manager who misrepresented risk, exposure and diversification to trustees; and an oil field services company for violations of the Foreign Corrupt Practices Act (FCPA) including bribes, travel and entertainment for foreign officials.
Colorado Man Charged by SEC With Bilking Elderly Investors to Pay His Mortgage
Gary Snisky of Longmont, Colo., was charged by the SEC with defrauding elderly investors into making what he told them were investments in government-secured bonds. He then used their money to pay his mortgage.
According to the SEC, Snisky, a self-described institutional trader, primarily targeted retired annuity holders by using insurance agents to sell interests in his company Arete LLC, which were pitched as a safe and more profitable alternative to an annuity. Investors were told their funds would be used to purchase government-backed agency bonds at a discount, and Snisky as an institutional trader would use the bonds to engage in overnight banking sweeps.
But Snisky never bought any bonds or did any trading. Instead he spent about $2.8 million of investor funds to pay commissions to his salespeople and make personal mortgage payments.
Snisky brought in at least $3.8 million from more than 40 investors, not just in Colorado but also in several other states. Beginning in August 2011, he recruited veteran insurance salespeople who could sell the Arete investment to their established client bases that owned annuities. The majority of investors in Arete used funds from IRAs or other retirement accounts.
He described Arete as an “annuity-plus” investment in which, unlike typical annuities, investors could withdraw principal and earned interest with no penalty after 10 years while still enjoying annuity-like guaranteed annual returns of 6%–7%.
Snisky made up everything he said about the "investment," creating his own sales brochures and documentation. He did such a good job of pitching that one of his own salespeople actually put money into the bogus investment.
The SEC seeks a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, and a financial penalty. Its investigation is continuing.
In a parallel action, the U.S. Attorney’s Office for the District of Colorado also announced criminal charges against Snisky.
Penny Stock Financier to Pay $1.4 Million to Settle SEC Charges
Curt Kramer and his firms Mazuma Corp., Mazuma Funding Corp., and Mazuma Holding Corp. have agreed to pay $1.4 million — disgorgement totaling $1,061,367 plus prejudgment interest of $128,611 and penalties totaling $273,000 — to settle SEC charges that they bought billions of shares in two microcap companies and then failed to register them before resale.
Kramer and his firms bought unregistered shares in penny stock issuers Laidlaw Energy Group and Bederra Corp. For the Laidlaw transactions, more than 2 billion shares, they claimed an exemption in Rule 504 of Regulation D that permits certain companies to offer and sell up to $1 million in unregistered shares. But the Mazuma firms’ purchases of Laidlaw shares exceeded Rule 504’s $1 million limit, which meant the exemption did not apply.
Mazuma Holding Corp.’s acquisition and sale of more than 1 billion unregistered shares of Bederra that had been misappropriated from the issuer by its transfer agent also were not exempt from registration.
In both cases Kramer and his firms obtained the shares at a substantial discount, and in neither case were the shares registered.
Kramer and Mazuma neither admitted nor denied the SEC's charges. Their consent to the entry of the SEC's order constitutes a disqualifying event under the bad actor disqualification provisions of Rule 506.
Advisory Firm, Portfolio Manager Charged With Fraud in Money-Market Fund
A Detroit-based investment advisory firm and a portfolio manager were charged with fraud by the SEC for deceiving the trustees of a money-market fund and failing to comply with rules that limit risk in a money-market fund’s portfolio.
The SEC said that Ambassador Capital Management and Derek Oglesby repeatedly made false statements to trustees of the Ambassador Money Market Fund about the credit risk in the securities they purchased for its portfolio. Trustees also were misled about the fund’s exposure to the eurozone credit crisis of 2011 and the diversification of the fund’s portfolio.
The SEC uncovered the fraud through analysis of the fund's performance compared with others when reviewing the gross yield of funds as a marker of risk. The Ambassador Money Market Fund's performance was consistently different from the rest of the market, and when the SEC investigated further it found that Ambassador Capital Management and Oglesby misinformed trustees or held back critical information.
Not only was the fund's risk profile misrepresented, the fund often did exactly the opposite of what it claimed to do to reduce risk.
Oil Services Company Weatherford Fined $250 Million for Bribing Foreign Officials
The SEC charged Swiss-based oilfield services company Weatherford International with violating the Foreign Corrupt Practices Act (FCPA) by authorizing bribes and improper travel and entertainment for foreign officials in the Middle East and Africa to win business, including kickbacks in Iraq to obtain United Nations Oil-for-Food contracts.
Weatherford, which has a substantial presence in Houston, and its subsidiaries falsified its books and records to hide not just the bribes and junkets, but also commercial transactions with Cuba, Iran, Syria, and Sudan that violated U.S. sanctions and export control laws.
Lacking an effective system of internal accounting controls to monitor risks of improper payments and prevent or detect misconduct, the company reaped more than $59.3 million in profits from business obtained through improper payments, and more than $30 million in profits from its improper sales to sanctioned countries.
In one instance, in Angola, Weatherford’s legal department allowed its subsidiary to use an agent who insisted that an FCPA clause be omitted from the consultancy agreement. The company never investigated the possibility that the agent might be paying bribes to foreign officials, and the agent used sham work orders and invoices to pay bribes that ensured the renewal of a lucrative oil services contract for Weatherford in Angola. The same agent made illicit payments to obtain commercial contracts for Weatherford in Congo.
The company also allowed its subsidiary to enter into a joint venture agreement with companies whose beneficial owners included Angolan oil company officials and a relative of an Angolan Minister in order to win business. A Weatherford employee reported in a 2006 ethics questionnaire that Weatherford personnel were making payments to government officials in Angola and elsewhere, but the company failed to investigate.
Check out 2 Houston Firms Accused of Illicit Trading in Client Accounts on ThinkAdvisor.