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.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The Securities and Exchange Commission has charged a Chicago investment fund manager for conducting an $11 million Ponzi scheme to fund several personal ventures.
In addition, an administrative law judge ruled in favor of the SEC, finding that a Florida investment advisory firm and its owner made false and misleading claims in its advertising.
The Commisson also charged the former CFO of a Dallas company that dealt in expensive consignment goods, and won an emergency freeze order against an Illinois-based transfer agent to halt misappropriation of funds.
Chicago Fund Manager Charged With Bilking Clients to Fund Tavern, Kids' Boutiques
Neal Goyal, a Chicago-based investment fund manager, and two investment advisors that he owned and controlled — Blue Horizon Asset Management and Caldera Advisors — were charged by the SEC with fraud for stealing money he raised from investors to pay personal and business expenses; in addition, the agency obtained an asset freeze.
Goyal, who told investors that the four private funds he managed would invest in securities following a long-short trading strategy, raised more than $11.4 million in the last several years for investments in the funds that he managed and controlled. His investment strategy lost money from the beginning, but he hid that fact from investors by making Ponzi payments to older investors with newer investors’ cash and by creating phony account statements.
Meanwhile, Goyal used investors’ funds to make down payments and pay the mortgages on two homes he purchased. He also used their money to invest in a Chicago tavern, fund two children’s clothing boutiques that his wife operates in Chicago, and purchase artwork and lavish furniture.
The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest and a permanent injunction against Goyal, Blue Horizon Asset Management and Caldera Advisors. The agency named another Goyal-controlled entity, Caldera Investment Group, as a relief defendant for the purpose of recovering any investor funds it received.
Judge Rebecca Pallmeyer has issued a permanent injunction and asset freeze against Goyal and his firms, who consented to the order without admitting or denying the SEC’s allegations. Monetary remedies will be decided at a later date.
In a parallel action, the U.S. Attorney’s Office for the Northern District of Illinois has also announced criminal charges against Goyal.
Judge Fines, Bars Investment Manager for False Advertising
The SEC won in a proceeding against Florida-based ZPR Investment Management and its owner Max Zavanelli, when an administrative law judge found that ZPR and Zavanelli were making false and misleading advertisements in several financial magazines and monthly newsletters to clients and prospective clients.
In April 2013, the SEC’s enforcement division issued a cease-and-desist order that said ZPR and Zavanelli falsely represented that the firm’s advertisements and other reported information complied with global investment performance standards (GIPS), a voluntary method of presenting returns commonly used by investment advisors.
According to the agency, between October and December 2008, Zavanelli sent out ads for ZPR to prospective clients that left out information indicating that the firm was underperforming its benchmark index. Instead the ads claimed that the firm was not only outperforming the benchmark, but also was in compliance with GIPS standards for its performance results.
ZPR also claimed in advertisements that its performance results had been verified by a GIPS verification firm; that also was not true. In addition, magazine advertisements in February and May 2011 also claimed GIPS verification.
Noted in the order, and in the judge’s decision, was the fact that in 1987, Zavanelli settled allegations, without admitting or denying them, that he and Zavanelli Portfolio Research were found to have made claims about performance returns and also about his educational background; at the time he had been censured and prohibited from soliciting new clients for 180 days.
Cameron Elliot, administrative law judge, ordered ZPRIM to pay $250,000 and Zavanelli to pay $660,000 and permanently barred Zavanelli from the securities industry.
Former CFO of Dallas Collectibles Company Fined for Accounting Fraud
I. John Benson, former chief financial officer of Dallas-based DGSE Companies Inc., was charged by the SEC with accounting fraud after he manipulated the company’s balance sheets.
According to the agency, the problem started with deficiencies in DGSE’s accounting systems and controls that led to the integrity of the company’s financial data being significantly compromised. Such deficiencies as failure to properly record intercompany transactions, such as inventory transfers between stores, led to the intercompany accounts becoming out of balance by millions of dollars.
Benson then made repeated false accounting entries that materially inflated the value of inventory on the balance sheets at DGSE, which buys and sells jewelry, diamonds, fine watches, rare coins, precious metals and other collectibles.
While Benson’s entries were an attempt to bring the intercompany accounts and DGSE’s general ledger as a whole back into balance, instead they made it look as if DGSE owned some inventory that was actually only present on consignment until sold; until then, that inventory still belonged to the consignors.
Benson concealed the improper entries by manipulating inventory detail listings to improperly reflect the consigned inventory as being owned by DGSE. He sent these listings to DGSE’s external auditor and misled the auditor to believe the consigned goods were owned by DGSE. He then knowingly signed misleading public filings by DGSE, including annual reports for the 2009 and 2010 fiscal years as well as quarterly filings. He also signed false management certifications that were attached to these filings.
As a result DGSE overstated its inventory by anywhere from 99.1%–227.4% in public filings during 2009, 2010, and 2011.
Benson, who was charged with violating the antifraud, reporting, recordkeeping, lying-to-accountants and internal controls provisions of the federal securities laws, has agreed to a settlement in which he will pay a $75,000 penalty, be permanently barred from serving as an officer or director of a public company, and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.
In addition, DGSE, which was charged with reporting, recordkeeping, and internal controls failures, has agreed to settle its charges. In addition, it has also agreed to the appointment of an independent consultant to review the company’s accounting controls, and has taken or agreed to take remedial steps to correct its deficiencies.
Illinois-based transfer agent IST Shareholder Services and its owner Robert Pearson were the targets of fraud charges and an emergency asset freeze after an examination by the SEC turned up a misappropriation scheme. IST Shareholder Services is registered with the SEC as a transfer agent under the name of Illinois Stock Transfer Co.
According to the agency, IST and Pearson were misusing money belonging to their corporate clients and the clients’ shareholders to pay business expenses, including IST’s payroll. When SEC examiners questioned him, Pearson admitted it, at which point the SEC filed an emergency action to obtain an asset freeze and place control of the firm under a third-party receiver appointed by the court.
Pearson misappropriated more than $1.3 million during the past two years from an IST bank account holding the funds of clients who use IST as a paying agent to make cash disbursements to shareholders. The same account also holds money belonging to shareholders who sent IST dividend reinvestment checks for the purchase of additional securities.
SEC examiners found transactions during their examination that looked to be payroll-related rather than transfer agent-related. Pearson, questioned about why payroll payments were being made from a customer fund account, first claimed that the local bank couldn’t manage direct deposits for payroll, so he used the customer account instead to facilitate direct deposits.
However, when examiners asked if IST took in enough revenue in the customer account to cover payroll without resorting to the use of customer funds, Pearson said, “probably not.” Later it was obvious that Pearson was using the customer fund account because IST didn’t make enough money to cover its own expenses.
Pearson claimed that he originally intended to repay in full what he took, but didn’t have the money to do so in a timely manner.
IST was also charged with multiple violations of the SEC’s transfer agent rules with Pearson at the helm. IST failed to safeguard funds and securities and did not properly report lost and stolen securities; it did not file an accurate annual study and evaluation of internal accounting controls, and it failed to give notice of assumption and termination of transfer agent services.
Check out SEC Enforcement: Fund Manager Charged With Defrauding Fellow Church Members on ThinkAdvisor.