More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
The SEC may continue to seek settlements from financial wrongdoers without being obligated to require admissions of wrongdoing, the U.S. Court of Appeals for the Second Circuit said.
The SEC also took enforcement actions that included charges against a charter school operator for defrauding bond investors and against an Albany-based investment advisor for defrauding clients.
In addition, the Department of Labor reached a $5.25 million settlement with GreatBanc Trust on charges that the bank violated the Employee Retirement Income Security Act (ERISA).
2nd Circuit Backs SEC in Citigroup Case
When Judge Jed Rakoff made headlines by rejecting the SEC’s settlement with Citigroup over what he saw as a failure of the agency to get the bank to admit wrongdoing, it made headlines. The SEC appealed Rakoff’s decision, and the Court of Appeals for the 2nd Circuit found in favor of the agency, saying that Rakoff had applied “an incorrect legal standard” in reaching his judgment.
The SEC said of the decision that while it “has and will continue to seek admissions in appropriate cases, settlements without admissions also enable regulatory agencies to serve the public interest by returning money to harmed investors more quickly, without the uncertainty and delay from litigation and without the need to expend additional agency resources.”
The decision doesn’t entirely close the door on Rakoff’s rejection of the original settlement, however, nor does it mean that in future cases judges may not require additional information. In its ruling, the appellate court said, “On remand, if the district court finds it necessary, it may ask the SEC and Citigroup to provide additional information sufficient to allay any concerns the district court may have regarding improper collusion between the parties.”
Thomas Gorman, a partner at international law firm Dorsey Whitney, said of the ruling, “In its ruling the court largely adopted the SEC’s position that questions regarding settlement policies, the propriety of entering into a settlement and the terms of the arrangement are primarily within the discretion of the agency. To a large extent this validates the longstanding position of the SEC on these issues. At the same time the Circuit Court was careful to carve out a role for the District Court ... [which] has an obligation to examine the proposed decree, ensure that it is fair, reasonable and that the public interest would not be disserved if it is entered.”
Gorman added, “Notably, the Circuit Court stated that if the SEC did not want to subject its settlements to the scrutiny of the District Court then it should consider using its administrative process, although the remedies there might not be on a ‘par’ with those available in a federal district court.”
SEC Charges Charter School Operator With Defrauding Bond Investors
The SEC has charged UNO Charter School Network Inc. and United Neighborhood Organization of Chicago with making materially misleading statements about transactions in a $37.5 million bond offering for school construction that presented a conflict of interest.
According to the agency, UNO not only failed to disclose a multimillion-dollar contract with a windows company owned by the brother of one of its senior officers, but did not tell investors about the potential financial impact of that contract on its ability to repay the bonds.
UNO made two grant agreements with the Illinois Department of Commerce and Economic Opportunity (IDCEO) in 2010 and 2011 to build three schools. Each agreement required UNO to certify the absence of any conflict of interest, and to report in writing immediately any subsequent actual or potential conflicts. If UNO failed to do so, IDCEO could suspend grant payment of grants and recover money already paid.
During the construction phases in 2011 and 2012, UNO breached the agreements by contracting with two companies owned by brothers of its chief operating officer. UNO agreed to pay one company approximately $11 million to supply and install windows, and the other company approximately $1.9 million to serve as an owner’s representative during construction. It also failed to advise IDCEO in writing of its actions.
During its bond offering in October of 2011, not only did UNO not disclose the conflict of interest, it went to great pains to assure investors that its conflict of interest policy was superior to that required of nonprofits. It also neglected to disclose that IDCEO could take back all the money it had already paid UNO should the already-existing conflicts come to light. Had IDCEO done so, UNO would not have had the cash to repay the grants and as a result would have had to liquidate its charter schools—the revenue-producing assets without which it could never repay the bonds.
Without admitting or denying the charges, UNO is settling by agreeing to improve its internal procedures and training and to appoint an independent monitor.
Albany Investment Advisor Charged With Bilkig Clients to Buy Vacation Condo
The SEC has filed an emergency enforcement action against Albany-based Scott Valente and his firm The ELIV Group LLC for lying to clients about the success of their investments while stealing their money for his personal use.
The agency said that Valente and his one-man firm, which has an office in Warwick, N.Y., as well as in Albany, fraudulently raised more than $8.8 million from approximately 80 clients by claiming, among other falsities, that they wold get consistent and outsize positive returns and that their investments were safe. In fact, ELIV Group has lost money consistently for the past three years with no positive returns.
Meanwhile, Valente was taking client money and using it to pay for his home improvements and mortgage payments as well as jewelry and a vacation condominium.
Among Valente’s lies was the statement that clients’ principal was not only safe but “guaranteed” because it was backed by a large money market fund. Of course, no such guarantee existed. He also claimed that ELIV Group was independently audited—another lie, since the firm had never been audited; in fact, the investment reports the firm sent to its clients were inflated to look better.
In addition, Valente neglected to mention that he had twice filed for bankruptcy and started ELIV Group only after being permanently expelled by the Financial Industry Regulatory Authority from the broker-dealer industry in 2009 for serious misconduct against multiple customers.
The SEC resorted to the emergency action and is seeking an asset freeze because Valente has already severely depleted client funds with his unsuccessful investment strategies and outright theft — amounting to at least $2.66 million — yet is continuing to seek out new clients to keep the stream of incoming funds flowing.
The SEC seeks a temporary restraining order to freeze assets and prohibit Valente and ELIV from committing further violations of the federal securities laws, as well as a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest and pay financial penalties. The investigation is continuing.
Labor Dept. Reaches $5.25 Million Settlement With GreatBanc Trust
The Department of Labor has reached a settlement of $5.25 million with Lisle, Ill.-based GreatBanc Trust Co. based on allegations that the bank violated ERISA.
The settlement resolves a 2012 lawsuit concerning allegations that in 2006, GreatBanc, as trustee to the Sierra Aluminum Co. Employee Stock Ownership Plan, allegedly allowed the plan to purchase stock from Sierra Aluminum’s co-founders and top executives for more than fair market value.
GreatBanc, said the DOL in the suit, failed to adequately inquire into an appraisal that presented unrealistic and aggressively optimistic projections of Sierra Aluminum’s future earnings and profitability. GreatBanc allegedly failed to investigate the credibility of the assumptions, factual bases and adjustments to financial statements that went into the appraisal. The suit also alleged that GreatBanc asked for a revised valuation opinion in order to reconcile the ESOP’s higher purchase price with the lower fair market value of the company stock.
According to the settlement terms, GreatBanc and its insurers will make $4,772,727.27 in payments to the ESOP and pay $477,272.73 in civil penalties. The company has also agreed to put safeguards in place whenever the company is a trustee or fiduciary to an ESOP that is engaging in transactions involving the purchase or sale of employer securities that are not publicly traded. Those safeguards include requirements for the selection of a valuation advisor and the oversight of the advisor, the analysis required as part of the fiduciary review process and the required documentation of the valuation analysis.