More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
The SEC charged a brokerage firm and its founder for violations of net capital requirements and for falsifying documents in an attempt to keep the SEC from finding out. It also charged a Bahamas-based brokerage firm and its president with enabling a fraud; the state of Kansas with securities fraud; and an Atlanta-based accountant and three others with insider trading.
Also, the Justice Department is seeking both fine and forfeiture from Mathew Martoma for his role in SAC Capital’s insider trading scheme, and two mutual fund companies suing Puerto Rico over its bankruptcy law changes are seeking to add claims to their suit.
Kansas Charged With Securities Fraud
The SEC has charged the state of Kansas with securities fraud for understating municipal bond exposure to unfunded pension liability.
According to the agency, the state’s offering documents failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.
The SEC has been conducting a nationwide review of bond offering documents to evaluate disclosures of material pension liabilities and other investor risks. Around the same time in 2010 that it charged the state of New Jersey with failing to disclose underfunding in that state’s two largest pension plans, the agency also began to question disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010.
The bond offerings were issued through the Kansas Development Finance Authority (KDFA) on behalf of the state and its agencies. According to one study at the time, the Kansas Public Employees Retirement System (KPERS) was the second-most underfunded statewide public pension system in the nation. In the offering documents for the bonds, however, Kansas did not disclose that significant unfunded liability, nor the effect of such an unfunded liability on the risk of nonappropriation of debt service payments by the Kansas state legislature.
As the SEC began its inquiry, Kansas began adopting new policies and procedures to improve disclosures about its pension liabilities. Kansas has now fully implemented those remedial actions, and has agreed to settle the SEC’s charges for its prior incomplete disclosures without admitting or denying the findings.
Brokerage Firm, Founder Charged on Falsification, Net Capital Violations
Despite its efforts to mislead SEC examiners, a brokerage firm and its founder were charged with violating net capital requirements and falsifying books and records to conceal the capital deficiencies.
According to the agency, Charles “Chuck” Moore and Crucible Capital Group tried to hide the firm’s extensive and repeated net capital shortfalls by offloading its liabilities onto the books of an affiliated firm and treating nonmarketable stock as an allowable asset. Moore even attempted to hide Crucible’s true financial condition from SEC examiners via doctored invoices.
Angelic didn’t have the resources to pay the vendor debts, and if it were known that those debts were actually Crucible’s, the fact that Crucible had failed to meet its required minimum net capital over the 10 months from December 2012 to September 2013 would become known.
The U.S. Attorney’s Office for the Southern District of New York has also announced criminal charges against Moore for obstructing the SEC’s examination.
Bahamas-Based Brokerage Firm, President Charged by SEC
The SEC has charged Bahamas-based Alliance Investment Management Limited (AIM) and its president, Julian Brown, with enabling a fraud that was stopped when the SEC charged the hedge fund manager at the center of the scheme.
According to the agency, Brown and AIM claimed to be the “custodian” for assets managed by Nikolai Battoo. Battoo’s assets were frozen by the SEC in 2012 and he was charged with defrauding investors all over the world.
Brown and AIM misrepresented themselves to investors as Battoo’s custodian when, since at least 2009, their firm did not have custody of most of the assets listed on investor account statements. They let Battoo create false account statements on AIM’s letterhead that vastly overstated the value of investors’ assets by more than $150 million. Brown and AIM then provided those statements to auditors and others acting on behalf of Battoo’s investors.
Not only that, but Brown and AIM allowed Battoo to take at least $45 million of investor funds by transferring money on his request from investor accounts to his direct control. Battoo paid for that assistance with more than $5 million in investor funds.
The SEC’s investigation is continuing.
SEC Fines Atlanta Accountant, Three Others for Insider Trading
An Atlanta accounting firm partner has been charged with insider trading in the stock of a restaurant company based on confidential information he learned from a client on the board of directors who came to him for tax advice in advance of a tender offer announcement. Three others were also charged after SEC investigators checked the accountant’s client list against trading records.
After a client told him in a tax-planning meeting that Fidelity National Financial was planning to purchase O’Charley’s Inc., Donald Toth purchased stock in the company. O’Charley’s operates or franchises restaurants under the brands O’Charley’s, Ninety Nine Restaurant and Stoney River Legendary Steaks.
When the tender offer was publicly announced about two months later, the price of O’Charley’s stock closed 42% higher than the previous trading day. The insider trading activity made the four investors more than $160,000.
Without admitting or denying the allegations, Toth, Nash, Schlossberg and Manoah have agreed to pay a combined total of more than $420,000 to settle the SEC’s charges.
$9.4 Million Forfeiture, Fine Sought From SAC Manager Martoma
The Justice Department has said that former SAC Capital Advisors LP portfolio manager Mathew Martoma should be subject to forfeiture of $9.4 million, the amount of his bonus in 2008, for his role in masterminding the insider trading scheme that brought down SAC Capital. In addition, prosecutors are seeking at least eight years in prison and a fine that, because it represents double the profits SAC Capital made from the scheme, could range from $20,000 to more than $570 million.
Martoma was convicted in February for his role in the scheme. The $9.4 million forfeiture alone totals more than Martoma’s reported net worth of $7.4 million. He is scheduled to be sentenced on Sept. 8.
Puerto Rico Sued over Bankruptcy Plans by Mutual Funds
Investors for about $20 billion in bonds issued by Puerto Rico’s electricity, highway and water authorities could stand to lose big if the island’s government follows through on its plan to implement a law that permits a U.S.-style bankruptcy restructuring. The law was passed in June, but Oppenheimer & Co. and Franklin Templeton’s municipal bond funds sued to block it, and in July hedge fund Blue Mountain Capital Management joined the fight.
Now Oppenheimer and Franklin Templeton have asked to add claims to the suit, saying that the Puerto Rico Electric Power Authority has other ways to fix its financial situation other than by restructuring.
Puerto Rico has asked that the suit be thrown out.
Check out Whistleblowers Abroad Not Protected Under Dodd-Frank, Court Rules on ThinkAdvisor.