Fraud

SEC Charges NC Investment Adviser Selling Real Estate-Related Investments with Fraud and Breach of Fiduciary Duty

June 16, 2016 | Patricia Klusmeyer

The Securities Exchange Commission (“SEC”) recently filed suit against a North Carolina investment adviser for allegedly defrauding investors in the sale of certain real estate-related investments in unregistered pooled investment vehicles. The adviser, Richard W. Davis Jr., solicited investors primarily from the Charlotte, North Carolina region and was able to raise approximately $11.5 million from 85 investors, the majority of which were individuals with retirement accounts. However, he allegedly failed to disclose to clients that the money in the funds was being steered towards several other entities beneficially owned by himself.

Davis allegedly told investors in one of his funds that the fund’s capital would be invested in short term fully secured loans to real estate developers. He allegedly failed to mention, however, that many of the real estate developers receiving these loans were companies owned and operated by himself, creating an inherent conflict of interest. Furthermore, the companies never repaid the loans in full and Davis allegedly failed to inform his investors of this or reappraise the value of the fund’s investment. Instead, Davis allegedly misrepresented the value of the pooled fund by repeatedly stating that it had not lost any value.

SEC Fines Investment Adviser Over Lack of Heightened Supervision

May 13, 2016 | Steve Parker

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.

SEC Enforcement Case Arises From “Free Dinner” Seminar Fraud

April 18, 2016 | Steve Parker

Earlier this month, the Securities and Exchange Commission (SEC) filed a civil lawsuit against four individuals who are alleged to have defrauded seniors through so-called “Free Dinner” investment seminars conducted by their investment adviser firm. The SEC alleged that Joseph Andrew Paul and John D. Ellis, Jr., who managed and jointly owned Paul-Ellis Investment Associates, LLC (PEIA), created materially false and fraudulent marketing material in order to induce Florida residents to attend the “Free Dinner” seminar. More specifically, the SEC alleged that the marketing materials included performance return statistics that were not consistent with the actual track record of the firm, but rather had been copied and pasted from another advisory firm’s website.

The individuals were also alleged to have recruited James S. Quay of Atlanta, Georgia and Donald H. Ellison of Palm Beach, Florida, who allegedly used the false material to mislead seniors who responded to the “Free Dinner” invitation. The SEC further alleges that Mr. Quay used an alias, Stephen Jameson in order to conceal his true identity. Mr. Quay was previously involved and was held liable in an enforcement action brought by the SEC in 2012. Before that, Quay was an active sales agent in a multi-million dollar Ponzi scheme operated by an attorney in Atlanta, Georgia. According to the SEC, Quay was also convicted of tax fraud in 2005.

SEC Charges Fund Manager with Fraudulently Misleading Investors

March 11, 2016 | Patricia Klusmeyer

The Securities and Exchange Commission (“SEC”) recently brought an administrative proceeding against unregistered fund manager Steven Zoernack and his firm, EquityStar Capital Management, LLC (“EquityStar”), for engaging in allegedly fraudulent conduct in violation of federal securities and investment adviser laws. Mr. Zoernack and EquityStar allegedly concealed Mr. Zoernack’s criminal history, used false identities, and distributed false and misleading marketing materials, among other things, in their bid to lure investors.

As alleged, Mr. Zoernack created EquityStar in May of 2010 to serve as the investment adviser for two private investment funds, Global Partners and Momentum. Between 2011 and 2014 Mr. Zoernack actively sought investors for the two funds, managing to sell approximately $5.6 million of interests in Global Partners and Momentum. As EquityStar’s managing member and sole employee, he handled all activities of the firm and drafted all marketing and offering materials. In the furtherance of these activities, Mr. Zoernack allegedly made many material misrepresentations to investors and prospective investors regarding himself and EquityStar.

SEC Clarifies RIA Performance Advertising Obligations: The Lucia Matter

January 12, 2016 | Patricia Klusmeyer

Pursuant to Section 206 of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-1, it is considered fraud for a registered investment adviser to publish, circulate, or distribute any advertisement which contains any untrue statement of material fact or which is false or misleading. One type of advertising that has been the focus of recent regulatory activity is performance advertising.

Performance advertisements are generally used by investment advisers to portray their past performance results to prospective clients. In order to be avoid misleading the prospective client, all material facts regarding the performance data and how it was calculated must be disclosed. This includes disclosing any material market conditions, the amount of advisory fees or other expenses that were deducted, whether results portrayed include reinvested dividends and other earnings, the investment strategies which were used to obtain the results, and any other material fact which may have impacted the results in any way.
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Is your firm prepared? October is National Cybersecurity Awareness Month

October 17, 2014 | Bryan Gort

Earlier this year, the SEC announced one of its focus areas for examinations in 2014 would be cybersecurity. The SEC Office of Compliance Inspections and Examinations published a Cybersecurity Initiative Risk Alert in April that provides a sample request for information and documents, which are designed to determine the preparedness of a firm for a cybersecurity threats. Examples of questions asked include:

– Please provide a copy of the Firm’s written business continuity of operations plan that addresses mitigation of the effects of a cybersecurity incident and/or recovery from such an incident if one exists;

– Does the Firm have a Chief Information Security Officer or equivalent position? If so, please identify the person and title. If not, where does principal responsibility for overseeing cybersecurity reside within the firm?;

– Please provide a copy of the Firm’s procedures for verifying the authenticity of email requests seeking to transfer customer funds. If no written procedures exist, please describe the process.

SEC Enforcement Actions in 2013

January 27, 2014 | Bryan Gort

The SEC has released the results of the 686 2013 enforcement actions it filed in federal court, which resulted in $3.4 billion in sanctions against offenders. Of the $3.4 billion, securities violators were required to disgorge illegal profits of approximately $2.257 billion and pay penalties of approximately $1.167 billion. The chairperson of the SEC, Mary Jo White, stated, “A strong enforcement program helps produce financial markets that operate with integrity and transparency, and reassures investors that they can invest with confidence.”

The 2013 total sanction amount is 10 percent higher than 2012 and 22 percent higher than 2011. In 2013, the SEC pursued many categories of enforcement actions including:

– Broker-dealers (121)
– Delinquent Filings (132)
– Foreign Corrupt Practices Act (5)
– Financial Fraud/Issuer Disclosure (68)
– Insider Trading (44)
– Investment Adviser/Investment Co. (140)
– Market Manipulation (50)
– Securities Offering (103)
– Other (23)

The SEC highlighted certain enforcement programs on which they had focused in 2013 and programs that they will emphasize for the foreseeable future. The SEC is focused on making sure gatekeepers, people that have special duties to ensure that the interests of investors are protected, safeguard and protect investors’ rights.
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SEC Snares Hedge Funds Using Risk Analytics

December 5, 2011 | Steve Parker

The Securities and Exchange Commission (SEC) has implemented a new program — called the Aberrational Performance Inquiry (API) — that has resulted in enforcement proceedings against three hedge funds for overstating material aspects of their business. API looks to find statements made by funds relating to its investment strategy, performance or size, and compares those claims to market data using proprietary analytical processes. In a statement, the SEC stated that API is being used to find the same type of misleading information from registered investment advisers, not just hedge funds.

“We’re using risk analytics and unconventional methods to help achieve the holy grail of securities law enforcement — earlier detection and prevention,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, according to an SEC enforcement release. Robert Kaplan and Bruce Karpati, Co-Chiefs of the SEC Enforcement Division’s Asset Management Unit, added, “The extraordinary returns reported by these advisers and portfolio managers were, in most cases, too good to be true. In other cases, outlier returns were a telltale sign that something else was amiss.”
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