Two recent SEC enforcement cases highlight the importance of registered investment advisers presenting true and accurate records to the Commission. While the facts of each case differ, they show that the documents’ falsification is worse than their insufficiency.
In the first case, a CCO allegedly submitted around 170 falsified forms in an SEC examination. Suzanne Ballek, CCO of a now-defunct RIA, agreed to a settlement where she neither confirmed nor denied the findings that the Commission requested her employer’s pre-clearance policies and procedures. While gathering the responsive documents, Ms. Ballek found that most of the pre-clearance trading forms were signed after the transaction date, in violation of the firm’s Code of Ethics. Ms. Ballek then used whiteout to remove the original signature dates and wrote the transaction dates, giving the appearance that the forms were signed according to the firm’s compliance policies. Ms. Ballek also added missing information on some of the forms. In some cases, Ms. Ballek created new pre-clearance trading forms and signed for an investment adviser representative without informing him.
When questioned by the SEC Examiners about the alterations, Ms. Ballek claimed that the forms were incorrect when submitted to her on the dates of the transactions, and her corrections were made in real time.
The SEC found that Ms. Ballek had aided and abetted her employer RIA’s violations of Section 204(a) of the Advisers Act, which requires investment advisers to make their records available for examination by representatives of the Commission. The SEC also found that Ms. Ballek aided and abetted her employer’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which together require an SEC-registered investment adviser to adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and rules thereunder by the investment adviser and its supervised persons.
For her violations, Ms. Ballek agreed to a $40,000 civil penalty and a three-year bar from serving in any compliance or supervisory capacity for an investment adviser.
Similarly, the SEC settled a case with an investment adviser named American Portfolio Advisors (APA), Gary Bruce Gordon, its President, and Colin Michael Moors, its CCO. Without admitting or denying the facts, the parties agreed to settlement agreements finding that, in its unrelated SEC examination, Mr. Moors created backdated compliance calendars for three years rather than admitting that they did not exist. Although said compliance calendars are not explicitly required by the Advisers Act, APA mandated them internally. When responding to the SEC’s request for APA’s compliance review records, Mr. Moors found that the compliance calendars described in APA’s policies and procedures had not been created for 2018, 2019, and 2020. Rather than responding that APA did not have said calendars, Mr. Moors created calendars for each year and backdated his signature of each, as did Mr. Gordon. Mr. Moors voluntarily admitted his conduct to SEC staff.
APA was found to have violated Section 204(a) of the Advisers Act and Rule 204-2 thereunder, which requires SEC-registered investment advisers create and maintain accurate records of its annual review of policies and procedures. Messrs. Moors and Gordon were found to have aided and abetted APA’s violation of the same act and rule.
In conjunction with a larger violation, APA agreed to a censure, an order to cease-and-desist from violating Sections 204(a) and 206(2) of the Advisers Act and Rule 204-2 thereunder, and an order to pay a civil money penalty of $1,750,000. Messrs. Moors and Gordon agreed to similar censures, orders to cease-and-desist from violating Section 204(a) of the Advisers Act and Rule 204-2 thereunder, and civil money penalties of $10,000 and $20,000.
Another aspect of these cases illustrating the importance of presenting true and accurate records when requested by the SEC is the potential for personal liability for financial professionals when falsifying records. It is, therefore, vital to engage experienced counsel when responding to an SEC exam.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.