The Securities and Exchange Commission recently charged a fund-of-funds manager and its principals for allowing redemptions for insiders and preferred investors.
In addition, the New Jersey Bureau of Securities revoked the agent registration of Matthew Schulman, and Vermont ordered Raymond James to pay nearly $1.5 million over violations involving the EB-5 program.
Raymond James Ordered to Pay $1.45 Million to Vermont in EB-5 Case
The Securities Division of the Vermont Department of Financial Regulation has ordered Raymond James & Associates to pay penalties totaling $1.45 million, after the DFR found that a Raymond James registered representative allowed misuse of investor funds in a case involving the EB-5 program, which allows foreign investors to pursue a legal path to permanent residency in the U.S. through the investment of at least $500,000 in projects that create a certain number of jobs in an economically targeted area, often a rural or economically depressed area.
According to the agency, starting in 2006, Bill Stenger sold limited partnership interests in eight Vermont limited partnerships tied to EB-5 construction projects to foreign investors, who placed their funds into an escrow account in a Vermont bank pending U.S. Customs and Immigration Services approval. Upon approval, the funds were released to the partnership and the investor became a limited partner in a specific limited partnership.
From 2008 through 2014, Ariel Quiros and Stenger used bank accounts, as well as brokerage and margin accounts at RJA, to transfer the limited partnership funds to and from different partnerships or entities. Throughout this period, a registered representative was assigned to the RJA accounts.
In or about June 2008, Quiros had the representative open several brokerage accounts and at least four margin accounts at RJA for Quiros, several limited partnerships under his financial control and other entities connected with the Jay Peak ski resort in Vermont. RJA failed to obtain adequate documentation establishing Quiros’ authority to act on behalf of the limited partnerships.
The representative knew the firm accounts would be funded by foreign investors’ purchases of limited partnership interests as their participation in Vermont-based EB-5 projects, most of which were engaged in real estate development at either Jay Peak or Burke Mountain ski area. But the representative allowed Quiros and the limited partnerships under his financial control to set up margin accounts collateralized by short-term Treasury bills purchased by the limited partnerships, with funds derived from the EB-5 program.
On June 23, 2008, the representative allowed Quiros to direct the transfer of $13 million in limited partnership funds to purchase the Jay Peak ski resort, in spite of written instructions to the contrary. In connection with the payment of construction invoices as the projects moved forward, partnership funds from multiple limited partnerships were transferred among multiple firm accounts.
The representative knew, or should have known, that some of those transfers had no legitimate purpose, and that greater due diligence would be appropriate, but none was exercised. In addition, the representative ignored written supervisory procedures regarding funds transfers, prohibiting text message communications with clients without prior supervisory approval and cross-collateralization of margin loans.
The RJA anti-money laundering department identified some funds transfers through multiple Quiros-controlled accounts without apparent business purpose and questioned why RJA continued to do business with Quiros, but the Quiros-controlled accounts were not closed at RJA until November 2014.
On May 5, RJA executed an acceptance, waiver and consent agreement with FINRA arising from the failure to establish and implement adequate AML controls. The registered representative and his supervisor have withdrawn their registrations as broker-dealer agents in Vermont, and the consent order provides for the penalty, of which $1.25 million represents an administrative penalty and the remaining $200,000 is to reimburse the DFR for its costs.
SEC Charges Fund-of-Funds Manager, Principals With Fraud
The SEC has charged Thomas Conrad Jr., Stuart Conrad, Financial Management Corp. (FMC) and Financial Management Corp. S.R.L. (FMC Uruguay) with fraud after Conrad, despite being barred in 1971 from association with any registered broker-dealer, “has continued in the securities business in an unregistered capacity.”
From 2010 through late 2014, Conrad directed preferential redemptions and other disbursements to himself, his son Stuart, extended family and some favored investors, while telling other investors that redemptions were suspended. He also failed to disclose to investors certain fees he received for his purported management of the funds and related conflicts of interest and also hid his disciplinary history.
According to the agency, during different periods beginning in 1994, Conrad created at least four hedge funds: the World Opportunity Master Fund L.P. (WOF Master) and its feeder funds, World Opportunity Fund L.P. (WOF); World Opportunity Fund Ltd., based in the British Virgin Islands; and World Fund II L.P. (World Fund II). Investors in the feeder funds received limited partnership interests in those funds. FMC and FMC Uruguay were the general partners of and advisors to WOF Master and its feeder funds. World Fund II was created in 2011 after WOF was sued by a court-appointed receiver in connection with its investment in Valhalla Investment Partners L.P., a Ponzi scheme.
Between 2001 and 2005, Conrad invested $1.7 million of WOF’s assets in Valhalla, and withdrew $4 million, including false profits of approximately $2.3 million. In 2010, WOF was sued by the court-appointed receiver for Valhalla and, in 2013, an arbitrator ordered WOF to repay the $2.3 million. WOF paid this debt to the receiver in September 2014.
Currently there are two active feeder funds: WOF, with 44 limited partners and a purported portfolio value of $5.7 million, and World Fund II, with 48 limited partners and a purported portfolio value of $5 million.
The SEC seeks disgorgement of all ill-gotten gains, with prejudgment interest, as well as civil penalties and other unspecified relief.
New Jersey Revokes Broker’s Registration Over Bond Trades
The New Jersey Bureau of Securities has revoked the agent registration of Matthew Schulman after it found that he manipulated bond trades between his employer’s account and his own to his advantage.
According to the agency, Schulman, a bond trader for Vandham Securities Corp., had already submitted a letter of acceptance, waiver and consent to the Financial Industry Regulatory Authority in which he consented to FINRA’s findings, without admitting or denying, that, from in or about December 2014 through in or about May 2015, he effected approximately 23 bond trades between Vandham’s proprietary account and his personal brokerage account.
In doing so he caused Vandham to sell bonds to his personal account, then promptly rebuy them at a higher price, or to sell them to his personal account at a substantial discount. He determined the trading price in these transactions and always managed to provide himself with a substantial gain; the scheme gained him illicit profits of about $30,000 and lost about the same amount for Vandham.
In submitting the AWC, Schulman accepted expulsion from FINRA. That is cause to revoke his registration in New Jersey.
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