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SEC Enforcement: Court Fines Advisor for Misleading Clients Into Switching Firms

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Among recent enforcement actions by the Securities and Exchange Commission were a $1 million-plus court judgment against Sage Advisory Group and its principal as a result of two fraud cases and insider trading charges against four individuals.

Court Orders Advisor to Pay $1 Million in Two SEC Fraud Cases

Judge George O’Toole Jr. of the U.S. District Court for the District of Massachusetts has ordered Sage Advisory Group LLC and its principal, Benjamin Lee Grant, to pay a total of $1.05 million in two fraud cases brought by the SEC. In addition, Lee Grant has been permanently barred.

According to the agency, in the first case, which was filed in September 2010, Lee Grant was charged with fraudulently leading his brokerage customers to transfer their assets to Sage, his new advisory firm.

Prior to October 2005, Lee Grant was a registered representative of broker-dealer Wedbush Morgan Securities and had customer accounts of about $100 million in assets, nearly all of which were managed by California-based First Wilshire Securities Management. But in September 2005, Lee Grant resigned from Wedbush so he could run Sage.

When he did so, he lied to his customers and said that their accounts were being switched over to Sage at First Wilshire’s urging because First Wilshire was not willing to continue managing their assets if they stayed at Wedbush.

He also told customers that the “wrap fee” program being offered by Sage offered potential savings, based on historical commission costs. He didn’t tell them that the new arrangement, with a discount broker, would result in savings realized by Sage, not by the customers, under the wrap fee.

He also rushed them to sign up with Sage by suggesting that they might suffer disruption in First Wilshire’s management of their assets unless they signed and returned the new advisory and custodial account documents as soon as possible.

An August 2014 trial jury found both Sage and Lee Grant liable for fraud, among other charges.

In the second case, filed in September 2011, the SEC said that Sage and Lee Grant each violated antifraud provisions of the Investment Advisers Act, along with Lee Grant’s father, Jack Grant. The agency said Jack Grant violated an SEC bar from association with investment advisors by associating with Sage and by acting as an investment advisor himself. The bar had been based on a 1988 enforcement action against Jack Grant that alleged he sold $5.5 million of unregistered securities and misappropriated investors’ funds. The SEC said that, instead of complying with the SEC bar that he had accepted as a condition of settlement, Jack Grant went ahead and continued to provide investment advice to individuals and small businesses. He rejiggered his business as the Law Offices of Jack Grant and used his son, Lee Grant, to help implement his investment advice. In addition, all three failed to tell advisory clients of Jack Grant’s bar from the business. In a final judgment rendered in May 2013, Jack Grant was ordered to pay a total of $201,392.27, among other relief.

These latest judgments, on May 29 of this year, were entered with Sage’s and Lee Grant’s consent. As part of their consent in the second case, Sage and Lee Grant admitted wrongdoing.

SEC: Traders Posed as Portfolio Managers to Steal Inside Information

The SEC has charged four individuals with insider trading, saying they stole confidential information from investment banks and their public company clients to use in trading in advance of secondary stock offerings. The scheme involved at least 15 stocks and brought in more than $4.4 million in illegal trading profits.

According to the agency, Steven Fishoff, a former day trader living in California, schemed with his friend and neighbor Ronald Chernin; his friend Paul Petrello, a former day trader who resides in Florida; and his brother-in-law Steven Costantin to pose as legitimate portfolio managers so that they could persuade investment bankers to bring them “over the wall” and share confidential information about an upcoming secondary offering.

Of course they promised not to disclose nonpublic information, or to trade an issuer’s stock before the announcement of an offering, but they all tipped one another off when they knew about upcoming offerings expected to depress the price of the issuer’s stock. The tippees then shorted the stock before offering announcements and reaped the profits on the short sales after the stock price dropped.

They then graduated to buying stock in advance of a positive corporate news announcement based on confidential information obtained about secret negotiations between two large pharmaceutical companies.

The four were charged, along with seven entities they collectively controlled, with insider trading. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey has announced criminal charges against Fishoff, Petrello, Chernin and Costantin. The SEC’s investigation is continuing.

— Check out GOP Lawmakers Demand More Info on DOL, SEC Fiduciary Collaboration on ThinkAdvisor.