The US Securities and Exchange Commission has filed civil charges against Train Babcock Advisors LLC, lawyer Robert Gaughran, and accountant Kevin Clune related to an over $9M institutional fraud targeting a charitable foundation set up by an elderly widow in 1991. The organization, which focuses on improving healthcare and education, was set up using assets from her estate after she died in 2001.
To resolve the civil charges, Train Babcock Advisors will pay over $1.7M in disgorgement plus interest and penalties. It also has consented to withdrawing its SEC registration as an investment adviser. The firm is in the process of shutting down operations.
The $9M fraud was masterminded by former Train Babcock Advisors John Rogicki, who pleaded guilty to criminal charges in October. Earlier this month, he was sentenced to 30 to 90 months behind bars. Rogicki was also ordered to pay the foundation over $6.7M.
The SEC contends that Rogicki, who was the charitable foundation’s trustee and investment adviser, abused his roles when he liquidated securities positions in the foundation’s advisory account, moved money from the widow’s estate to his own bank accounts, and misappropriated over $9M of the money.
Attorney and Tax Accountant Accused of Aiding and Abetting
The regulator is accusing Clune and Gaughran of aiding and abetting Rogicki and Train Babcock Advisors in their scam.
Gaughran, who was the lawyer for the widow’s estate when she was 95, and a foundation trustee, is accused of disregarding “glaring signs” that Rogicki was stealing the foundation’s money even though documents he examined regularly showed there was fraud. Gaughran was the one who created the trust and estate papers that gave control of the charitable foundation to Rogicki.
Also, as trustee, Gaughran knew how much the Foundation was supposed to pay out each year for numerous fees, including investment advisory and trustee fees, as well as for charitable distributions and other costs. The SEC said that attorney had reason to allow the fraud to continue because he collected over $90k annually as a trustee. He also was paid for legal services even though this was the same “limited work” that he did as trustee.
Clure, who served as the tax accountant for the widow’s estate and her charitable foundation, is also accused of disregarding the red flags indicating that a fraud was taking place. He purportedly knew how much money there was in the estate at the end of each year and how much of that money should have been directed to the foundation. Clure also was privy to the brokerage account statements, as well as to documents that showed withdrawals that were “inappropriate and excessively large.”
The SEC is accusing both men of actively hiding the theft by giving an external audit firm false information during a surprise examination of the foundation three years ago. For Gaughran’s part he allegedly gave the auditor a made up figure that “significantly understated the foundation’s outlays.”
When asked in 2014 to provide information about withdrawals made from the Foundation in 2014, Gaughran reportedly asked Clure. The latter allegedly gave a withdrawal number that was about $800K less than what had been taken from the account.The SEC said that as the accountant for the two entities, Clune either knew or was reckless for not knowing about the fraud yet did nothing to stop the scam.
At The SSEK Partners Group, our institutional investment fraud lawyers represent charitable foundations, nonprofits, and other institutional clients in trying to recoup their investment losses. Contact us today.
Read the SEC Complaint (PDF)
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