Articles Tagged with Investment Advisers Act of 1940

On August 23, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the District of Colorado against Sonya D. Camarco (“Camarco”), an investment adviser.  The complaint alleges that Camarco “misappropriated over $2.8 million in investor funds from her clients and customers.”  The complaint also alleges that Camarco used these funds to pay a variety of personal expenses, including credit card bills and mortgages.

As stated in the SEC’s complaint, Camarco was a registered representative and investment adviser representative of LPL Financial LLC (“LPL”) from February 2004 through August 2017.  Under LPL’s policies, Camarco was not allowed to take money from client accounts unless the clients given her “specific and express” authority to do so.  However, the SEC’s complaint alleges that in July 2017, LPL realized that Camarco had been part of numerous suspicious transactions involving her clients’ accounts from 2004 through 2017. Continue reading ›

On August 22, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Central District of California against Jeremy Drake (“Drake”), an investment adviser.  The complaint alleges that Drake lied to two clients, a high-profile professional athlete and his wife, regarding their annual management fees.  The complaint also alleges that Drake used extensive measures to back up his deception, including sending “false and misleading emails” and “a number of fabricated documents.”

According to the SEC’s complaint, Drake’s alleged misconduct occurred when he was an investment adviser representative of HCR Wealth Advisers (“HCR”), a Los Angeles-based registered investment adviser.  In September 2009, the clients entered into an “Investment Advisory Agreement” with HCR.  The agreement, which was signed by Drake on behalf of HCR, provided that the clients would pay an annual management fee of 1% of the clients’ assets under management.  Evidence shows that the clients paid a 1% management fee for the entire period when they were clients of HCR. Continue reading ›

On August 2, 2017, a federal court in Connecticut ordered Steven Hicks (“Hicks”), a hedge fund manager, and his hedge fund advisory firms to pay almost $13 million.  This payment includes disgorgement and a penalty.  In 2010, the Securities and Exchange Commission (“SEC”) filed a complaint against Hicks and his two hedge fund advisers, Southridge Capital Management LLC (“Southridge Capital”) and Southridge Advisors, LLC (“Southridge Advisors”).  The complaint alleged that Hicks, Southridge Capital, and Southridge Advisors committed fraud by placing investor money in illiquid securities when investors were told that “at least 75% of their money would be invested in unrestricted, free-trading shares.”

According to the SEC’s complaint, starting in 2003, Hicks started soliciting investors.  He told them that 75% of any money they invested in two funds he was starting would be invested in unrestricted, free-trading shares.  Free-trading shares are shares that are eligible to be sold.  Evidence shows that some potential investors were also told that the funds would invest “in short-term transactions that would take only 10 or 15 days, such as equity line of credit (‘ELC’) deals.”  Continue reading ›

The Securities and Exchange Commission (“SEC”) recently announced a proposal to amend Rules 203(l)-1 and 203(m)-1 of the Investment Advisers Act of 1940 (“Advisers Act”). The purpose of these proposed amendments is to “reflect changes made by… the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”).” The FAST Act amended sections 203(l) and 203(m) of the Advisers Act to provide advisers to small business investment companies (“SBICs”), venture capital funds, and certain private funds with additional avenues to registration exemption.

SBICs are commonly defined as privately-owned investment companies that are licensed and regulated by the Small Business Administration (“SBA”). They typically provide a vehicle for funding small businesses through both equity and debt. Section 203(b)(7) of the Advisers Act provides that investment advisers who only advise SBICs are exempt from registration. Moreover, investment advisers who use the SBIC exemption are not obligated to comply with the Advisers Act’s reporting and recordkeeping provisions, and they are not subject to SEC examination. Continue reading ›

On April 17, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Southern District of New York against Justin D. Meadlin (“Meadlin”), an investment adviser, and Hyaline Capital Management, LLC (“Hyaline”), his advisory firm.  The complaint alleges that Meadlin and Hyaline made fraudulent misrepresentations and omitted material facts in order to “induce clients, and prospective investors… to invest funds with them.”  These actions caused them to be in violation of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-8 under the Advisers Act.

The SEC’s complaint alleges that from September 2012 to April 2013, Meadlin sent emails that exaggerated the amount of Hyaline’s assets under management (“AUM”) to clients and prospective investors.  These emails provided that Hyaline had AUM that ranged from $17.5 million to $25 million.  In reality, however, Hyaline had only $5.5 million in AUM during the relevant time period.  Meadlin also sent emails that contained false statements pertaining to expected AUM. Continue reading ›

On May 10, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Barclays Capital Inc. (“Barclays Capital”).  The Order alleges that Barclays Capital, in its capacity as a dually-registered investment adviser and broker-dealer, overcharged advisory clients in the course of its wealth and investment management business.  In conjunction with the Order, Barclays Capital submitted an Offer of Settlement where it agreed to pay about $97 million, which includes disgorgement and a penalty.

According to the SEC’s Order, Barclays Capital was the adviser and fiduciary to its advisory clients for two wrap fee programs: the Select Advisors Program and the Accommodation Manager Program, both of which were launched in September 2010.  Starting in September 2010 and ending around the close of 2014, Barclays Capital assured Select Advisors Program clients in both client agreements and in its brochure that “Barclays Capital performed initial due diligence and ongoing monitoring of third-party managers it recommended to manage its clients’ assets using specific investment strategies.”  Likewise, beginning in May 2011 and ending in March 2013, Barclays Capital assured Accommodation Manager Program clients that it conducted limited due diligence and monitoring of Accommodation Manager Program strategies. Continue reading ›

On January 13, 2017, the United States Supreme Court agreed to examine a case involving the Securities and Exchange Commission’s (“SEC’s”) ability to seek disgorgement of ill-gotten gains in fraud cases, including fraud cases involving investment advisers.  The case, Kokesh v. SEC, raises the issue of whether claims for disgorgement are subject to a five-year statute of limitations on civil penalties.  Oral arguments were heard by the Supreme Court in April.

The underlying case involves a New Mexico investment adviser named Charles R. Kokesh (“Kokesh”), who acted as an investment adviser to various funds organized as limited partnerships.  The SEC filed suit against Kokesh, alleging that from 1995 through 2006, Kokesh ordered the funds’ treasurer to take money from the funds to pay various expenses, including $23.8 million for salaries and bonuses to the funds’ officers, including Kokesh, $5 million for office rent, and $6.1 million characterized as “tax distributions.”  According to the Tenth Circuit, the payments violated the funds’ contracts because the contracts did not permit payments for salaries of the funds’ controlling persons, including Kokesh, until 2000.  The contracts also did not address bonus payments, and they only permitted payment of tax obligations if certain prerequisites were present.  A jury found that Kokesh violated the Investment Advisers Act of 1940, among other statutes, and the District Court ordered Kokesh to pay a $2.4 million civil penalty, plus disgorgement of $35 million based on amounts going back to 1995.

In response, Kokesh appealed to the Tenth Circuit Court of Appeals, arguing that the disgorgement was a penalty subject to a five-year statute of limitations under 28 U.S.C. § 2462.  The SEC argued that the disgorgement was remedial and not punitive, and therefore not a penalty subject to the statute of limitations.  The Tenth Circuit agreed with the SEC and held that disgorgement was not a penalty.

On March 8, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Voya Financial Advisors, Inc. (“Voya”), an SEC-registered investment adviser.  The Order, to which Voya consented, obligates Voya to pay disgorgement of $2,621,324, prejudgment interest of $174,629.78, and a civil money penalty of $300,000.

The SEC’s Order claims that Voya did not inform its clients that it was receiving compensation from a third-party broker-dealer and that these receipts created a conflict of interest.  Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”) states that investment advisers are forbidden from participating in “any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”  Section 207 provides that investment advisers are not allowed to “make any untrue statement of a material fact in any registration application or report filed with the Commission, or to omit to state in any such application or report any material fact which is required to be stated therein.”  Finally, Rule 206(4)-7 under the Adviser’s Act compels investment advisers to “[a]dopt and implement written policies and procedures, reasonably designed to prevent violation” of the Adviser’s Act and the rules thereunder. Continue reading ›

On February 2, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the District of Connecticut against Sentinel Growth Fund Management, LLC (“Sentinel”), an investment adviser, and its founder, Mark J. Varrachi (“Varrachi”).  The complaint alleges that from about December 2015 to November 2016, Varacchi and Sentinel stole $3.95 million or more from investment advisory clients.  The complaint asks that the District Court impose a permanent injunction against Varacchi and Sentinel, order them to disgorge any ill-gotten gains, and order them to pay civil penalties.

Neither Sentinel nor Varrachi was registered as an investment adviser with the SEC or with any state regulatory authority.  However, the SEC charged both of them with violations of the Investment Advisers Act of 1940 (“Advisers Act”).  The SEC found that Sentinel was “in the business of providing investment advice concerning securities for compensation,” which fits the definition of an investment adviser in Section 202(a)(11) of the Advisers Act.  As for Varrachi, the SEC determined that because he owned and managed Sentinel, he too was an investment adviser.  As a result of meeting the definition of an investment adviser, Sentinel and Varrachi were subject to the Advisers Act’s antifraud provisions. Continue reading ›

In February 2017, the Financial Industry Regulatory Authority Inc. (“FINRA”) published a Regulatory Notice asking for comment on proposed changes to FINRA Rule 2210, which governs communications with the public.  Under current Rule 2210, broker-dealers are not allowed to make communications that “predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast.”  According to FINRA, the purpose of this rule is to prevent retail investors from relying on performance projections relating to individual investments, which tend to be deceptive.

However, FINRA has acknowledged that performance projections that are not based on how well an individual investment performed can be helpful to investors who are contemplating an investment strategy.  Furthermore, investment advisers are permitted to use performance projections in choosing an investment strategy for their clients, provided that the projections do not violate the Investment Advisers Act of 1940’s antifraud rules.  Therefore, FINRA proposed the amendments to Rule 2210 in order to allow broker-dealers to use projections in a way that benefits clients and to make the rules governing performance projections by broker-dealers and investment advisers more uniform. Continue reading ›

Contact Information