Articles Posted in Investment Advisers

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty

Published on: April 14, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Several industry and consumer groups have written a letter to the Securities and Exchange Commission asking it to put into effect a uniform fiduciary standard for both investment advisers and broker-dealers. The groups are AARP, National Association of Personal Financial Advisors, Fund Democracy, Certified Financial Planner Board of Standards, Inc., Consumer Federation of America, Financial Planning Association, and the Investment Adviser Association. They want the SEC to extend the duty as it exists under the 1940 Investment Advisers Act to brokerage industry members and not just investment advisers.

“This has been my position since the subject arose. No new definition of ‘fiduciary duty’ is warranted. For hundreds of years laws and legal decisions have fully defined the term,” said stockbroker fraud lawyer William Shepherd. ” Why should this not simply apply to Wall Street as it does the rest of us, including lawyers?”

Currently, broker-dealers have to abide by the “suitability” standard, which is considers a less strict standard of care. For example, under the suitability standard, brokers don’t have to reveal the majority of conflicts of interest to a client to get out of any obligation to control investment expenses.

Investment Adviser Roundup: Two Firms Pay Over $47M For Alleged Failure to Properly Disclose Allegations, District Court Allows Claims Involving Excessive Mutual Fund Fees, and Conn. Firm to Settle CDO Misrepresentation Allegations for $1.62M

Published on: February 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Investment Advisory Firms Settle SEC’s Failure to Disclose Mutual Fund Risk Allegations for Over $47M

Claymore Advisors LLC and Fiduciary Asset Management LLC have agreed to pay over $47 million to settle SEC proceedings related to the roles that they allegedly played in failing to properly disclose the risky derivative strategies of a closed-end mutual fund. The strategies are partially to be blame for the collapse of the

Fiduciary/Claymore Dynamic Equity Fund (HCE) during the economic crisis. The two firms are resolving the claims without denying or admitting to wrongdoing, and some of the money will go toward reimbursing shareholders.

SEC Revises Dollar Amount Thresholds Determining Whether to An Advisory Client Would Have to Pay Performance Fees

Published on: February 25, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is adopting changes to the dollar amount thresholds, under the 1940 Investment Advisers Act, that are used to determine whether an advisory clients can be made to pay a performance fee. Per the current provision, an adviser has to be managing at least $750k of the client’s money or the adviser must have reasonable grounds for believing that the client’s net worth is over $1M. However, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has directed that inflation adjustments to the dollar amount tests would be made every five years.

Last year the SEC put out an order modifying the “qualified client” assets management test from $750K to $1M. The test for net worth was changed from $1M to $2M. On February 15, 2012, the SEC said it was adopting these amendments to the Advisers Act’s Rule 205-3.

Per the amended rule, an individual’s primary residence worth and specific debt related to property would not be included when determining the net worth calculation. The amended rule comes with a grandfather provision that lets advisers keep charging clients who were qualified clients prior to the rule change performance fees. The amendments will be in effect 90 days after they are published in the Federal Register.

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty

Published on: November 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to FINRA CEO and Chairman Richard G. Ketchum, the SRO may put out a second concept proposal about its stance regarding disclosure obligations related to a possible Securities and Exchange Commission rulemaking about formalizing a uniform fiduciary duty standard between broker-dealers and investment advisers. Currently, the 1940 Investment Advisers Act defines the investment advisers’ fiduciary obligation to their clients, while broker-dealers are upheld to suitability rules that will be superseded next August by two FINRA rules regarding broker-dealer suitability standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, however, said that it is SEC’s responsibility to determine whether these current regulatory and legal standards s are still effective and if any regulatory shortcomings that exist need to be filled. In July 2010, the SEC asked stakeholders for feedback about this mandates. After receiving over 3,000 public comments, it issued a study recommending that there be a uniform fiduciary standard for both types of representatives when giving advice to retail clients. The SEC could put out its proposed rule by the end of this year.

FINRA is working with the Commission on this and plans to stay involved in the process. It was just last year that the SRO put out a concept proposal seeking public comment about the idea that broker-dealers should have to provide retail investors with certain disclosures at the start of a business relationship. These clients would be required to give a written statement detailing the kids of services and accounts they provide, any conflicts of interests, and limits on duties that they are entitled to expect. FINRA said that regardless of what a unified fiduciary standard would look like, retail investors would benefit from getting this disclosure document at the start and that such a mandate is an “outright necessity.

Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC

Published on: October 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

House Financial Services subcommittee Chairman Scott Garrett (R-N.J.) is encouraging the Securities and Exchange Commission to refrain from rulemaking for establishing a uniform fiduciary standard that would apply to both broker-dealers and investment advisers unless the federal agency can come up with adequate evidence to support this action. Garrett made his views known at a Subcommittee on Capital Markets and Government Sponsored Enterprises oversight hearing. Committee Chairman Spencer Bachus (R-Ala.) and Rep. Ed Royce (R-Calif.) also echoed these same sentiments.

Says Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd, “Washington is again bowing to Wall Street pressure to exempt them from liability for their wrongful acts. It is incredible that, considering the unmitigated investment fraud perpetrated on the American public in the last decade, Congress would even consider thwarting the very investors who elected them from receiving the justice they deserve!”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, the SEC has the authority to start up the rulemaking for this uniform fiduciary standard but is under no obligation. Earlier this year, the SEC put out a report recommending that it take up this rulemaking.

While Garrett questioned whether “hard factual data” existed demonstrating that a suitability standard is not enough to protect investors, others noted that it is a fiduciary standard and not a suitability standard that addresses cost, which impacts investors’ long-term performance. The majority of those that testified at the hearing also supported a uniform fiduciary standard that would apply to both investment advisers and broker-dealers. Consumer Federation of America director of investor protection Barbara Roper said that investors lose money when the person giving them investment advice must only meet a suitability standard and not a fiduciary one.

Meantime, while financial industry representatives have expressed support for a uniform fiduciary standard for investment advisers and broker-dealers, they don’t believe that it could be properly executed under the 1940 Investment Advisers Act.

Securities Industry and Financial Markets Association senior managing director and general counsel Ira Hammerman has said that the Act is unable to work with the business models for broker-dealer, while Financial Services Institute government affairs director and general counselor David Bellaire said that imposing a 1940 Act fiduciary duty on broker-dealers would decrease investor choice and decrease services, which would all significantly affect the market.

Currently, broker-dealers have to abide by a suitability standard, which is more lenient than the fiduciary duty standard for investment advisers. SEC Chairman Mary Schapiro has told staff that they need to recommend a proposal before the year is over.

Also up for discussion was the draft that Senator Bachus released last month mandating that there be at least one self-regulatory organization tasked with overseeing investment advisers. The Financial Industry Regulatory Authority is a top candidate for the role and has expressed interest in taking on this new responsibility. However, not everyone is a supporter of FINRA becoming SRO.

More Blog Posts:
Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010

Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010

FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

SEC & DOJ File Charges Against San Francisco Investment Adviser For Alleged “Soft Dollar” Fraud

Published on: October 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is suing investment adviser Kurt Hovan for allegedly misappropriating $178K in “soft dollars” that he claimed was used for investment research. The federal agency contends that, in fact, the money was used to cover other business-related expenses. When Kurt, as Hovan Capital Management president, was asked to provide documents supporting this, he generated bogus research reports. Meantime, the US Department of Justice is charging the 43-year-old with obstruction and mail fraud.

Soft dollars are rebates or credits. They come from brokerage firms on commissions for trades made in investment adviser’s client accounts. If the soft dollar credits are disclosed appropriately, the IA may keep the credits and use them to cover expenses related to a specific area research and brokerage services benefiting clients.

The SEC contends, however, that Kurt didn’t solely use the soft dollars for research services. Instead, $166,667 was used to pay for the salary of his brother Edward Hovan. Soft dollars were also used to pay for computer hardware and office rent. Edward and Kurt’s wife Lisa Hovan (Hovan Capital Management’s chief financial officer) are also named in the SEC’s complaint. The SEC is accusing all three of them for violating federal securities laws’ antifraud provisions. Kurt Hovan and HCM are also accused of recordkeeping violations.

The securities lawsuit also claims that conceal their soft dollar-related activities, Kurt, Lisa, and Edward set up a “Bolton Research,” which was a shell company that Edward Hovan secretly controlled. The company then billed Hovan Capital Management’s brokerage companies for research that was never conducted. Edward allegedly kicked back $65,000 of payments to Kurt and Lisa.

The allegedly false reporting to the SEC is said to have taken place during a January 2010 examination of HCM. Staff requested that the financial firm give over copies of the research reports that Bolton Research had prepared. Instead, Kurt allegedly gave the SEC phony research reports and doctored materials.

The SEC is seeking disgorgement with prejudgment interest, injunctive relief, and other financial penalties.

Securities Fraud
As you can see, securities charges and criminal charge can be filed against an investment adviser that commits securities fraud. You may want to file your own securities fraud lawsuit to recover your losses if you lost money because investment adviser misconduct was a factor.

Our securities fraud law firm knows that the thought of pursuing a financial firm to get your money back can be an overwhelming process, which is why you want to retain an experienced investment fraud lawyer that knows how to successfully pursue your recovery while protecting your rights.

SEC CHARGES BAY AREA INVESTMENT ADVISER FOR DEFRAUDING CLIENTS AND FALSIFYING DOCUMENTS DURING SEC EXAM, SEC, September 28, 2011
Belvedere investment adviser faces criminal charges in fraud case, Marin Independent Journal, September 28, 2011

More Blog Posts:
New Jersey Investment Adviser Who Pleaded Guilty to $11.5M Financial Fraud Gets 168-Month Prison Sentence, Stockbroker Fraud Blog, September 29, 2011
Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg, Stockbroker Fraud Blog, August 11, 2011
Custodial Firms Get Tougher About Registered Investment Adviser Compliance, Stockbroker Fraud Blog, December 28, 2010 Continue Reading ›

New Jersey Investment Adviser Who Pleaded Guilty to $11.5M Financial Fraud Gets 168-Month Prison Sentence

Published on: September 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Sandra Venetis, a New Jersey investment adviser has been sentenced to 168 months behind bars. Venetis had entered guilty pleas to che charges of securities fraud and transacting in criminal property. She also must pay $11,579,781 in restitution to the investors she defrauded.

The government had accused Venetis, who owns Systematic Financial Associates Inc., of soliciting her financial firm’s clients so that they would put their money in an “alternative investment program” that she ran separate from her registered investment advisory business. This was between 1997 and 2010. To get these clients to invest, she falsely told them the money was being used to pay for loans for doctors’ quarterly pension funds. There were even occasions when Venetis would tell these clients to liquidate their positions in securities so they could take part in her alternate program. 114 clients sent her about $16.7M.

None of the investors’ money went to any doctors-although she did make up fictitious physicians and forged real doctors’ names on promissory notes to make it look as if she was using her clients’ money in the manner promised. Venetis has admitted that not only did she not run a legitimate alternative investment program, but also that she created Systematic Financial Services Inc. so that she could run her financial scam. She acknowledges that she used some of the investor money to help cover her advisory’s operation costs.

It was last year that Venetis and three of her firms, Systematic Financial Services, LLC, Systematic Financial Services, Inc., and Systematic Financial Associates, Inc., settled SEC charges over the multimillion-dollar financial fraud. The Commission said that Venetis and her companies violated sections of the Securities Act of 1933, Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the Investment Advisers Act of 1940. Relief defendants included Venetis LLC, which Venetis also owned and operated, her brother Kevin Persley, and her daughter Jennifer Venetis.

The Commission accused Venetis of telling investors that the Federal Deposit Insurance Corporation had guaranteed promissory notes that would make about 6-11% tax-free interest annually. Although investors believed their investments were paying for loans to doctors the money paid for Venetis’s business debts and personal spending, including travel abroad, property taxes, home mortgages, gambling, and money for relatives.

Venetis and the companies settled the charges and all agreed to the relief sought by the SEC, including enjoinment from future securities law violation, payment of disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and appointment of an independent monitor.

N.J. IA Sentenced to 168 Months After Pleading Guilty in $11.5M Fraud, BNA Securities Law Daily, September 12, 2011
SEC CHARGES NEW JERSEY INVESTMENT ADVISER IN MULTI-MILLION DOLLAR OFFERING FRAUD, SEC, September 2, 2010

More Blog Posts:
FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors, Stockbroker Fraud Blog, September 13, 2011
Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg, Stockbroker Fraud Blog, August 11, 2011
Harvest Managers, Benchmark Asset Managers, and Investment Advisor to Pay $11.6 Million to Settle SEC Charges Over Allegedly Mishandled Client Funds, Stockbroker Fraud Blog, July 23, 2011
SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investment Fraud Blog, January 13, 2011 Continue Reading ›

Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed

Published on: September 24, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has thrown out some of the Securities and Exchange Commission charges against GSCP (NJ) managing director Edward Steffelin for his alleged involvement in a JP Morgan Securities LLC collateralized debt obligation deal. GSCP (NJ) was the collateral manager for the CDO transaction.

While JP Morgan Securities settled for $153.6 million the SEC’s allegations that it misled investors about the CDO deal by agreeing to pay $153.6 million, Steffelin opted to fight the charges. He claimed that there was no reason for him to think that the CDO offering documents were problematic. He argued that nothing had been left out and nobody was “defrauded.”

In district court, Judge Miriam Goldman Cedarbaum granted Steffelin’s motion to dismiss the SEC’s 1933 Securities Act Section 17(a)(3) claims against him. Per the Act, any person involved in the sale or offer of securities is prevented from taking part in any transaction or practice that would deceive or be an act of fraud against the buyer. Cedarbaum said it would be a “big stretch” to conclude that Steffelin owed the investors that bought the CDO a fiduciary duty. However, she decided not to throw out the SEC’s securities claims related to the 1940 Investment Advisers Act, which has sections that make it unlawful to sell or offer securities to get property or money as a result of an omission or material misstatement. The act also prevents investment advisers from taking part in a transaction or practice that performs a deception or fraud on a client.

The SEC’s charges revolved around a JPM-structured CDO called Squared CDO 2007-1. It mainly included credit default swaps that referred to other CDOs linked to the housing market. Per the Squared CDO’s marketing collaterals, GSCP was noted as the one choosing the portfolio’s deals. What wasn’t included in the disclosure was the fact that Magnetar Capital LLC, a hedge fund, played a key part in choosing the CDOs and had a short position in over 50% of the assets. This meant that Magneta Capital stood to gain financially if the CDO portfolio failed.

JP Morgan Securities is JP Morgan Chase affiliate. Under the terms of its $153.6 million settlement, the financial firm agreed to fully pay back all monies that investors lost. By agreeing to settle, JP Morgan Securities did not admit to or deny wrongdoing. Other large financial firms that have settled SEC securities fraud cases related to CDOs in the last 16 months include Citigroup, which recently reached a $250 million settlement and Goldman Sachs, which settled its case with the SEC last year for $550 million.

More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rackoff, Institutional Investor Securities Blog, November 9, 2011

Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court, Institutional Investor Securities Blog, October 27, 2011

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

***This post has been backdated.

FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors

Published on: September 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Speaking before a House Financial Services Committee, Financial Industry Regulatory Authority Chief Executive Richard Ketchup said that the self-regulatory organization is ready to set up a new entity to oversee investment advisers and make sure they are in compliance with federal securities laws. Ketchum also said the SRO would hire experienced staff to do the job and that regulatory oversight to tailored to investment advisers would be put into place.

Currently, the Securities and Exchange Commission is the watchdog for investment advisers. Staffing issues, however, prevent the commission from doing a thorough and frequent job-checks are about once every 11 years. Last year, the SEC was only able to examine 9% of all registered investment advisers.

Yet there are many in the financial industry that have expressed a preference for this status quo, or, if change has to happen, they would like state regulators to do the job. Some have expressed worry that FINRA would uphold investment advisers to rules more that applicable to broke-dealers. Others are not sure that the SRO is up to the task. Many are still not happy with FINRA’s performance as a financial industry watchdog prior to financial crisis. (It is important to note that FINRA has taken some responsibility for not discovering the Bernard Madoff Ponzi scam earlier.)

Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg

Published on: August 11, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg.com, the registered investment adviser industry may offer little protection to investors who end up with an incompetent adviser. This, even though investment advisers, unlike brokers, are upheld to a fiduciary standard to make their clients’ interests a priority and charge fees rather than commissions.

With over 14,000 independent RIA firms controlling about $1.5 trillion of assets (says Aite Group), this is important for investors to know. Problems they could face include too high fees, inappropriate investments, and a hard time collecting on legal awards. Unfortunately, many investors would rather deal with their losses rather than spend the time and money to take legal action against a negligent registered investment adviser.

Currently, advisers who manage at least $25 million have to register with the SEC. If the amount under management is less than that then they must register with the states where they do business. On June 28, 2012, however, the threshold will go up to $100 million, which means that approximately 3,200 advisers will be subject to state rather than SEC oversight.

It was just this January that the U.S. Securities and Exchange Commission recommended that traditional brokers also be upheld to the fiduciary standard that RIAs must meet. Currently, the nation’s approximately 632,000 brokers have to fulfill a suitability standard requiring them to offer advice that meets a client’s needs at the time that the sale of the product is made.

Yet even with the fiduciary standard, advisers don’t have to disclose their performance history to prospective clients. Because SEC-registered advisers don’t have to deal with net capital requirements, some of those that are ordered to pay an investor award cannot afford to and don’t. Unlike brokers, who may face suspension of their registration suspended if they don’t pay, advisers must only disclose that they have unpaid judgment.

The nonprofit firm Sunlight Foundation says that more than 1 in 10 RIAs is subject disciplinary actions, including convictions for felony crimes. Last year, the SEC took 113 enforcement actions against investment firms and investment advisers. That said, legal settlements and arbitration awards have to be disclosed on an adviser’s ADV form, which an RIA must register with the states or the SEC. Customer disputes involving investment adviser representatives can also be found on the SEC Web site.

Advisers will usually include arbitration clauses in agreements requiring clients to work through disputes through JAMS private arbitration of the American Arbitration Association. However, standard initial filing fees can start in the high hundreds and go into the thousands of dollars. Additional fees that may follow run into the tens of thousands of dollars.

Consumer Federation of America investor protection director Barbara Ropers says that because the majority of advisers don’t accept commissions, they may have less conflicts of interests than brokers. However, where there can be a conflict interest is in the charging of adviser fees (usually range from under 1% to 2%) of assets under management, which can compel an adviser to plays clients in higher-fee or –risk investments.

The SEC reports that most federally registered investment advisers charge client fees based on the percentage of assets under management (just 9% of them get commissions). Some advisers, however, may be charging fees that are too high.

Our securities fraud lawyers represent clients who have suffered losses because an investment adviser or a broker dealer was negligent.

Related Web Resources:
Safeguards Scant for U.S. Investors as Registered Advisers Increase by 39, Bloomberg, July 6, 2011
Investment Advisers Could Arbitrate Through Finra Under New Plan, The Wall Street Journal, April 11, 2011
Protect Your Money: Check Out Brokers and Investment Advisers, SEC

More Blog Posts:
SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investor Securities Blog, January 13, 2011 Financial Services Institute Wants FINRA to Serve as SRO for RIAs, Stockbroker Fraud Blog, January 3, 2011
Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010 Continue Reading ›