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Regulation and Compliance > Federal Regulation > SEC

SEC Charges Advisor Who Stole $3M From Clients: Enforcement

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The Securities and Exchange Commission charged Cape Cod-area investment advisor Kimberly Pine Kitts with defrauding multiple clients by stealing more than $3 million from their investment and retirement accounts.

According to the SEC’s complaint, Kitts — who was employed as an investment advisor representative at a dually registered broker-dealer and RIA — engaged in a six-year scheme to steal money from client accounts. She was fired from the firm, Royal Alliance Associates, and barred from the industry in late 2017, according to the Financial Industry Regulatory Authority.

(Check out 12 Worst Financial Advisors in America: 2016.)

The SEC alleges that Kitts engaged in at least three separate schemes to misappropriate the assets of her clients in order to pay her personal expenses. These schemes involved forging client signatures on withdrawal requests from variable annuities, forging client signatures to wire funds from client brokerage accounts, and misleading clients into withdrawing funds from a retirement account to make fake tax payments.

Kitts continued this practice until 2017 when a client questioned Kitts about the dwindling balance in her account.

Through 82 unauthorized withdrawals, Kitts stole more than $3 million from seven clients, and then tried to conceal her fraud through falsified account statements and other documentation. Kitts used the money she stole for personal expenses, including paying for vacations and several luxury vehicles, according to the SEC.

“In each instance, [Kitts] exploited her fiduciary relationship with an advisory client, made intentional misstatements, and engaged in deceptive conduct in order to obscure her wrongdoing,” the complaint states.

The SEC’s complaint seeks permanent injunctions, civil penalties and disgorgement plus prejudgment interest against Kitts.

Former State Street Exec Convicted of Defrauding Customers

A jury in federal court in Boston, Massachusetts convicted Ross McLellan, a former State Street Corp. executive, of engaging in a scheme to defraud customers of State Street’s Transition Management line of business.

McLellan was found guilty of applying secret commissions to billions of dollars of securities trades executed on behalf of these customers.

The criminal conviction is based on substantially the same conduct alleged in a parallel enforcement action brought by the SEC.

The SEC’s complaint against McLellan, which was filed on May 13, 2016, in federal court in Boston, alleges that between February 2010 and September 2011 McLellan led a scheme to add secret commissions to securities trades performed for at least six clients of State Street’s “transition management” business. That business helps institutional clients move their investments between asset managers or to otherwise restructure large investment portfolios.

The complaint further alleges that these commissions were charged in addition to fees the clients had expressly agreed to pay the bank, and that McLellan took steps to conceal the commissions from the clients and others within State Street.

The SEC’s litigation continues.

Massachusetts Sanctions BD For Selling to Seniors on Bank Premises

Secretary of State William Galvin, Massachusetts’ top securities regulator, announced that his office has entered into a settlement agreement with Infinex Investments Inc. for failing to adequately supervise agents who were selling primarily to senior investors at local banks.

Infinex is majority owned by a group of nearly 40 banks who offer securities on bank premises and has selling agreements with approximately 30 banks in Massachusetts.

Galvin’s Securities Division began an investigation into sales practices by Infinex after receiving complaints from Massachusetts senior citizens, who believed they had been sold investments they did not ask for or did not understand.

Galvin’s investigation uncovered one supervisor who had oversight of approximately 180 Infinex representatives, yet testified that he spent “maybe 10%” of his week in a compliance function.

The order identifies four investors who filed complaints with Galvin’s office regarding the sales of high commission securities products, including real estate investment trusts and variable annuities. It also spotlights failures to disclose that the investors were dealing with a broker dealer, failures to disclose that products were not insured by the Federal Deposit Insurance Corp. and the sale of unsuitable investments to investors.

The order requires Infinex to pay a fine of $125,000 and to make full restitution to the investors.

The order also requires Infinex to cease and desist from further violations of Massachusetts securities laws, imposes a censure, and requires Infinex to retain an independent compliance consultant to review its supervisory structure.

FINRA Bars Securities Rep for Making Unsuitable Mutual Fund Transactions

FINRA barred a securities representative for making unsuitable recommendations for mutual fund switches, forging customers’ signatures on mutual fund switch forms and exercising discretion without customers’ prior written authorization.

According to FINRA’s July 2018 disciplinary actions, Brian Joseph Panfil, who was registered with FINRA firms Caldwell International Securities and then Ridgeway & Conger, effected 24 mutual fund switch transactions in four customer accounts with no reasonable basis to believe the transactions were suitable.

On these occasions, he sold mutual funds after the customers had held them for only two or three months. The switches resulted in the customers paying $27,924 in excess sales charges and other fees, most of which went to Panfil.

These sales charges and fees outweighed any marginal benefit from the new mutual funds, FINRA says.

The switches were unsuitable because, among other things, they were inconsistent with the long-term nature of the mutual funds the customers already held in their accounts. There were no reasonable grounds to believe the switches were in the customers’ best interests and the investment objectives of the new funds were similar to those of the previous funds.

The findings also stated that Panfil decided to execute short-term mutual fund switches, chose which funds to purchase and which to sell and determined the time and price for the purchases and sales. Panfil acted without prior written authorization from the customers and without the firm’s approval to maintain discretionary accounts.

SEC Charges Asset Manager for Stealing Client Assets and Due Diligence Failures

The SEC announced fraud charges against a Miami-based asset manager accused of perpetuating lies about his portfolio manager’s investment performance and assets under management, and for stealing approximately $1 million of client funds.

The SEC alleges that John Geraci formed the Meridian Matrix Long Short Equity Fund in 2015 and hired Nicholas Mitsakos and his company, Matrix Capital Markets, as the fund’s portfolio manager.

Mitsakos had no assets under management, but falsely claimed that he managed millions of dollars of assets and that he had generated returns of up to 66% in preceding years. The complaint alleges that, rather than verifying these claims, Geraci used Mitsakos’ false and unsubstantiated claims to market his fund, and eventually obtained $2 million from investors.

Geraci later learned of Mitsakos’ deception, and that he had misappropriated approximately $800,000 of the investors’ money, but continued to market the fund and to let Mitsakos trade the clients’ assets. Mitsakos returned approximately $1 million of the funds to Geraci, which Geraci then misappropriated for his own use, telling his clients that Mitsakos had lost all of it.

The SEC’s complaint seeks permanent injunctions, an officer and director bar, and disgorgement of ill-gotten gains plus penalties. The SEC previously obtained a judgment against Mitsakos, and he pleaded guilty in a parallel criminal action.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Geraci.

SEC Files Charges in Busted Microcap Schemes

The SEC charged a stock promoter and four others involved in an alleged series of microcap fraud schemes that were foiled by FBI undercover work and an SEC trading suspension.

According to the SEC’s complaint, stock promoter Gannon Giguiere took control of a purported medical device company. Giguiere, together with a Cayman Islands-based broker, then allegedly engaged in a matched trading scheme that caused the company’s share price to rise from zero to $1.20 per share.

Giguiere and the brokerage owner, Oliver-Barret Lindsay, allegedly coordinated their matched trading through an individual who turned out to be an FBI cooperating witness.

According to the complaint, despite extensive encrypted communications, the defendants were caught by an undercover FBI operation that recorded their communications, with Lindsay going so far as to tell an individual cooperating with the FBI, “I’m a little hesitant about typing all of these details into this app. … You can just imagine if it finds its way somewhere it’s fairly incriminating.”

According to the complaint, the pair’s plan to dump millions of shares in the purported medical device company was thwarted when, this past March, the SEC suspended trading in the securities of the purported medical device company.

The SEC’s complaint also charges three others who began laying the groundwork for a pump-and-dump scheme involving a purported digital media company.

The SEC alleges that Kevin Gillespie, Annetta Budhu, and Andrew Hackett entered into a number of sham stock and debt issuances, and Hackett wound up communicating with someone he believed to be a participant in the scheme who in reality was an undercover FBI agent.

The SEC’s complaint seeks permanent injunctions, disgorgement, penalties, penny stock bars, and officer-and-director bars against Giguiere and Gillespie.

The U.S. Attorney’s Office for the Southern District of California has announced criminal charges in the case.

SEC Charges BD for Inaccurately Recording Expenses Like Season Tickets and Lavish Birthday Parties

New York-based broker-dealer BGC Financial agreed to pay a $1.25 million penalty to settle charges that it failed to preserve audio files sought by the SEC and inaccurately recorded travel, entertainment and other expenses. The SEC’s order finds that after receiving document requests in 2014 from the SEC’s Division of Enforcement, BGC deleted audio files for the recorded telephone lines of eight brokers that were responsive to the document requests.  According to the order, the department responsible for maintaining voice recordings was unaware of the SEC’s request and deleted the files in keeping with the firm’s policy of not maintaining them after one year. The SEC order also finds that BGC failed to maintain books and records that accurately recorded compensation, travel, entertainment and gifts. For example, BGC provided a high performing broker with season tickets for a New York-area sports team that cost more than $600,000 per year, and failed to record the payments for the tickets as compensation in its general ledger.

The SEC says that BGC also reimbursed this same broker for more than $100,000 of expenses associated with an international trip for his birthday and other foreign travel that lacked a sufficiently documented business purpose. BGC inaccurately recorded these items in its books and records as selling and promotion.

BGC also reimbursed a different broker for thousands of dollars of personal expenses spent on his birthday party, his bachelor party, and two separate trips to Las Vegas for his friends’ bachelor parties. The SEC order finds that BGC violated books and records provisions of the federal securities laws and related SEC rules.  Without admitting or denying the SEC’s findings, BGC agreed to a cease-and-desist order, a censure and a $1.25 million penalty.

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