Among recent enforcement actions, the SEC took on a hedge fund, two executives and its auditor over improper expense allocations and the New York attorney general reached a settlement with the trustees of a nonprofit that “squandered assets” intended for underprivileged kids.
In addition, FINRA fined Fidelity Brokerage Services for overcharging customers.
FINRA Censures, Fines Fidelity Brokerage Services for Overcharging
FINRA censured Fidelity Brokerage Services LLC and fined the firm $350,000 after it found that the firm overcharged 20,663 customer accounts approximately $2.4 million.
According to the agency, Fidelity did not have adequate supervisory systems or procedures to make sure that customers were charged accurate fees for for accounts managed by third-party investment advisors.
As a result, there were erroneous and duplicate fees on certain customer accounts utilizing asset-based pricing, duplicate fees on certain customer accounts managed by third-party wrap providers, and erroneous markups on certain fixed-income investments.
The firm voluntarily reimbursed customers, with interest.
In addition, FINRA also found the firm’s supervisory system and written procedures weren’t up to the tasks of making sure that customers got accurate disclosures relating to its Asset-Based Pricing Program for accounts managed by third-party investment advisors and to monitor billing in these fee-based brokerage accounts to ensure that customers were charged in accordance with the firm’s disclosures.
The firm neither admitted nor denied the findings but consented to the sanctions.
SEC Fines Hedge Fund, Execs, Auditor for Misusing Fund Assets
The SEC has charged Alpha Titans LLC, its principal Timothy McCormack and general counsel Kelly Kaeser, and its outside auditor Simon Lesser after it found that the firm and the executives were involved in improper allocations of fund assets to pay undisclosed operating expenses. Lesser, who conducted the outside audit of financial statements, was also charged.
According to the agency, the firm, McCormack and Kaeser used assets of two affiliated private funds to pay more than $450,000 in office rent, employee salaries and benefits, and similar expenses without fund clients’ authorization, and without disclosing how they used the money.
They also sent investors audited financial statements that failed to disclose almost $3 million in expenses tied to transactions involving other entities controlled by McCormack.
Lesser was aware of how Alpha Titans used fund assets, but still approved audit reports saying the funds’ financial statements were presented fairly.
All have agreed to settle the SEC’s charges but neither admitted nor denied wrongdoing. Alpha Titans and McCormack agreed to pay disgorgement of $469,522, prejudgment interest of $28,928 and a penalty of $200,000.
In addition, McCormack and Kaeser each agreed to be barred from the securities industry for one year, and Kaeser agreed to a one-year suspension from practicing as an attorney on behalf of any entity regulated by the SEC.
Lesser agreed to pay a penalty of $75,000 and consented to an order suspending him from practicing as an accountant on behalf of any entity regulated by the SEC for at least three years.
NY AG Fines Children’s Fund Board for Misusing Money, Buying Hamptons Home
New York Attorney General Eric Schneiderman has announced a settlement of $1.025 million with the trustees and former trustees of the Victor Perley Fund after an investigation revealed that assets were frittered away on “risky investments, unreasonable pay and the purchase of [a] Southampton house.”
The Perley Fund is a private foundation established by Victor Perley in 1959 for the benefit of underprivileged children. Before its recent troubles, the Perley Fund had focused almost exclusively on making grants to settlement houses and other institutions serving children in New York City, issuing approximately $250,000 per year in grants.
But, according to the AG’s office, an investigation found that beginning in 2009, the Perley Fund’s board allowed the foundation’s new leader, Richard Basini, to shift the nonprofit’s focus to fund his own interests and those of a fellow trustee, James Cahill, resulting in the Perley Fund’s purchase of a million-dollar Southampton home that Basini used as his private residence, and, ultimately, the waste of the nonprofit’s entire investment portfolio.
The investigation began in 2012. It found that after Basini, a long-time trustee, took control in 2009 and all the other trustees resigned, everything changed. Basini recruited Cahill, an investment banker, to join the new board. As required by Perley’s will, three clergy trustees were also added: Rabbi Jill Hausman, Monsignor Michael Crimmins and Reverend Peter Larsen.
But the new trustees met only rarely, and when they did, failed to observe basic principles of sound governance, such as reviewing budgets, monitoring investments, and circulating and approving minutes. So they failed to voice any concerns when Basini shifted the fund’s focus from making generous annual grants directly for needy children to sponsoring a children’s choir. That allowed Basini to further his own interests.
He also convinced the board to purchase a house in Southampton, purportedly as a choir retreat, and to let him live there for low or no rent. In addition, Basini paid himself tens of thousands of dollars a year for fundraising and marketing services, even though the Perley Fund conducted virtually no fundraising and received few contributions.
In addition to its willful blindness about Basini’s activities, the board also unreservedly delegated responsibility for the fund’s investment portfolio to Basini and Cahill. That allowed them to make whatever risky investments they chose. As a result, the fund’s approximately $3.7 million investment portfolio was almost completely lost, with the exception of the $1.1 million value of the Southampton house. The Perley Fund’s losses resulted primarily from four sets of highly risky investments proposed and mismanaged by Cahill, whose investment advice was clouded by various conflicts of interest.
Under the terms of the settlement, the Perley Fund’s board will also be completely reconstituted, with the approval of the Attorney General’s Office.
— Check out SEC Awards Whistleblower in Paradigm Capital Case on ThinkAdvisor.