SEC Charges Advisor With ‘Soft Dollar’ Fraud

As the SEC explains, soft dollars are credits or rebates from brokerage firms on commissions paid by clients for trades executed in the client accounts of an investment advisor. If appropriately disclosed, an investment advisor may retain the soft dollar credits to pay for a limited category of brokerage and research services that benefit clients.

According to the SEC’s complaint filed in federal court in San Francisco, Kurt and Lisa Hovan falsely disclosed to clients that HCM would use soft dollars only for certain research services. Instead, they used $166,667 in soft dollars to pay Edward Hovan’s salary over a 10-month period in 2008 and 2009.

To cover up these payments, the three Hovans created a shell company–“Bolton Research”–secretly controlled by Edward Hovan, the SEC states. “Through this company, the Hovans invoiced HCM’s brokerage firms for research services that had never been rendered. Once Edward Hovan received the payments, he kicked back approximately 40% ($65,000) to Kurt and Lisa Hovan to pay the office rent,” the SEC says.

The SEC further alleges that Kurt and Lisa Hovan instructed a research provider paid with soft dollars to pad its invoices by $12,000 and kick back this amount to help HCM pay for a new computer server.

The SEC says that during a January 2010 examination of HCM, the SEC staff asked HCM to provide copies of the research reports prepared by Bolton Research in exchange for the soft dollar payments. In response, the SEC says that Kurt Hovan “quickly drafted numerous research reports and doctored materials to make them appear as if they had been prepared by Bolton. Hovan provided these phony documents to SEC examiners.”