More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Proxy Voting RIAs are not required to vote proxies on behalf of their clients. However, when an RIA does assume responsibility for voting proxies, the firm’s policies and procedures should help to ensure that votes are cast in the best interest of clients.
Recent enforcement actions included charges by the SEC in a stock-lending scheme and an astrology-based Ponzi scheme, the recovery of funds for 401(k) accounts from an electrical contractor by the Department of Labor and numerous FINRA actions on everything from short sales to data breaches in client accounts.
Gurudeo “Buddy” Persaud, a former broker in Orlando, Fla., was charged by the SEC with defrauding investors in an astrology-based Ponzi scheme. The agency seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against Persaud to enjoin him from future violations of the federal securities laws.
In one of the more colorful schemes, Persaud is alleged to have relied on an Internet service that provided directional market forecasts based on lunar cycles and gravitational pull for an investment strategy that was premised on the idea that gravitational forces affect mass human behavior, and in turn, the stock market. For example, Persaud believed that when the moon exerts greater gravitational pull on the Earth, people feel dejected and are more inclined to sell securities.
With this as his strategy, Persaud is alleged to have lured family, friends and others into investing in his firm, White Elephant Trading Co. LLC, by falsely guaranteeing their money would be safe and yield substantial returns ranging from 6–18%. Persaud told investors he would invest in the debt, stock, futures and real estate markets, but did not reveal that his trading strategy was based on his belief that markets are affected by gravitational forces.
According to the SEC’s complaint filed in U.S. District Court for the Middle District of Florida, Persaud used investors’ money to make payments to other investors, lost $400,000 of investor funds through his trading and diverted at least $415,000 to pay for his personal expenses. The same month Persaud began receiving investor money, he started using some of that money for his personal expenses. The SEC said that Persaud created phony account statements to hide his trading losses and give investors a false sense of security.
Persaud was a registered representative at a Florida-based broker-dealer but separately operated the now-inactive White Elephant, starting in mid-2007. In all, he raised more than $1 million from at least 14 investors between July 2007 and January 2010.
Sales of Loaned Stocks
Without admitting or denying the allegations, Manuel M. Bello, owner of Ayuda Equity Funding LLC and AmeriFund Capital Holdings LLC, both in North Butler, N.J., agreed to pay a $500,000 penalty and be permanently barred from the securities industry, and his firms agreed to return $3.2 million in allegedly ill-gotten gains after charges by the SEC that Bello ran a stock-lending scheme that defrauded public company officials and brought restricted stock to the market.
The SEC also alleged that in at least 35 loan transactions, Ayuda and AmeriFund sold the borrowers’ restricted shares into the market without registering the transactions, and the firms and Bello failed to register with the SEC as brokers or dealers. The settlement is subject to court approval.
In a separate administrative proceeding, the SEC charged Howard L. Blum, alleging that he brokered numerous transactions for Ayuda without being registered as a broker or dealer. Blum, without admitting or denying the SEC’s findings, agreed to return more than $1 million of allegedly ill-gotten gains, plus interest; pay a $50,000 penalty; and be suspended from the securities industry for 12 months.
Journey Electrical CEO to Restore Misdirected 401(k) Funds
The Department of Labor reached an agreement with the former president and CEO of Aliso Viejo, California-based Journey Electrical Technologies Inc., a defunct electrical contractor, to restore $570,983 to the company’s 401(k) plan. In a partial consent judgment and order, Mark Dell Donne of San Clemente has agreed to restore $472,235 to the plan. Dell Donne, who served as a fiduciary of the plan, already has restored $98,748 to the plan’s accounts.
Labor had brought a lawsuit in the wake of an investigation by its Employee Benefits Security Administration, which determined that, between January 2004 and March 2008, some of Journey’s employees’ wages for work they performed on public works projects were deposited in the company’s general funds instead of the workers’ 401(k) plan accounts as required under the government contracts.
Also, in violation of the Employee Retirement Income Security Act (ERISA), employee elective 401(k) contributions and participant loan payments also were not forwarded for deposit into plan accounts. According to the most recent information available, the plan had 105 participants and a balance of more than $1.9 million as of Dec. 31, 2010.
Not only must Dell Donne restore funds to the appropriate accounts, as a result of the partial consent and judgment order, he is permanently barred from violating ERISA and removed as a plan trustee upon the appointment of an independent fiduciary, who will collect and pay out the assets in the plan’s accounts.
Morgan Keegan & Co. was censured and fined $150,000 by FINRA after the agency found that it violated its own policies and procedures about sharing a customer’s personal confidential information only with that customer, and that unauthorized access or use of sensitive customer information was to be reported immediately to the firm’s compliance department and its privacy officer as well as to appropriate outside sources and to the customer.
The firm neither admitted nor denied findings that that for approximately six months, an account username for a firm customer was erroneously linked to other unrelated customer accounts so that the customer had unapproved online viewing access to personal confidential information for unrelated customer accounts. While the link was removed after about six months, the affected customers were not notified for more than a year.
In addition, another customer at a different branch found that he had unauthorized access to accounts that were not his, and when he reported the problem the firm was unable to determine how it had occurred and once again did not notify affected customers for approximately 10 months. Another breach at the same office resulted in a customer receiving unrelated account statements, and again affected customers were not notified in a timely manner.
Undocumented Trade Times, Transaction Data
Without admitting or denying findings, Neuberger Berman LLC found itself censured and fined $56,000 over findings by FINRA that it had failed to report correct trade times to the Real-Time Transaction Reporting System (RTRS) in municipal securities transaction reports, and also failed to report information about such municipal securities transactions within 15 minutes of trade time to an RTRS Portal. The findings stated that the firm failed to show the correct execution time on the memorandum of transactions and failed to document the execution time on the memorandum of transactions for the firm’s account executed with another broker or dealer.
Unfavorable Prices for Customers at Edward Jones
FINRA censured and fined Edward D. Jones & Co. $55,000 and ordered the firm to pay $13,231.52, plus interest, in restitution to customers based on findings that the firm failed to use reasonable diligence to find the best inter-dealer market in corporate fixed income transactions for or with a customer.
The firm neither admitted nor denied findings that also determined that the firm failed to buy or sell in such market so that the resultant price to its customer was as favorable as possible under prevailing market conditions, and that its supervisory system did not provide for supervision reasonably designed for compliance with applicable laws and regulations on best execution of those transactions.
Order Execution Issues at Janney Montgomery Scott
Janney Montgomery Scott was censured by FINRA, fined $55,000, ordered to pay $1,599.67, plus interest, in restitution to customers, and to revise its written supervisory procedures. It neither admitted nor denied findings that it failed to execute orders fully and promptly; failed to use reasonable diligence to ascertain the best interdealer market for the customer, and incorrectly marked its ledger as long when its position was short; failed to maintain customer confirmations; failed to document accurate opening and closing proprietary positions; failed to show the correct entry time on brokerage order memoranda; and failed to provide order memoranda for brokerage orders.
In addition, findings stated that the firm incorrectly reported the second leg of riskless principal transactions as agent to the FINRA/NASDAQ Trade Reporting Facility (FNTRF) and transmitted reports to OATS that contained inaccurate timestamps, and omitted or contained inaccurate account type codes; executed short-sale transactions and failed to report each of the deals to the FNTRF with a short-sale modifier, and executed short-sale orders and failed to properly mark the orders as short.
The firm’s supervisory system was also found by FINRA not to achieve compliance in a number of areas, and to have failed to produce and enforce written policies and procedures adequate to prevent trade-throughs of protected quotations in NMS stocks that do not fall within any applicable exception, and if relying on an exception, were reasonably designed to assure compliance with the terms of the exception.
Proscribed Short Sales Sanctioned at Piper Jaffray
FINRA censured and fined Piper Jaffray & Co. $30,000 over findings that it engaged in numerous short sales of a common stock when an Emergency Order of the SEC prohibited short sales in that security. According to the findings, which the company neither admitted nor denied, the firm had created a spreadsheet to track companies covered by an Emergency Order. When the order was amended and the NYSE changed the list of stocks, the firm updated its spreadsheet and in so doing incorrectly removed an Included Financial Firm from the list, subsequently entering and executing short sale orders for that company’s securities over several trading days and through multiple executions.