More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
The SEC recently charged a coal company and its founder for false disclosures, the operators of a global pyramid scheme that preyed on Asian and Latino communities, and two in separate cases who engaged in insider trading on information they received from their wives.
Also, the agency charged Transamerica advisors with overcharging clients.
SEC Charges Inside Traders Using Wives’ Info in Two Separate Cases
Two men were charged by the SEC in separate cases for insider trading on information they had gotten from their wives.
Tyrone Hawk of Los Gatos, Calif., overheard work calls made by his wife, a finance manager at Oracle Corp., regarding Oracle’s plan to acquire Acme Packet Inc. Hawk’s wife also told him that there was a blackout window for trading Oracle securities because it was in the process of acquiring another company.
However, according to the SEC, Hawk went ahead and bought Acme Packet shares before the acquisition was announced in February 2013, and reaped approximately $150,000 by selling after the stock price rose 23% on the news. Without admitting or denying the allegations, Hawk agreed to pay more than $300,000 to settle the SEC’s charges.
In an unrelated case, the SEC charged Ching Hwa Chen of San Jose, Calif., after he acted on confidential information in mid-2012 that his wife’s employer, Informatica Corp., would miss its quarterly earnings target for the first time in 31 consecutive quarters.
During a drive to vacation in Reno, Nev., Chen overheard business calls by his wife, who previously advised Chen not to trade in Informatica securities under any circumstances. But the temptation proved too much for Chen, who, once they returned from the trip, set up positions in the stock that would make money if the stock price fell.
Informatica’s shares dropped more than 27% after the news of the earnings miss hit. Chen profited by nearly $140,000. Without admitting or denying the allegations, Chen agreed to pay approximately $280,000 to settle the SEC’s charges.
Coal Company, Founder Charged on False Disclosures
Dickson Lee, the founder of L&L Energy Inc., was charged, along with his company, for making false disclosures about who was running the company.
Lee went to great pains to make it appear as if L&L had a professional management team at the helm, when in fact he was in sole control of the company and its actions. L&L, headquartered in Seattle but with all its operations in China and Taiwan, was purportedly being run by Lee’s brother as CEO, with a woman as CFO, according to the company’s annual report in 2008. However, Lee himself was the only one in charge and the woman had turned down his offer to be CFO the month before.
She confronted Lee in mid-2009, but he went ahead and kept up the deception, to the company’s board of directors and in the company’s 2009 annual report. He even certified falsely that all fraud involving management had been disclosed to the company’s auditors and audit committee.
Lee even managed to get the company listed on the NASDAQ by falsely stating that all required Sarbanes-Oxley certifications had been accurately made.
The SEC has also issued a settled cease-and-desist order against Shirley Kiang, L&L Energy’s former audit committee chairwoman, finding that she played a role in the company’s reporting violations by signing an annual report that she knew or should have known contained a false Sarbanes-Oxley certification by Lee. Kiang has neither admitted nor denied the charges.
The SEC is seeking disgorgement and financial penalties against L&L Energy and Lee as well as an officer-and-director bar against Lee, as well as preventing him from practicing as a CPA before the agency. Its investigation is continuing.
Lee is also the target of a parallel criminal indictment being prosecuted by the U.S. Attorney’s Office in the western district of Washington.
Pyramid Scheme Perpetrators Charged, Assets Frozen by SEC
The SEC has charged the perpetrators of a global pyramid scheme that preyed on Asian and Latino communities, and frozen the assets in the case.
According to the SEC, three entities, controlled by “Phil” Ming Xu, a resident of Temple City, Calif., are collectively operating under the business names WCM and WCM777. They are posing as multilevel marketing companies in the business of selling third-party cloud computing services, which can include website hosting, data storage and software support. The entities are based in California and Hong Kong.
WCM and WCM777 have raised more than $65 million since March 2013 by falsely promising tens of thousands of investors that the return on investment in the cloud services venture would be 100% or more in 100 days. WCM and WCM777 sell their products exclusively to investors and have no other apparent sources of revenue, and claimed that investor money would be used to build out cloud services or to incubate high-tech companies.
While investors were told they would receive “points” for making investments or enrolling other investors, points that would be convertible into equity in initial public offerings of those high-tech companies their money would help launch, instead Xu and the WCM entities used the money to make Ponzi payments masquerading as investment returns to some investors.
The SEC has obtained asset freezes and the appointment of a temporary receiver over the assets of WCM, WCM777, and several other entities named as relief defendants for the purpose of recovering money from the scheme in their possession. In addition, the agency’s request for an order prohibiting the destruction of documents and requiring the defendants to provide accountings was granted.
Transamerica Advisors Fined for Improper Fees, Overcharging
St. Petersburg-based Transamerica Financial Advisors was fined by the SEC for improperly calculating advisory fees and overcharging clients.
According to the SEC, the firm offered breakpoint discounts designed to reduce the fees that clients owed to the firm when they increased their assets in certain investment programs and permitted clients to aggregate related account values to get the discounts.
But Transamerica failed to process all client aggregation requests, and also had conflicting policies on whether representatives were required to pass on to clients the savings from breakpoint discounts. As a result, the firm overcharged certain clients by failing to apply the discounts and failed to have adequate policies and procedures to ensure that the firm was properly calculating its fees.
Failures in processing aggregation requests occurred since 2009, and the firm was first told about them by SEC examiners in 2010 after examination of a branch office. The firm did give refunds to the clients of that branch office, but never executed the firmwide review recommended by the examiners.
That meant that in 2012, when examiners were at the firm’s headquarters, they found that Transamerica was still failing to aggregate some related client accounts. The problem was firmwide and, in fact, Transamerica had conflicting policies throughout its branch offices on whether the firm required its representatives to provide breakpoint discounts to advisory clients.
Transamerica has agreed to settle the SEC’s charges. As a result of the agency’s investigation, the firm reviewed client records and has reimbursed 2,304 current and former client accounts with refunds and credits totaling $553,624 including interest. The firm has also agreed to pay an additional $553,624 penalty.
Additional settlement terms require the firm to retain an independent consultant to review its policies and procedures pertaining to its account opening forms, fee schedules, and fee computation methodologies as well as the firm’s account aggregation process for breakpoints.