More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The Securities and Exchange Commission on Thursday charged Mark Spangler, a former chairman of the National Association of Personal Financial Advisors (NAPFA), with defrauding clients by secretly investing their money in two risky startup companies he co-founded.
The SEC alleges that the Seattle-based advisor and his firm funneled approximately $47.7 million of client money into these private ventures despite representing that he would invest primarily in publicly traded securities. Such risky investments were inconsistent with the investment strategies that Spangler promised his clients and contrary to their investment objectives.
Spangler served as chairman and CEO of one of the companies, which is now bankrupt, the SEC says. He was chairman of NAPFA in the late 90s.
The U.S. Attorney’s Office for the Western District of Washington as well as the FBI announced parallel criminal charges against Spangler. Spangler’s inactive membership in NAPFA was suspended in October of 2011 when the FBI investigation was launched.
NAPFA released a comment on Friday stating that the alleged actions committed by Spangler are "severe" and "have been deeply concerning" and the association "strongly condemns the actions contained in the FBI indictment and SEC complaint and any behavior that violates the public trust."
NAPFA went on to say that while organizations like NAPFA exist to set standards that promote ethical behavior, "in any organization there are members or former members who act in unethical ways. NAPFA takes all complaints against its members seriously and has taken appropriate actions."
Susan John, the current chairwoman of NAPFA, told The New York Times in October, “He was perhaps one of the strongest believers in standards for NAPFA. So it’s very difficult for me to see how he could have evolved into the person that these allegations would lead you to believe he had become.”
Marc Fagel, director of the SEC’s San Francisco Regional Office, said in a statement that “Spangler assured his clients he was investing them in publicly traded equities and bonds, not risky startups in which he had a personal interest. For an investment advisor to put his self-interest above the best interests of his clients is a disturbing abuse of trust.”
According to the SEC’s complaint filed in federal court in Seattle, Spangler raised more than $56 million from his clients since 1998 for several private investment funds he managed. Beginning around 2003, without notifying investors in the funds, Spangler and his advisory firm The Spangler Group (TSG) began diverting the majority of client money into two private technology companies he created. One of the companies received nearly $42 million from the funds before shutting down operations.
It had long been a cash-poor company with a history of net losses, generating less than $100,000 in revenue during its 11-year history. Yet Spangler continued to treat the funds as the company’s piggy bank.
Patrick Burns (left), with The Law Office of Patrick Burns in Los Angeles, told AdvisorOne that while "a lot of people are surprised to see this case involving a high profile figure in the advisory industry," he doesn't believe the Spangler case "casts a negative light on NAPFA, it's membership or mission."
This case, Burns continued, does however, demonstrate that regulators' slowness to act against "high-profile figures is changing."
The SEC also alleges that Spangler did not tell investors that TSG collected fees for “financial and operational support” from these companies, which were essentially paying these fees with the client money they had received from the funds. Therefore, Spangler and his firm secretly reaped $830,000 from the companies in addition to any management fees that TSG received from clients.
According to the SEC’s complaint, Spangler concealed his diversion of client funds for years. He disclosed it only after he placed TSG and the funds he managed into state court receivership in 2011.