More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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 was handed a huge victory by the courts with the decision by an administrative law judge that audit firms registered in the U.S. but located overseas must disclose records to the agency. The SEC also obtained a settlement from a former Oppenheimer fund manager on fraud charges.
In addition, the Department of Labor reached a $10 million settlement with People Care Holdings and its former owners, who sold the company to its employees via an employee stock ownership plan at what DOL said was an inflated value.
Big Four Overseas Dealt Blow in Court by SEC; Must Disclose Records
An administrative law judge ruled in favor of the SEC in a long-running battle with U.S.-registered accounting firms doing business in China over records disclosure. Not only that, he placed the Big Four’s Chinese units under suspension for six months, forbidding them from auditing U.S.-listed companies for that period.
The Chinese affiliates of KPMG, Deloitte & Touche, PricewaterhouseCoopers and Ernst and Young, along with a fifth firm, Dahua, which was previously a member of the BDO international network, have argued for years that they would be in danger of violating Chinese secrecy laws by disclosing audit work papers. This has frustrated many of the SEC’s efforts to go after Chinese firms listed in the U.S. that have been involved in accounting scandals.
The decision by SEC Administrative Law Judge Cameron Elliot left no doubt as to his feelings on the matter, rendered in a 112-page document that was highly critical of the accounting firms and their behavior.
In the decision, he said, "Respondents operated large accounting businesses for years, knowing that, if called upon to cooperate in a Commission investigation into their business, they must necessarily fail to fully cooperate and might thereby violate the law.... Such behavior does not demonstrate good faith, indeed, quite the opposite—it demonstrates gall."
Elliot censured all five firms, but did not impose a suspension on Dahua, which had already withdrawn from the market.
The decision’s consequences could be far-reaching, not only for the audit firms involved, but for the companies they audit. Even though the accounting firms plan an appeal, the process could be protracted and the companies they audit would need to put in place other auditors during the suspension or risk suspension of share sales because of failure to file their accounts.
In addition, Chinese firms seeking IPOs in the U.S. could find their progress halted, and even U.S. multinationals doing significant business in China might think twice about using any of the Big Four’s Chinese units for auditing work.
DOL Wins $10 Million Settlement in ESOP Case
The Department of Labor has announced a $10 million settlement with People Care Holdings Inc. and former owners Bruce Jacobson and Jerry Lewkowitz, who sold the company to their employees through the creation of an employee stock ownership plan. DOL found that they were in violation of the Employee Retirement Income Security Act (ERISA) by selling the company to the ESOP at a higher price than its fair market value.
The Employee Benefits Security Administration’s New York regional office found during an investigation that Jacobson, Lewkowitz and People Care breached their fiduciary duties by allowing unrealistically optimistic projections of People Care’s future earnings and profitability to remain in effect even after the company lost a key municipal contract.
In addition, EBSA’s investigation determined that the stock purchase agreement’s indemnification provision was invalid because it would require People Care, which is entirely owned by the ESOP, to pay any costs incurred by Jacobson and Lewkowitz in connection with an investigation or litigation.
Under the terms of the settlement agreement, Jacobson and Lewkowitz will pay $9,090,910 to the ESOP and a civil penalty of $909,090.
SEC Reaches $100,000 Settlement with Former Fund Manager
The SEC has reached a settlement with former Oppenheimer & Co. portfolio manager Brian Williamson over charges that he misrepresented the valuation of a fund consisting of other private equity funds.
Williamson agreed to be barred from the securities industry and to pay $100,000 to settle the SEC’s charges. In August the SEC had said that he claimed that the reported value of the largest investment in the fund he managed came from the portfolio manager of the underlying fund, when in fact Williamson had valued the investment himself—and at a significant markup to the value assigned by the underlying fund’s manager.
Williamson also sent marketing materials to potential fund investors reporting a internal rate of return that didn’t subtract the fund’s fees and expenses from the final figure. He also made false and misleading statements to investor consultants and others to try to hide what he had done.
Oppenheimer had agreed last year to pay $2.8 million to settle related charges. The firm is not affiliated with OppenheimerFunds.
William Galvin Bars Massachusetts Advisor for Fraudlent, Unethical Behavior
Secretary of the Commonwealth William Galvin charged Gerald William Nannen of East Longmeadow, a registered investment advisor representative, with both fraud and “dishonest and unethical business practices.” The complaint alleges that Nannen borrowed money from a client and issued unregistered notes claiming to pay up to 50% interest; offered and sold his client high-risk unsuitable oil and gas deals without disclosing his ownership interest and compensation arrangement with the issuer; and made false filings with the division.
The complaint states that Nannen began borrowing money in 2007 from a 69-year-old advisory client who had received a $1 million lawsuit settlement. In all, he borrowed more than $90,000. The complaint alleges that Nannen used the money for personal use as well as for marketing his insurance business. The promissory notes he gave the client constituted unregistered securities, the complaint charged.
Nannen persuaded the client to invest more than $200,000 in at least 10 oil and gas joint ventures managed by a Texas company. Eight others invested more than $250,000 as well. “Nannen engaged in dishonest and unethical conduct,” the complaint charges, “by failing to disclose in writing his ownership interests and compensation from the oil and gas joint ventures that Nannen recommended to his advisory clients.”
By not disclosing his interest in the gas and oil joint ventures, as well as his $92,972 in tax liens and civil judgments, Nannen made false filings with the Securities Division.
The Securities Division notified the state Division of Insurance of today’s action against Nannen, who is also president, treasurer, secretary and director of Senior Financial Insurance Agency Inc. of East Longmeadow.
Check out SEC, FINRA, DOL Enforcement: $2 Million Restored to U.S. Postal Drivers’ 401(k)s on ThinkAdvisor.