Recent enforcement actions taken by the Securities and Exchange Commission (SEC) include charges against a California man who tipped off a hedge fund manager with inside information; three men in a $27.5 million investment fraud case; a China-based company over fraud via phony sales that inflated revenues; a PR executive who took advantage of knowledge of a client's firm to engage in insider trading; a financial guru and radio personality who misled investors about an investing plan; and an advisor who failed to disclose revenue sharing agreements.
Radio Financial Guru Charged Over Misleading Information
The SEC charged Ray Lucia Sr., a nationally syndicated radio personality and financial advice author, for spreading misleading information about his "Buckets of Money" strategy at a series of investment seminars that he and his company hosted for potential clients.
The SEC's Division of Enforcement alleges that Lucia claimed that the wealth management strategy he promoted at the seminars had been empirically "backtested" over actual bear-market periods. Lucia, who lives in the San Diego area, and his company, formerly named Raymond J. Lucia Cos. (RJL), allegedly presented a lengthy slideshow at the seminars indicating that extensive backtesting proved that the Buckets of Money strategy would provide inflation-adjusted income to retirees while protecting and even increasing their retirement savings. However, Lucia and RJL performed scant, if any, actual backtesting of the Buckets of Money strategy.
Hedge Fund Tipster Charged
The SEC charged Hyung Lim of Los Altos, Calif., with illegally tipping a hedge fund manager with inside information about Nvidia Corp.'s quarterly earnings that he learned from his friend who worked at the company. In a parallel action, the U.S. Attorney for the Southern District of New York announced criminal charges against Lim. The SEC's own investigation is ongoing.
According to the SEC's complaint filed in federal court in Manhattan, Lim passed information to Danny Kuo, a hedge fund manager, who illegally traded on the information and passed it on to multibillion-dollar hedge fund advisory firms Diamondback Capital Management and Level Global Investors.
Kuo and the hedge funds made nearly $16 million trading in Nvidia securities based on Lim's inside information. They were charged earlier in the year by the SEC.
The SEC alleges that Lim and Kuo met at poker parties organized by a mutual friend, and that during at least 2009 and 2010, Lim's Nvidia friend regularly provided him with detailed information about the contents of Nvidia's upcoming quarterly earnings announcements. Lim's source provided him with not only one tip but a whole series; they grew more accurate and reliable as Nvidia finalized its financial results for a given quarter and prepared to report them publicly.
Lim's Nvidia friend usually told Lim the nonpublic information in phone conversations; within one minute of ending a conversation, Lim would be on the phone to Kuo to pass along the latest data.
In compensation for the tips, Kuo wired $5,000 to a Las Vegas casino to pay a debt for Lim, and later Kuo made two $5,000 cash payments to Lim. Kuo also provided Lim with nonpublic information about a pending corporate acquisition, which Lim used to make more than $11,000 in trading profits.
In the seminars, held to solicit advisory clients who would pay for Lucia and RJL's advisory services, the Buckets of Money strategy was promoted—as it also was on Lucia's radio show and on his personal and company websites. However, Lucia and RJL have admitted during the SEC's investigation that the only testing they actually performed were some calculations that Lucia made in the late 1990s—copies of which no longer exist—and two two-page spreadsheets.
According to the SEC's order instituting administrative proceedings against Lucia and RJL, not only did the so-called "backtests" use a 3% inflation rate, lower than actual historical inflation and designed to make the strategy more favorable, they failed to account for the negative effects of the advisory fees. In addition, the backtesting didn't allocate in the manner advocated by the Buckets of Money strategy.
The Division of Enforcement is seeking financial penalties and other remedial action in the proceedings.
Advisor Charged Over Undisclosed Revenue Sharing
Two Portland, Ore.-based investment advisory firms, Focus Point Solutions and The H Group, and their owner, Christopher Keil Hicks, were the target of a settled administrative proceeding over the failure to disclose a revenue-sharing agreement and other potential conflicts of interest to clients. Without admitting or denying the SEC's charges, Hicks, Focus Point and The H Group agreed to pay a combined $1.1 million to settle the case.
The SEC's investigation found violations in three areas of Hicks' advisory business. Most notably, Focus Point did not disclose to customers that it was receiving revenue-sharing payments from a brokerage firm that managed a particular category of mutual funds being recommended to Focus Point clients.
Focus Point had an incentive to recommend these funds to clients over other investment opportunities, since it received a percentage of every dollar its clients invested in them, bringing in additional revenue.
According to the SEC's order, there were two additional ways Hicks and his firms failed to disclose conflicts of interest while seeking approval to have Focus Point added as the subadviser to a mutual fund called the Generations Multi-Strategy Fund.
First, while seeking required approval from the fund's trustees, Focus Point misrepresented that it would receive no payments other than fees paid under the subadvisory contract. The trustees did not know that the fund's primary adviser had a separate payment arrangement with Focus Point, which it was required to disclose to them but did not.
