Among recent enforcement actions, the Financial Industry Regulatory Authority (FINRA) barred a broker and fined him for making fraudulent misrepresentations about unsuitable investments to customers, many of whom were retired.
In addition, the SEC ordered an RIA to hire a dedicated chief compliance officer, in addition to other measures, on charges of client overbilling; charged an unregistered fund manager with fraud in hiding a criminal past; and won a settlement from a tech company after it misled investors.
SEC Charges Fund Manager With Hiding Criminal Past
The SEC announced fraud charges against an unregistered fund manager accused of hiding his checkered past while providing false and misleading data to investors and an independent research firm.
According to the agency, Zoernack and his firm EquityStar Capital Management fraudulently offered and sold at least $5.6 million of interests in a pair of private investment funds (Global Partners Fund and Momentum Growth Fund) to more than 40 investors from May 2010 to March 2014. In addition, Zoernack secretly made more than $1 million in unauthorized withdrawals from the funds’ accounts without informing investors.
Zoernack and EquityStar went to great lengths to hide Zoernack’s background, which included two felony fraud convictions, a bankruptcy filing and other money judgments and liens against him. He even hired a firm to manipulate search results on his name by flooding the Internet with phony information that painted him as a successful fund manager, investor and philanthropist. This made it tougher for investors to uncover Zoernack’s criminal past and other negative information in Internet searches.
Zoernack also used at least three false identities in communicating with investors, so that Equity Star looked like more than a one-man operation. One of those phony identities was the nonexistent Amanda Sutton, with the lofty title of “investor relations professional.”
Both Zoernack and EquityStar provided phony data to Morningstar Inc., so the Momentum fund could become a “Morningstar Five-Star-Rated Fund,” under false pretenses; that way Zoernack could market the fund as highly rated. Zoernack claimed to Morningstar that the fund had been around longer and had 40 times more assets than was actually the case. They also created and distributed phony investment marketing materials that hid the fact that results were hypothetical and not based on actual fund performance.
In addition, neither Zoernack nor his funds were registered with the SEC or any state regulator.
RIA Ordered to Hire CCO by SEC
An RIA and its CEO have settled with the SEC after charges of overbilling clients.
According to the agency, Marco Investment Management, LLC, of Atlanta, Georgia, and Steven Marco, its chief executive officer, overbilled clients, charging asset management fees on total asset balances that did not deduct the proceeds of securities sales from margin balances.
For approximately 25 clients with margin accounts, Marco and MIM, acting through Marco, calculated the quarterly management fees without adjusting for sales proceeds or other credits applied against the margin balance by the custodial broker-dealer. This occurred since at least 2005.
Marco said he had an understanding with these clients that each wanted to use the margin available within their custodial accounts, but at the same time wanted to maintain a level of assets with MIM that would remain essentially fixed, despite margin use, so that sales proceeds or other credits were contemplated to be reinvested in the portfolio to be managed by MIM.
However, there were no written amendments on record to modify the terms of the clients’ management agreements. And for those clients, the custodial broker-dealer’s actual application of the proceeds from sales and other credits to the accounts’ margin balance was inconsistent with MIM’s internal records and the MIM appraisals sent to clients. As a result, MIM statements overstated the balances in those clients’ accounts, and the management fee was calculated on the “total portfolio” value, which included investment proceeds.
Both the firm and Steven Marco, the firm’s chief executive officer, have been censured. The firm must hire a dedicated CCO and bring in an independent compliance consultant, and Marco has agreed to undergo compliance training. In addition, the firm has agreed to pay $124,750.44 in disgorgement, as well as prejudgment interest of $7,595.94, and a penalty of $100,000; Marco, who cannot serve as a compliance officer for three years, is to pay a penalty of $50,000.
FINRA Bars, Fines Broker on Unsuitable Recommendations