Enforcement Roundup: Investors Win $900,000 in FINRA Arb Over Nontraded REITs

Instinet Sanctioned by SEC on Red-Flag Soft-Dollar Payments

New York-based brokerage firm Instinet Inc. was sanctioned by the SEC and has agreed to pay more than $800,000 to settle charges that the firm paid more than $400,000 in soft dollars despite red flags indicating that to do so was improper.

While such payments — credits or rebates from a brokerage firm on commissions clients pay to advisors for trades — are allowed if they are properly disclosed, and can be used to pay for such expenses as brokerage and research services that benefit clients, in Instinet’s case this was not so.

San Diego-based investment advisory firm J.S. Oliver Capital Management, which received the soft dollars, was separately charged by the SEC, along with its president, Ian Mausner, for misuse of those funds.

Instinet ignored several red flags as it paid out inappropriate soft dollars from January 2009 to July 2010.

One of those was an altered employment agreement for Mausner’s ex-wife, who had failed to do any work for J.S. Oliver after 2006, but who nonetheless received $329,000 from Instinet.

Another was a request midway through 2009 for soft dollars to pay for a 50% rent increase, from $10,000 per month to $15,000 per month, for J.S. Oliver offices — which were not only located in Mausner’s home, but had already been paid at the lower rate by Instinet.

A third was the submission of two requested soft-dollar payments for Mausner’s travel to New York, cited as related to evaluating “potential investment opportunities.” In actuality the money was for maintenance, taxes and fees on Mausner’s personal timeshare in New York City. Despite copies of timeshare bills that were clearly in Mausner’s name indicating the payments would be for his own financial benefit, Instinet approved the soft-dollar payments totaling more than $40,000. Instinet agreed to pay a penalty of $375,000, disgorgement of $378,673.76, and prejudgment interest of $59,607.66. The firm also must engage an independent compliance consultant to review its policies, procedures and practices related to soft-dollar payments. Without admitting or denying the SEC’s findings, Instinet also consented to a censure and a cease-and-desist order.

PBI Bank Sued by DOL for ESOP Losses

The U.S. Department of Labor has filed suit against PBI Bank Inc., and seeks to remove it as trustee of the Miller’s Health Systems Inc. employee stock ownership plan for its actions resulting in losses for the participants.

According to DOL, the bank, as trustee of the plan, authorized the purchase of company stock for $40 million, which far exceeded the stock’s fair market value. PBI Bank then approved financing for the deal at an excessive interest rate. Miller’s Health is a Warsaw-based company that manages long-term care and assisted-living facilities.

The Chicago regional office of the DOL’s Employee Benefits Security Administration focused on a September 2007 stock purchase. At the time of the purchase, Miller’s Health managed 31 long-term care facilities under the name of Miller’s Mary Manor and 10 assisted living facilities under the name Miller’s Senior Living. Miller’s Health also operated Theracare Inc., an Indiana corporation, which primarily provided physical and occupational therapy and speech-language pathology to residents in Miller’s Health facilities.

The agency’s investigation determined that, as a result of the way the transaction was designed and because of the fiduciary breaches of PBI, the stock purchase was not for the primary benefit of participants and did not promote employee ownership in Miller’s Health. In its suit, DOL is not only seeking to require PBI to restore all losses suffered by the ESOP, plus interest, but also to remove PBI as trustee as a fiduciary and service provider of the plan and to permanently bar it from serving in either of those capacities to ERISA-covered plans in the future.

As of Sept. 30, 2012, the ESOP had 2,939 participants and assets of $12.85 million.

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Check out Advisors Brace for More Exams in 2014; DOL ‘Game Changer’ on Horizon on ThinkAdvisor.