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Regulation and Compliance > Federal Regulation > DOL

SEC, DOL Enforcement: Fiduciaries Fined $4.7M Over Fake Health Plan

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Among recent enforcement actions, the Department of Labor went after two fiduciaries who faked an employee benefit plan.

The SEC was also busy, bringing charges of fraud against an investment advisory firm and its two co-owners for their false statements in recommending a risky hedge fund; of accounting violations against a bank holding company; and sanctions against eight audit firms for violating auditor independence rules.

Fiduciaries Ordered to Pay $4.7 Million for Fake Health Plan

The Department of Labor has emerged the victor from a case against the two fiduciaries of the Professional Industrial Trade Workers Union Health and Welfare Fund after a federal judge ordered James Doyle and Cynthia Holloway to pay $4.7 million in restitution, plus interest, for ERISA violations.

The court found that Doyle and others used the fake Professional Industrial Trade Workers Union as a front for a scheme to operate a purported, union-sponsored employee benefit plan. To get medical benefits from the plan, employers and workers across the U.S. had to join the phony union and make payments.

But instead of paying out health care benefits and paying reasonable administration costs, Doyle diverted the money and instead used most of it to cover bogus expenses including “union dues.” For her part, Holloway failed to act as a fiduciary and allowed the scheme to continue.

The court also found that the defendants marketed and ran the health plan in violation of federal law when they failed to administer the fund’s assets for the exclusive purpose of providing benefits to the fund’s participants and beneficiaries.

Doyle and Holloway are permanently barred from serving as a fiduciary or service provider to any employee benefit plan covered by the Employee Retirement Income Security Act. The court also appointed an independent fiduciary to administer and ultimately terminate the plan, which, at its height, had approximately 2,500 participants.

SEC Charges Firm Pushing Risky Hedge Fund on Retirees With Fraud

The SEC has charged Timothy Dembski and Walter Grenda Jr., co-owners of Buffalo, New York-based investment advisory firm Reliance Financial Advisors, with fraud for making false and misleading statements to clients when recommending investments in a risky hedge fund. The hedge fund’s portfolio manager agreed to settle similar charges.

According to the agency, Dembski and Grenda steered clients toward a hedge fund managed by Scott Stephan, who had virtually no hedge fund investing experience. Instead, Stephan had spent the majority of his career collecting on past-due car loans.

Not only did Dembski and Grenda urge clients to invest in Stephan’s fund via offering materials that exaggerated Stephan’s experience, they pushed the highly speculative “investment” on clients who were retired or nearing retirement and living on fixed incomes.

In addition, the trading strategy that was allegedly described to investors was fully automated by an algorithm purportedly sought by big banks. The trading algorithm, however, did not work as intended and Stephan began placing trades manually, which led to the hedge fund’s eventual collapse.

Dembski’s clients invested approximately $4 million in Prestige Wealth Management Fund, and Grenda’s clients invested approximately $8 million. The hedge fund, which began trading in April 2011, did not generate the positive returns advertised, so Grenda withdrew his clients in October 2012. The fund lost about 80% of its value when it collapsed a couple of months later, leaving Dembski’s clients to lose the vast majority of their investments.

In addition, the SEC said that Grenda also borrowed $175,000 from two clients in late 2009 and falsely told them that he would use it as a loan to grow his investment advisory business. Instead he spent the money on personal expenses and debts.

While Dembski and Grenda will face the SEC’s charges in court, Stephan has already settled with the SEC. Without admitting or denying the allegations, he agreed to be permanently barred from the securities industry. Disgorgement and penalties will be determined at a later date.

Bank Holding Company Charged by SEC With Accounting Violations

The SEC has charged Virginia Beach-based Hampton Roads Bankshares, which is the holding company for the Bank of Hampton Roads and Shore Bank, and its former CFO Neal Petrovich with violating federal securities laws by improperly accounting for a deferred tax asset (DTA) that was not fully realizable due to the company’s deteriorating loan portfolio and financial condition.

According to the agency, the DTA reported by Hampton Roads was $56.4 million as of Dec. 31, 2009, and $70.3 million as of March 31, 2010. The vast majority of the DTA during this time related to the company’s loan loss reserves.

In March 2010, Petrovich and others under his direction prepared an internal memo analyzing whether a valuation allowance was required against the DTA as of year-end 2009. After improperly concluding that Hampton Roads was likely to become profitable again in 2011, and thus would utilize its DTA within the applicable time period, they decided that no valuation allowance was necessary.

As a result, the bank’s annual report for 2009 and its first quarterly report for 2010 included financial statements recording its DTA without a valuation allowance.

However, internal reports at Hampton Roads in late 2009 and the first half of 2010 indicated that the bank’s loan portfolio — including nonperforming assets, delinquent loans, and nonaccruing loans — was continuing to deteriorate, indicating that the loan losses were likely to continue.

Hampton Roads ended up restating its filings in August 2010 to record a valuation allowance against its entire DTA, which impacted the capitalization level that the company was required to report quarterly to bank regulators and that investors consider material information. Before the restatement, Hampton Roads reported that it was “adequately capitalized” as of Dec. 31, 2009, and “undercapitalized” as of March 31, 2010. After the restatement, Hampton Roads updated its reports to say it was “undercapitalized” as of Dec. 31, 2009, and “significantly undercapitalized” as of March 31, 2010.

Without admitting or denying the SEC’s findings, both Hampton Roads and Petrovich have agreed to settle the charges. In addition, Hampton Roads has agreed to pay a $200,000 penalty and Petrovich agreed to pay $25,000.

SEC Sanctions Eight Audit Firms on Auditor Independence Rule Violations

The SEC has sanctioned eight audit firms on charges that they violated auditor independence rules when preparing financial statements of brokerage firms that were their audit clients.

According to the agency, the firms — which have agreed to settle the cases — generally took data from financial documents provided by clients during audits and used it to prepare their financial statements and notes to the financial statements. By preparing financial statements, which are not audit services, the firms essentially put themselves in the position of auditing their own work, and they inappropriately aligned themselves more closely with the interests of clients’ management teams in helping prepare the books rather than strictly auditing them.

The firms are BKD LLP, based in Springfield, Missouri; Boros & Farrington Accountancy Corp., based in San Diego; Brace & Associates PLLC, based in Londonderry, New Hampshire; Robert Cooper & Co. CPA PC, based in Chicago; Lally & Co. LLC, based in Pittsburgh’ Lerner & Sipkin CPAs LLP, based in New York City’ OUM & Co. LLP, based in San Francisco; and Joseph Yafeh CPA Inc., based in Los Angeles.

The firms, which consented to the orders and censure without admitting or denying the findings, will collectively pay $140,000 in penalties and must comply with a series of remedial undertakings designed to prevent future violations of these independence requirements.


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