More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- 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.
An Atlanta insider trading case has brought prison terms for two former executives at Carter’s and for a hedge fund manager.
In addition, the SEC charged five traders with short selling and a school district with misleading bond investors, and fined an RIA for breach of fiduciary duty.
SEC Fines SignalPoint for Fiduciary Duty Breach
Springfield, Missouri-based SignalPoint Asset Management LLC (SAM) was the target of a cease-and-desist order sought by the SEC after failing to disclose conflicts of interest to clients. The firm and its principals were also fined and subject to sanctions.
According to the agency, John Handy Jr., Jonathan Timson and Dennis Walker, principals of the firm, provided brokerage and advisory services as both registered representatives and investment advisor representatives of a dually registered broker-dealer and investment advisor. During 2007 and early 2008, the three tried to get permission from the dual registrant to form and own a separate investment advisory firm, but were denied.
Regardless, in August 2008, the three went ahead and formed SAM, but when they advised clients to invest with their new firm they neglected to mention the fact that they controlled it, and that there were conflicts of interest that arose from their capitalization of and potential receipt of profits from it.
SAM also failed to disclose to its clients who its owners were, and also failed to properly identify them on the firm’s Form ADV. Michael J. Orzel, its comptroller and SAM’s chief compliance officer from 2008 onward, was responsible for drafting and filing most of the firm’s Forms ADV.
The three principals had formed Walnut Capital Management (WCM), which they described as a wealth management firm, in March of 2007. They attempted to create, according to the SEC, a hybrid model — a “money management firm that enabled them to process both commission-based business as registered representatives and fee-based business as IARs through the formation of a[n] ... RIA.”
Toward the end of 2006, they had negotiated with a number of broker-dealers, including the dual registrant, about their hybrid model. At the time the dual registrant told them they couldn’t register WCM as an RIA because the dual registrant didn’t support that model, but the principals went ahead and “associate[d] themselves with the dual registrant as registered representatives and IARs, and established WCM as a branch office of the dual registrant.”
Subsequently they asked again about registering WCM as an RIA, and were again denied. So they asked about creating a separate RIA, and were told that the dual registrant prohibited them from “assuming an ownership interest” in such an RIA.
When they formed SAM, however, they not only provided capital but ran the firm — facts that they failed to disclose to clients or in the firm’s ADVs, and definitely assuming an ownership interest.
Sanctions imposed by the SEC include the notification of clients of the circumstances surrounding SAM and potential conflicts of interest, as well as cease-and-desist orders. In addition, the three principals are to pay $60,000 each, and Orzel will pay $35,000, all to the U.S. Treasury.
A criminal case in Atlanta on charges of insider trading has resulted in prison terms for Eric Martin and Richard Posey, two former executives of Carter’s, the children’s clothing company, as well as for Mark Megalli, a former New York hedge fund manager.
Martin, a former vice president of investor relations, started the scheme when he was still at Carter’s. From 2005 to 2009, he passed inside information to a former Wall Street analyst who has cooperated with the investigation but has not been identified.
Martin left Carter’s in 2009, but Posey kept him informed through July 2010. Martin not only passed along the information to the analyst, but also began to act as a consultant for investment firms beginning in September 2009. Level Global was one of these.
Megalli, for his part, made $3 million from the use of Martin’s information for trading.
Martin got two years for his part in the scheme. He pleaded guilty in 2012 to conspiracy to commit securities fraud and wire fraud. Posey, a former vice president of operations, got a year and three months. He was the tipper who provided information to Martin once the latter left the company, and pleaded guilty in June 2013.
Megalli was a former fund manager at Level Global Investors. He, along with other hedge fund investors, got tips from Martin. He pleaded guilty last November and was sentenced to a year and a day in prison.
The three must also pay restitution. Martin is on the hook for $950,000; Posey must pay $750,000; and Megalli, $50,000.
In May, charges were brought against Steven Slawson, co-founder of New Jersey-based Titan Capital Management, for insider trading of Carter’s stock. Slawson has pleaded not guilty.
Civil charges from the SEC are pending against a number of people in the case. Carter’s has been cooperating with the investigation.
Five Traders Charged by SEC With Short Selling Violations
Derek Bakarich, Carmela Brocco, Tina Lizzio, Steven Niemis and William Vowell have all been charged by the SEC with short selling violations while trading for themselves and Worldwide Capital Inc. Long Island-based Worldwide and its owner Jeffrey Lynn had paid $7.2 million in March to settle short sale charges.
The five were charged with violating Rule 105 by selling shares short during the restricted period and purchasing offering shares of the same securities they had shorted.
According to the agency, Lynn chose Bakarich, Brocco, Lizzio, Niemis and Vowell to conduct trades for Worldwide Capital, which he created for the purpose of investing and trading his own money. The five pursued an investment strategy focused primarily on obtaining allocations of new shares of public issuers coming to market through secondary and follow-on public offerings at a discount to the market price of the company’s shares that were already trading publicly.
From approximately August 2009 to March 2012, the five each violated Rule 105 in connection with at least nine covered offerings. For this they received remuneration ranging from approximately $16,000 to more than $200,000.
Each of the five has agreed to settle, without admitting or denying the charges. They also must pay penalties as follows:
Bakarich, of Duluth, Georgia, agreed to pay $16,231 in disgorgement, $757 in prejudgment interest, and a $9,739 penalty for a total of $26,727. Brocco, of East Meadow, New York, agreed to pay $215,233 in disgorgement, $27,056 in prejudgment interest, and a $129,140 penalty for a total of $371,429. Lizzio, of Boca Raton, Florida, agreed to pay $28,864 in disgorgement, $1,548 in prejudgment interest, and a $17,319 penalty for a total of $47,731. Niemis, of Jupiter, Florida, agreed to pay $130,842 in disgorgement, $5,893 in prejudgment interest, and a $78,505 penalty for a total of $215,240. Vowell, of Manasquan, New Jersey, agreed to pay $51,519 in disgorgement, $4,427 in prejudgment interest, and a $30,911 penalty for a total of $86,857.
The investigation is continuing.
California School District Charged by SEC With Misleading Investors
A California school district is the first to be charged with misleading bond investors under a new SEC initiative to address materially inaccurate statements in municipal bond offering documents.
According to the agency, in a 2010 bond offering, Kings Canyon Joint Unified School District told investors that it had complied with its prior continuing disclosure obligations when it had not. Instead, between at least 2008 and 2010, the school district had failed to submit some required disclosures relating to three bond offerings between 2006 and 2007, making its affirmation of compliance false.
In those three bond offerings between 2006 and 2007, Kings Canyon had contractually agreed to disclose annual financial information and notices of certain events pertaining to those bonds. But it had failed to make some of the required disclosures. When it conducted a $6.8 million bond offering in November 2010, Kings Canyon was required to describe any instances where it had failed to materially comply with its prior disclosure obligations. Instead of revealing its failures in the 2010 offering document, it said that it had been in full compliance.
Under the Municipalities Continuing Disclosure Cooperation (MCDC) initiative, the SEC’s Enforcement Division agreed to recommend standardized settlement terms for issuers and underwriters who self-report or were already under investigation for violations involving continuing disclosure obligations. The 2014 initiative, launched on March 10, expires on Sept. 10.
The school district has agreed to settle the charges without admitting to or denying the findings. In addition to consenting to a cease-and-desist order on the violations, it has also agreed to adopt written policies for its continuing disclosure obligations, comply with its existing continuing disclosure obligations, cooperate with any subsequent investigation by the Enforcement Division, and disclose the terms of its settlement with the SEC in future bond offering materials.
Check out FINRA Enforcement: Goldman Fined $800,000 for Trade-Through Failures on ThinkAdvisor.