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SEC Enforcement: H.D. Vest Failed to Monitor Reps’ Outside Activities

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Among recent enforcement actions by the SEC were charges and a fine against H.D. Vest for violating supervisory and customer protection rules; charges against a so-called venture capital fund manager for a Ponzi scheme; and suspension of trading in 128 dormant shell companies to prevent their being used for microcap fraud.

SEC Fines H.D. Vest for Failing to Monitor Reps

The SEC has charged Irving, Texas-based H.D. Vest Investment Securities with violating key customer protection rules after failing to adequately supervise registered representatives who misappropriated customer funds. It has also fined the firm $225,000.

According to the agency, H.D. Vest has more than 4,500 registered representatives that typically work as independent contractors and also operate tax businesses outside of their securities businesses. H.D. Vest failed to have proper policies and procedures in place to monitor its representatives’ outside business activities, including email communications, and as a result some representatives used their outside businesses to defraud brokerage customers in such ways as transferring or depositing customer brokerage funds into their outside business accounts.

In a settled administrative proceeding, in which H.D. Vest neither admitted nor denied the SEC’s findings, the agency cited in particular the instance of Lewis Hunter, who as part of a fraudulent scheme, “misappropriated approximately $300,000 from H.D. Vest brokerage customers by soliciting customers to invest in both foreign and domestic bank investments and promising guaranteed returns.”

Instead, the SEC said, Hunter used the money for his own personal and business expenses, and lied to his customers about what he had done, going so far as to fabricate bank documents to indicate investments that actually had never been made.

But Hunter wasn’t the only one. And not only did H.D. Vest fail to ride herd on these rogue representatives, according to the SEC, it failed to follow customer protection rules that required it to calculate how much money it needed to keep in a reserve account to make good on losses for customers harmed by the misconduct. It did neither.

SEC: Manager Used Fake Uber Fund to Pay for Twitter Ponzi Scheme

The SEC has charged Gregory Gray Jr. and obtained an emergency asset freeze to halt a Ponzi scheme in which Gray fraudulently used money from three investment funds to pay fictitious returns to investors in a different fund.

According to the agency, Gray and his firms Archipel Capital LLC and BIM Management LP solicited money for a fund created to invest in pre-IPO shares of Twitter that would be delivered to investors with profits once the company went public.

Gray raised nearly $5.3 million from investors, which was enough to purchase 230,000 pre-IPO Twitter shares under the terms of the fund’s offering documents. But he only bought 80,000 shares before Twitter went public in November 2013. Under pressure from investors to distribute their shares and profits, instead he stalled and stole to make up the shortfall by tapping three other unrelated funds to pay investors in the Twitter-related fund. Most of the money Gray used to make the Ponzi payments came from a single investor who was told he had bought the entirety of a fund supposedly investing in $5 million worth of stock in Uber Technologies. To put off this investor, Gray faked a document, using the signature pages of an earlier legitimate stock purchase agreement for shares in a completely different company, to make it look as if the fund had bought Uber stock. The money, however, had been used to pay other investors instead, and the alleged seller of the Uber shares never even owned Uber stock.

The SEC seeks, in addition to preliminary relief and a temporary restraining order, permanent injunctions and disgorgement against all defendants and a financial penalty. The complaint names several relief defendants associated with Archipel Capital and BIM for the purposes of recovering proceeds they received from the fraud.

The investigation is continuing.

SEC Suspends Trading of 128 Dormant Shell Companies

The SEC has suspended trading of 128 inactive penny stock companies to keep them out of the reach of pump-and-dump schemers.

According to the agency, the suspensions are the latest in a microcap fraud-fighting initiative known as Operation Shell-Expel in which the SEC Enforcement Division’s Office of Market Intelligence uses technology to scout the over-the-counter (OTC) marketplace and find dormant companies that could be hijacked for such schemes. Once a stock has been suspended from trading, it can’t be relisted unless the company itself provides updated financial information to prove it’s actually operational.

This latest action suspended the trading of dormant shell companies in 24 states and Canada.

— Check out SEC Gives First Whistleblower Award to Former Company Officer on ThinkAdvisor.