More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.
Among recent SEC enforcement actions were an $11 million settlement from two Hong Kong asset management firms after the firms’ assets were frozen for insider trading and a guilty verdict in the trial of a Connecticut fund manager who facilitated a Ponzi scheme and sought to divert a settlement to his own purposes.
In addition, FINRA censured and fined a Dayton, Ohio-based firm and its principal on compliance failures.
Ponzi Schemer Busted Trying to Divert Settlement Cash
A jury found guilty a Connecticut fund manager who, not content to bilk clients out of funds via a Ponzi scheme he facilitated, also tried to subvert funds from a settlement connected to that scheme.
Marlon Quan, who was charged in 2011 with facilitating fraud for his part in funneling several hundred million dollars into a Ponzi scheme run by Minnesota businessman Thomas Petters, also was the target of an emergency court order by the SEC designed to stop him from diverting to himself and others settlement funds intended for U.S. victims of the original scheme.
According to the SEC, Quan and his firms (Stewardship Investment Advisors LLC and Acorn Capital Group LLC) invested hedge fund assets with Petters while pocketing more than $90 million in fees. They provided false assurances of security to investors and even participated in “round-trip” transactions that made it look as if Petters were making payments on the funds Quan managed.
But that wasn’t enough for Quan, who then also negotiated an agreement to divert a settlement payment of approximately $14 million relating to a receivership and a bankruptcy of Petters’s entities. In the attempt, blocked by the SEC, Quan had arranged for nearly $6 million of the settlement amount to be paid to a German bank, more than $7 million to be paid to a liquidator appointed by a Bermuda court for certain overseas fund investors, and approximately $862,500 to be directed to pay Quan’s lawyers and other expenses.
Although he purportedly negotiated on behalf of his U.S. fund investors, Quan’s U.S. victims would receive no money under this agreement. Instead, the money was paid into a firm affiliated with Quan’s Acorn Capital Group LLC. However, the SEC stepped in with an emergency freeze order that segregated the funds and held them under court order.
Now Quan has been found guilty by a jury of securities fraud for his role in the various schemes. Andrew Ceresney, director, SEC Division of Enforcement, said in a statement, “We’re very pleased the jury found Marlon Quan liable for securities fraud and that he will be held accountable for his deception in funneling several hundred million dollars of investor money into the Tom Petters Ponzi scheme. Facilitators of Ponzi schemes are just as culpable and harmful to investors as those who are conducting the schemes, and we thank the jury for sending that message in its verdict.”
Two Hong Kong Firms to Pay $11 Million on SEC Insider Trading Charges
Two Hong Kong asset management firms have agreed to pay settlements totaling nearly $11 million in the wake of an emergency asset freeze by the SEC to halt an insider trading scheme involving the acquisition of Canadian energy firm Nexen Inc. by China-based CNOOC Ltd. in 2012.
In its investigation, the SEC found that traders using accounts in Hong Kong and Singapore racked up more than $13 million in illegal profits when the shares of Nexen spiked by more than 50% in the wake of the acquisition announcement. It won an emergency asset freeze against the then-unknown traders, and has since reached a string of settlements with the firms found to have engaged in insider trading.
CITIC Securities International Investment Management (HK) Limited and China Shenghai Investment Management Ltd., the most recent firms to settle and the last whose accounts remained frozen, agreed to pay $6.6 million and $4.3 million respectively. CITIC’s settlement, approved by the court in late January, requires the firm to pay $3,299,596.84 in disgorgement and a $3,299,596.84 penalty for purchasing shares of Nexen stock in the U.S. for the accounts of two of its affiliates.
Neither firm, nor eight clients of China Shenghai on whose behalf trades were made — Biggain Holdings Ltd., Classictime Investments Limited, Feng Hai Yan, Gao Mei, Sparky International Trade Co., Stephen Wang Sang Wong, Zhang Jing Wei, and Zheng Rong — admitted or denied the SEC’s findings, but agreed to disgorgement of all ill-gotten gains totaling $4,268,057.16. Trades had been made in the accounts of those eight clients in the week prior to the acquisition announcement.
The SEC had previously settled with Hong Kong-based firm Well Advantage, which agreed to a $14.2 million settlement in October 2012; a Chinese businessman, his private investment company, and his wife and her brokerage customers, who agreed to a $3.3 million settlement in March 2013; and a Singapore-based businesswoman who agreed to a $566,000 settlement in May 2013. Altogether the settlements total nearly $30 million.
FINRA Fines, Censures Firm and Principal on Compliance Failures
Dayton, Ohio-based Sicor Securities Inc. and its registered principal Gregory Lunar Merrick have been censured and fined by FINRA on findings that the firm, by and through Merrick, failed to properly inspect its home office and branch offices.
Merrick was designated as having oversight responsibilities for ensuring compliance with all applicable rules and regulations concerning membership and registration information, and was specifically charged with the responsibility of correctly designating each location as an office of supervisory jurisdiction (OSJ), supervisory branch, branch or nonbranch office location. However, he not only failed to keep numerous promises to inspect branch offices but also deregistered all of its single representative branch office locations by submitting Uniform Branch Office Registration Forms (Forms BR) indicating that those locations no longer qualified as branch offices.
FINRA also found numerous failures to retain and preserve emails from representatives who were using their personal email accounts at the firm for businesses purposes, and failures to put in place reasonable procedures to make sure that the representatives’ incoming and outgoing emails were preserved.
In addition, other supervisory failures were cited, including failure to report disclosure events or changes in status of currently disclosed events, failure to disclose outside business activities, failure with regard to anti-money laundering (AML) procedures and failure even to approve business cards, letterhead and websites.
Without admitting or denying FINRA’s findings, both the firm and Merrick consented to fines — $200,000 for the firm and $25,000 for Merrick — and to entry of the findings. Merrick was also suspended for two years.
Check out FINRA OKs Plans on BrokerCheck Link, Expungement and Arbitrator Definition on ThinkAdvisor.