SEC Fines Investment Adviser Over Lack of Heightened Supervision

Last month the Securities and Exchange Commission (SEC) instituted and simultaneously settled an administrative enforcement case in which a civil penalty of $225,000.00 was assessed against Cambridge Investment Research Advisors, Inc. (Cambridge).  The action illustrates the importance of designing and implementing effective heightened supervision programs for investment adviser representatives who have a history of allegations of rules violations or other misconduct or disclosure items on the Form U-4.

The case stemmed from an incident that was the subject of a separate SEC proceeding filed in 2013 against Richard P. Sandru, who was an investment adviser representative operating from Cambridge’s Perrysburg, Ohio branch office.  In that proceeding, Sandru was found to have forged clients’ signatures on financial planning agreements or, in some cases, adding client charges to the agreements without the clients’ knowledge and without obtaining additional signatures from the clients authorizing the additional charges.  Sandru’s conduct, which the SEC characterized as a fraudulent scheme to misappropriate client funds, took place between 2009 and 2011 and potentially affected 47 advisory clients, from whom Sandru allegedly misappropriated “at least $308,850.00.”  Sandru was, at this time, an OSJ of Cambridge and supervised two other Cambridge representatives and other administrative assistants.

In the earlier SEC case, the regulators alleged that Sandru had caused some of his clients to lose money in their advisory accounts during 2008, while he was associated with another investment adviser, and that, after the losses were incurred, Sandru falsely told at least six clients to ignore the monthly statements the clients received from Cambridge because they were either inaccurate or incomplete.  Instead, Sandru told his clients that they had other accounts that contained additional funds which were “guaranteed.”  When some of these clients who needed regular monthly withdrawals from the accounts ran out of funds, Sandru actually had to pay shortfalls out of his own pocket in order to conceal his activity.

The SEC action filed in 2016 focused on Cambridge itself, and on Sandru’s supervisor at Cambridge, Alexander R. Bastron.  When Sandru joined Cambridge in July 2009, the firm determined that he should be placed on heightened supervision because, among other reasons, he had a poor credit rating which included a home in foreclosure, and there was a FINRA investigation into his termination by his prior employer, another investment advisory firm.  As a result of Cambridge’s decision to place Sandru on heightened supervision, Cambridge’s compliance department sent a heightened supervision plan to Bastron.  Bastron, however, failed to implement the plan.  As a result of Bastron’s failure, the SEC charged Cambridge for failing to ensure that the heightened supervision plan was implemented, and for failing to maintain systems, policies and procedures adequate to prevent fraudulent activities.  In addition to the civil penalty that Cambridge agreed to pay, Bastron also agreed to settle the charges, pay a $20,000.00 civil penalty, and serve a suspension of one year from acting as a supervisor.

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 complying with federal and state laws and rules. Please visit our website for more information.

Contact Information