Investment Advisers

SEC Charges Investment Advisory Firm and its Owner for Cherry-Picking Scheme

February 2, 2017 | Elizabeth Dalziel

On January 25, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the District Court for the District of Massachusetts (“District Court”) against Strategic Capital Management, LLC (“SCM”), an investment advisory firm, and its owner, Michael J. Breton. The complaint alleges that Breton, through SCM, garnered about $1.3 million by defrauding clients using what is known as a “cherry-picking” scheme. The action follows a similar action brought by the SEC last October.

According to the SEC, cherry-picking occurs when an investment adviser “defrauds clients by purchasing stock and then waiting to see if the stock price goes up, or down, before deciding whether to keep the trades… or to put the trades into clients’ accounts.” Cherry-picking typically involves the investment adviser allocating more profitable trades to its own accounts and allocating less profitable ones to client accounts. It is a breach of fiduciary duty because it entails an investment adviser placing its interests above those of its clients.

The SEC’s complaint alleges that from about January 2010 through August 2016, Breton and SCM were investment advisers to numerous client accounts. Breton, through SCM, bought public companies’ securities using a block trading omnibus account known as a “Master Account.” Through this Master Account, Breton was permitted to make orders for both his personal accounts and his clients’ accounts.

SEC Sanctions Investment Adviser for Breaking Promises to Correct Deficiencies

January 17, 2017 | Steve Parker

Most deficiencies identified in the course of investment adviser examinations can be remedied by the adviser simply taking corrective measures. This can be true even with regard to deficiencies that are somewhat serious violations, but only if corrective action is taken and sustained.

In 2016, the Securities and Exchange Commission (“SEC”) starkly demonstrated the importance of following through with promises advisers make to the SEC Examinations Staff. Because they did not make promised corrections, Moloney Securities Co., Inc. and Joseph R. Medley, Jr. were forced to consent to the entry of an Order Instituting Proceedings that required them, among other things, to pay civil penalties and to hire an independent compliance consultant to monitor and report certain aspects of the firm’s compliance program. Continue reading ›

Asset Management Company and its Owner Charged With Fraud

December 22, 2016 | Elizabeth Dalziel

On December 1, 2016, the Securities and Exchange Commission (“SEC”) announced that it had filed a complaint for injunctive and other relief in the United States District Court for the Southern District of Florida against Onix Capital LLC (“Onix Capital”), an asset management company, and its owner, a Chilean national by the name of Alberto Chang-Rajii (“Chang”). The complaint alleges that Onix Capital and Chang “violated the federal securities laws by fraudulently raising approximately $7.4 million from investors based on material misrepresentations regarding the investments offered, the use of the funds raised, and the background and financial success of Chang himself.”

Onix Capital was not an SEC-registered adviser, nor was Chang registered as an investment adviser or broker-dealer. However, the SEC alleged that Onix Capital and Chang violated the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the SEC alleged that Chang, “for compensation, engaged in the business of advising… investors… as to the value of securities or as to the advisability of investing in, purchasing, or selling securities,” and therefore met the definition of an “investment adviser” subject to the anti-fraud provisions of the Advisers Act. Continue reading ›

Court Reverses Illinois Department of Securities’ Administrative Order Revoking Investment Adviser’s Registration

November 3, 2016 | Elizabeth Dalziel

On July 29, 2016, the Appellate Court of Illinois entered a decision reversing a circuit court decision that affirmed an administrative order of the Illinois Secretary of State (“Secretary”) finding that Richard Lee Van Dyke, a registered investment adviser with the Illinois Department of Securities (“Department”), had defrauded clients by recommending the sale of indexed annuities in violation of Illinois law.

Section 2.1 of the Illinois Securities Law of 1953 (“Act”) provides that the term “security” is defined to include a “face amount certificate.” Section 2.14 of the Act further defines a “face amount certificate” to include “any form of annuity contract (other than an annuity contract issued by a life insurance company authorized to transact business in this State)”. However, Section 12(J) of the Act prohibits fraudulent or manipulative conduct as an investment adviser regardless of whether the investment adviser sells securities. The Van Dyke case is perhaps most notable for its rejection of the circuit court’s conclusion that Van Dyke’s practices were fraudulent. Continue reading ›

NASAA Adopts Model Legislation or Regulation to Protect Vulnerable Adults From Financial Exploitation

October 31, 2016 | Elizabeth Dalziel

Earlier this year, the North American Securities Administrators Association (“NASAA”) adopted a proposed model legislation or regulation (“Model Act”) aimed at protecting vulnerable adults from financial exploitation. A 2010 survey by the Investor Protection Trust Elder Fund Society found that one out of every five United States citizens age sixty-five and over has been a victim of financial fraud. As a result, the protection of vulnerable adults, such as senior investors, from financial exploitation has been one of NASAA’s priorities.

The Model Act is entitled “NASAA Model Legislation or Regulation to Protect Vulnerable Adults From Financial Exploitation.” It is designed to protect “eligible adults.” An “eligible adult” is defined as a person age sixty-five years or older, or a person subject to a state’s Adult Protective Services statute, such as disabled or impaired persons. Continue reading ›

Investment Advisers Charged for Failure to Disclose Conflicts of Interest Arising From Receipt of Forgivable Loans

September 27, 2016 | Elizabeth Dalziel

On July 18, 2016, the Securities and Exchange Commission (“SEC”) settled charges against two SEC-registered investment advisers (“investment advisers”). The investment advisers, Advantage Investment Management, LLC (“AIM”) and Washington Wealth Management, LLC (“WWM”) failed to disclose receipt of revenue from third-party broker-dealers in the form of forgivable loans and the consequent conflicts of interest.

Investment advisers are prohibited from engaging in any transaction, practice, or course of business that operates as a fraud upon any client or prospective client under Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”). They are also prohibited from making any untrue statement of a material fact or omitting any material fact in any report filed with the SEC under Section 207 of the Advisers Act. Continue reading ›

Private Equity Fund Adviser Sanctioned for Acting as Unregistered Broker-Dealer

July 28, 2016 | Steve Parker

Last month the Securities and Exchange Commission (“SEC”) sanctioned a registered investment adviser and its managing member for violating the Investment Adviser’s Act of 1940 (“Adviser’s Act”) and for acting as an unregistered broker-dealer in connection with the services the adviser provided to a private fund that it managed and the fees charged for those services.

Blackstreet Capital Management, LLC (“Blackstreet”) serves as the manager of two private equity funds (the “Funds”). In the Funds’ governing documents, Blackstreet disclosed to the Funds’ investors that it would charge fees for brokerage services rendered in connection with acquiring portfolio companies. Blackstreet did, in fact, perform brokerage services including soliciting transactions, identifying buyers and sellers, negotiating and structuring transactions, arranging for financing, and executing transactions. In exchange for those services it received over $1.8 million.

SEC Proposes Business Continuity and Transition Plan Rule for RIAs

July 15, 2016 | Steve Parker

The Securities and Exchange Commission (SEC) has frequently said that an investment adviser’s fiduciary duty requires an adviser to plan for unexpected disruptions in business. Consequently, advisers have developed business continuity plans as a “best practice” without necessarily being required to do so by rule. Recently, however, the SEC proposed a rule that would require all SEC-Registered investment advisers to adopt and implement written business continuity and transition plans and to review them no less often than once per year. The SEC also issued guidance for the baseline requirements that such plans should contain.

SEC Charges Private Fund Administrator with Failure to Satisfy Gatekeeper Responsibilities

June 28, 2016 | Patricia Klusmeyer

The Securities Exchange Commission (“SEC”) recently settled charges against a New Jersey private fund administrator, Apex Fund Services (“Apex”), for failing to notice or correct what it contended were clear indications of fraud by two of its clients, ClearPath Wealth Management (“ClearPath”) and EquityStar Capital Management (“EquityStar”). The SEC’s Division of Enforcement noted that Apex failed to “live up to its gatekeeper responsibility” and thereby enabled the fraudulent activities of these two investment advisers.

Apex provided accounting and administrative services to various private funds, including several managed by ClearPath and EquityStar. Its duties as fund administrator included keeping records, preparing financial statements, and preparing investor account statements. The SEC charged both ClearPath and EquityStar with securities fraud in enforcement actions, finding that ClearPath had allegedly misappropriated fund assets and used fund assets for unauthorized investments, and that EquityStar had allegedly made materially false and misleading statements to investors and prospective investors of its funds regarding undisclosed withdrawals of fund assets.

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.