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June 19, 2015 at 05:20 AM
The Securities and Exchange Commission has imposed $2.8 million in penalties on a Swiss trader for using inside information to trade in the stock of a company that was being acquired by Apple.
Among other enforcement actions, the agency went after an investment advisor for fraud; a company for illegally offering complex derivatives to retail investors; and an investment advisor and mutual fund board members for failures in connection with mutual fund advisory contract evaluations and approvals. And in Massachusetts, the secretary of the commonwealth charged a Newton man with investor fraud.
SEC Fines Fantasy Sports-Style Investing Site Over Complex Derivatives
Sand Hill Exchange, an experimental investing site based in Silicon Valley, was fined $20,000 by the SEC after the agency determined that the firm was illegally offering complex derivatives products to retail investors.
The SEC found that Sand Hill was offering and selling security-based swaps contracts to retail investors outside the regulatory framework of a national securities exchange, and without the required registration statements in effect. The violations were found shortly after the offering process began, and with cooperation from the company the platform was shut down before any investor harm occurred.
The agency said that Sand Hill began as two Silicon Valley entrepreneurs creating an online business involving the valuation of private startup companies in the region along the lines of a fantasy sports league. But Gerrit Hall and Elaine Ou changed their business model multiple times, and earlier this year Sand Hill evolved to invite Web users to use real money to buy and sell contracts referencing pre-IPO companies and their value.
Sand Hill looked for people to fund their accounts either via dollars or bitcoin, and did no investigation as to accreditation status of their prospective investors. They did intend to pay users who profited from their contracts, but although they understood they were buying and selling derivatives linked to the value of private companies, Ou falsely claimed that they were in the process of seeking regulatory approval for Sand Hill’s contracts, the SEC said.
For about seven weeks, Sand Hill offered, bought and sold contracts through the website, violating Dodd-Frank provisions limiting security-based swaps transactions with people who don’t meet the definition of an eligible contract participant. Hall and Ou also exaggerated Sand Hill’s trading, operations, controls and financial backing. They stopped their swaps activity after SEC inquiries early in April.
Sand Hill has agreed to settle the SEC’s charges without admitting or denying them and will pay a $20,000 penalty. It says on its website that all money provided by users has been refunded and that the site is for “entertainment purposes only.”
Investment Advisor, Mutual Fund Board Members Charged by SEC
The SEC has charged a mutual fund advisor, its principal, and three mutual fund board members with failing to satisfy their statutory obligations in connection with the evaluation and approval of mutual fund advisory contracts.
Richmond, Virginia-based advisory firm Commonwealth Capital Management was charged with violating Section 15(c) of the Investment Company Act of 1940 for providing incomplete or inaccurate information to two mutual fund boards, and the firm’s majority owner, John Pasco III, was charged with causing the violations. They and former trustees J. Gordon McKinley III, Robert Burke, and Franklin Trice III have agreed to settle the SEC’s charges.
According to the agency, Commonwealth acted as the investment advisor to various mutual funds within World Funds Trust (WFT) and World Funds Inc. (WFI). Commonwealth was part of a turnkey mutual fund platform that provided various services to small to midsize mutual funds.
But during an SEC investiation, the agency found that as part of what’s known as the 15(c) process, the WFT board of trustees requested that Commonwealth and Pasco provide certain information regarding advisory fees paid by comparable funds as well as the nature and quality of the firm’s services. However, no evidence could be found that Commonwealth provided, or that trustees evaluated, fees paid by comparable funds.
Commonwealth also provided incomplete responses about the nature and quality of services that it provided, compared with services provided by the funds’ subadvisor and administrator, and the trustees neither requested nor received any additional materials. In spite of that, the trustees approved the advisory contracts without having all of the information they requested as reasonably necessary to evaluate the contracts. “The advisory fee typically is the largest expense reducing investor returns,” Julie Riewe, co-chief of the SEC Enforcement Division’s asset management unit, said in a statement. “The WFT trustees fell short as the shareholders’ watchdog by essentially rubber-stamping the advisor’s contract and related fee.”
When independent directors in the WFI series of funds requested information from Commonwealth in connection with board meetings to approve the firm’s advisory contract, Commonwealth omitted or provided inaccurate information. It supplied a fee chart that omitted some information while including other false information and making inapt comparisons.
In addition, the firm failed to provide some profitability information, as well as information about an expense limitation agreement that had been in place to limit the relevant fund’s expenses. Commonwealth also informed the WFI independent directors that the fund had appropriate breakpoints when, in fact, breakpoints were omitted from the advisory contract.
Without admitting or denying the findings, Commonwealth Capital Management, McKinley, Burke, Trice and Pasco consented to the SEC’s enforcement order. Pasco, Commonwealth Capital Management and its affiliated administrator Commonwealth Shareholder Services, which was contractually responsible for preparing the shareholder reports on behalf of the WFI funds, agreed to jointly and severally pay a $50,000 penalty. The trustees each agreed to pay a $3,250 in penalty.
Commonwealth Capital is not affiliated with Commonwealth Financial Network.
