Even in a year with vanilla index funds generating returns of near 20 percent, bad-apple advisors and brokers saw the need to be greedy.
We list some of the more egregious complaints filed by U.S. authorities in 2017 among the hundreds of complaints filed by federal and state enforcement officials.
Even by the standards of retail advisor rip-offs, Robert H. Shapiro’s alleged scheme was bold – as in billion-dollar bold.
Shapiro, of Sherman Oaks, Calif., bilked as many as 8,400 investors of as much as $1.2 billion through a group of unregistered investment companies – the Woodbridge Group of Companies, formerly based in Boca Raton, Fla., authorities allege.
“Our complaint alleges that Woodbridge’s business model was a sham,” said Steven Peikin, co-director of the Securities and Exchange Commission’s Enforcement Division, in a news release.
Woodbridge advertised itself as issuing loans to commercial property owners paying between 11 and 15 percent in annual interest for short-term financing. Woodbridge promised to pay investors 5 to 10 percent interest annually.
But most borrowers were Shapiro-owned companies with no income and never made interest payment on the loans, the SEC alleges in a Dec. 21 complaint.
Woodbridge used investors’ money to pay other investors, and paid $64.5 million in commissions to sales agents who pitched the investments as “low risk” and “conservative.”
By the time the scheme collapsed in early December when Woodbridge stopped paying investors and filed for Chapter 11 bankruptcy protection, Shapiro had diverted at least $21 million for his own benefit to charter planes, pay country club fees and buy luxury vehicles and jewelry, authorities said.
Shapiro, Woodbridge and affiliated companies face securities fraud and broker-dealer registration provisions of the federal securities laws.
Back from the Dead
Do you remember Stratton Oakmont, that firm founded by Jordan Belfort and made famous in the "Wolf of Wall Street" film starring Leonardo DiCaprio?
It’s back, but in this time through a former Stratton employee and broker – long since barred from doing business by FINRA – named Leonard Vincent Lombardo.
Working from headquarters of The Leonard Vincent Group on Long Island, Lombardo resorted to high-pressure sales tactics to steal $6 million from retirees and other investors to bankroll a lavish lifestyle and even start an e-cigarette business, authorities said.
With help from CFO Brian Hudlin, the company defrauded more than 100 people with claims that funds would be invested in distressed real estate.
Some investors were told their investments had increased by more than 50 percent in a matter of months when in fact there were no actual earnings on their investments, authorities alleged in their September complaint.
Lombardo invested only a fraction of investor money in real estate and used the bulk of it for separate business ventures into the cigarette industry and personal expenses that included luxury cars, marina fees and visits to tanning salons, authorities said.
TLVG, Lombardo and Hudlin have agreed to settlements that are subject to court approval, the SEC said.
TLVG and Lombardo agreed to pay disgorgement of $5.8 million and Lombardo pleaded guilty in a parallel criminal case brought by the U.S. Attorney’s Office for the Eastern District of New York, authorities said.
Hudlin agreed to pay a $40,000 penalty, authorities said.
Violation of Public Trust
John Venditto, the former top elected official of Oyster Bay, N.Y., once held the public trust but it seems that flew out the window as authorities have now accused him of defrauding investors in connection with a municipal securities offering.
Venditto, former town supervisor, treasurer and chief fiscal officer, never revealed the existence and financial impact of indirect loan guarantees made to a businessman and contributor who owned several restaurants and concession stands in town, according to the SEC complaint.
The former supervisor, who served from January 1998 to January 2017, and other officials agreed to indirectly guarantee four private loans totaling more than $20 million as a favor to the businessman, authorities said.
In exchange, Venditto and the town received gifts, bribes and other political support, the SEC alleged in its November complaint.
Loan guarantee information should have been disclosed during Oyster Bay’s 26 municipal bond offerings from August 2010 to December 2015, but never was, SEC officials said.
Defaulting on the loan guarantee would have triggered a termination clause and required Oyster Bay and taxpayers to pay $16 million.
Oyster Bay and its most senior elected official “concealed from its municipal investors that the town had gone to great lengths and taken on financial risk in an unusual decision to assist a vendor,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, in a news release.
In addition to the SEC’s Nov. 21 complaint against Venditto, the U.S. Attorney’s Office for the Eastern District of New York filed a superseding indictment that included securities fraud charges against the former town supervisor, the SEC said.
Investment advisor Jeremy Joseph Drake was charged with defrauding a “high profile” professional athlete and his wife by misleading his clients with the amount of fees charged for services, the SEC said in an August complaint.
Drake, an advisor with the registered investment advisor HCR Wealth Advisors in Los Angeles, charged his famous clients 1 percent of assets under management, and the clients paid Drake about $1.5 million in management fees.
But Drake told his clients he was charging them a special VIP rate of between 0.15 percent and 0.20 percent of assets under management, which meant that his clients had overpaid by $1.2 million, SEC officials said.
Of the $1.2 million, Drake received about $900,000 as incentive-based compensation while he was at HCR from March 2009 to July 2016, the SEC said.
When confronted with the high fees, Drake lied to clients through misleading emails, deceptive fee reports and bogus brokerage documents.
Drake went so far as to adopt the persona of “Ron Stenson,” a fictional Charles Schwab Advisor Services expert who could help explain Drake’s fee, the SEC said.
The SEC is seeking a permanent injunction, return of Drake’s allegedly ill-gotten gains plus interest, and penalties.
VA Rollover Scam
Four former Atlanta-area brokers were charged with fraudulently inducing federal employees to roll over holdings from their federal Thrift Savings Plan (TSP) retirement accounts into higher-fee, variable annuity products, the SEC said.
Through a front called Federal Employee Benefits Counselors, the brokers targeted federal employees nearing retirement with funds invested in the TSP. They misled investors about recommended variable annuity investment, fees and investment returns, the SEC said.
“The brokers allegedly fostered the misleading impression that they were in some way affiliated with or approved by the federal government,” the SEC said. “In some instances, investors were led to believe that their funds would be invested in a product that was offered, vetted, or specifically selected by the TSP.
The four former brokers charged are Christopher S. Laws, Jonathan D. Cooke, Danny S. Hood, and Brandon P. Long.
The brokers earned about $1.7 million in commissions on the sales, authorities said.
The brokers sent investors incomplete, modified transaction forms and materials that obscured the fact that the investment was a privately issued variable annuity with no connection to the TSP, the SEC said in its July complaint.
The brokers sold approximately 200 variable annuities with a total face value of $40 million to federal employees, who used monies rolled over from their TSP accounts to fund their purchases, according to the SEC complaint.
The SEC seeks disgorgement of ill-gotten gains plus interest and penalties and permanent injunctions against the brokers, authorities said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]