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Barred Broker Pleads Guilty to SEC Obstruction, May Avoid Jail

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A just-barred financial advisor has agreed to plead guilty to charges that he blocked a Securities and Exchange Commission investigation by concealing secret and improper referral payments made to a lawyer in order to win the business of a wealthy client.

A U.S. district court charged John William Rafal, 66, the former head of Connecticut-based Essex Financial Services, with obstructing an SEC investigation and scheduled a plea hearing for Jan. 20.

“Today’s charge underscores our determination to investigate and prosecute those who impede SEC examinations and enforcement,” said U.S. Attorney Carmen M. Ortiz, in a statement. “When those people choose to mislead the SEC, my office will act to ensure that the truth comes forth.”

In 2011, Rafal allegedly struck a deal with attorney Peter D. Hershman to pay the lawyer a $50,000 referral fee in return for his referring a wealthy client to Essex.

The financial firm discovered the payments and stopped them. However, Rafal then secretly wrote checks to Hershman from private checking accounts.

In May 2015, the former registered rep testified that the referral matter had been “cured,” “reverse[d],” “undo[ne],” or “fix[ed].” According to the district court, Rafal failed to mention anything about checks he had written to the attorney out of his personal accounts.

If the plea agreement is accepted by the court, he is likely to be sentenced to four months of home confinement and four months of probation.

He also will pay a fine of $4,000, in addition to separate fees, disgorgements and penalties of roughly $577,000 he has agreed to pay to the SEC.

“Mr. Rafal is gratified to put this matter, which has been pending for several years, behind him. No client lost any money as a result of Mr. Rafal’s actions, and Mr. Rafal is looking forward to opening a new chapter in his professional life,” according to a statement from attorney John F. Sylvia of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo.

SEC Details

According to the SEC order against Rafal, he and the attorney did not disclose their referral-fee arrangement to an elderly widow; instead, they agreed to disguise the payments “as legal services purportedly provided by the lawyer’s firm.”

The SEC’s order also finds during its probe of the matter, Rafal “reacted to escalating rumors that he had committed a securities law violation by sending numerous emails to Essex clients falsely stating that the SEC had ‘fully investigated all matters’ and” that it had issued a “no action” letter in which he and the firm were “completely exonerate[ed].”

”Rafal misled one client by hiding referral fees, misled other clients by falsely stating the SEC’s investigation was over, and then attempted to mislead those investigating him. He will now be paying the price for his deceit,” said Stephanie Avakian, acting director of the SEC’s Enforcement Division, in a statement.

Hershman agreed to pay more than $90,000 to settle SEC charges.

Furthermore, both Rafal and Hershman agreed to be barred from the securities industry, to be barred from serving as an officer or director of a publicly traded company to be permanently suspended from appearing and practicing before the SEC as attorneys.

Rafal is no longer affiliated with Essex, which agreed to pay more than $180,000 in disgorgement and interest to settle charges related to Rafal’s misconduct.

The firm says it “cooperated fully with the SEC throughout the investigative process and ultimately terminated Mr. Rafal’s employment; indeed, in the settlement, the SEC explicitly acknowledged our cooperation and the fact that we implemented remedial measures on our own initiative. We take any compliance matter very seriously.”

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