From Ponzi schemes to wacky real estate deals and movie ventures to managerial inertia, 2016 was another year filled with rogue advisors and brokers, at least in the eyes of the Securities and Exchange Commission.
In a review of financial advisors behaving badly, we highlight brokers and advisors who preferred — either by design or by oversight — helping themselves before helping others. In nearly every instance, their actions ended up costing them a pretty penny.
The entries were collected from press releases issued by the SEC over the past 12 months. They don't make up an exhaustive list of past misdeeds, but they are a reminder of what brokers and advisors might want to avoid in the future.
“The SEC takes a dim view of firms that fall short in their obligations,” said Michael J. Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. Osnato's comments were made in a news release issued in connection with the SEC's levying a $15 million fine against UBS Financial Services in September.
Sales of $548 million in reverse convertible notes, or RCNs, led to a $15 million settlement by UBS Financial Services.
UBS agreed to pay more than $15 million to settle charges that it failed to educate, train and supervise its sales force adequately in regard to aspects of complex financial products, the SEC said in a Sept. 28 news release.
The financial products, known as reverse convertible notes, were sold to retail investors between 2011 and 2014.
RCNs are a type of security or structured note. They contain embedded derivatives whose performance is driven by the “concept of implied volatility,” investment concepts unsuited to many of the investors buying them, the SEC said.
UBS sold an estimated 2,500 different RCNs based upon 425 underlying stocks during the three-year period.
The sale resulted in $548 million worth of RCNs to 8,743 relatively inexperienced retail customers with moderate incomes and net worth, the SEC said.
The SEC also said it took into account UBS’ steps to remedy the issues around its Structured Solutions Desk when coming to terms for the settlement.
Plain Old Theft
Everything from a bonsai tree nursery to an antique watch retailer were the recipients of funds that a former movie producer and self-proclaimed private equity executive stole from clients, the SEC alleged.
The SEC charged David R. Bergstein, 54, of Hidden Hills, Calif., with defrauding investors in hedge funds and using the money he stole to support a lavish lifestyle.
Bergstein was charged with stealing millions of dollars from investors in 2011 and 2012 to support a lifestyle that included expenses incurred with a firearms auctioneer and retailer, an antique watch and jewelry retailer, a bathroom and kitchen retailer and a bonsai tree nursery.
The scheme relied on intricate transactions by Weston Capital Asset Management, a registered investment advisor, with two of its unregistered hedge funds, Weston Capital Partners Master Fund II and the Wimbledon Fund SPC Class TT Segregated Portfolio, the SEC said.
In one transaction, Bergstein misappropriated at least $2.3 million of money purportedly meant for investments in medical-billing businesses and helped Weston Capital Asset Management conceal the transaction from Weston investors, according to the SEC.
In a second transaction, Bergstein stole more than $3.5 million of funds also purportedly meant, in part, for investments in medical-billing businesses, the SEC alleged.
The SEC is seeking injunctions against Bergstein, the return of the stolen money and penalties.
Professional Athletes Targeted
A Pittsburgh-based financial advisor was accused of taking money without permission from the accounts of professional athletes to invest in movie projects and Ponzi-like payments. The SEC announced fraud charges against Louis Martin Blazer III in May.
The SEC alleged that Blazer withdrew money from his clients’ accounts. When confronted, he lied and produced bogus documents generated after the fact in an attempt to conceal the misconduct.
Blazer founded Blazer Capital Management as a “concierge” firm targeting professional athletes and other high-net-worth individuals. He took $2.35 million from five clients without their authorization so he could invest in two movie projects, the SEC alleged.
Blazer had a personal financial interest in the development of both films, one called “Mafia the Movie” and the other called “Sibling.”
In one instance, Blazer pitched the movie project to an athlete as an investment, but the client refused to invest. Blazer took $550,000 from the client’s account anyway and invested the money in the film projects himself, the SEC alleged.
When the client threatened to sue Blazer, the advisor simply refunded the money by dipping into another client's account, the SEC said.
The SEC wants Blazer to refund his clients and to pay fines. Blazer has agreed to settle the charges subject to court approval.
The Lure of Free Dinners
"Free dinner" investment seminars to seniors citizens living in Florida led to fraud charges filed against four advisors.
The SEC alleges that Philadelphia residents Joseph Andrew Paul, 39, and John D. Ellis Jr., 43, lied about the track record of their investment advisory firm. They recruited James S. Quay, 55, of Atlanta and Donald H. Ellison, 64, of Palm Bay, Fla., to lure potential victims with promises of high returns.
Paul and Ellis created fraudulent marketing materials, including some with performance numbers that were “cut and pasted” from another firm’s website, according to the SEC's complaint. In addition, the two men allegedly misrepresented assets on ADV forms. Quay and Ellison used the materials to mislead senior citizens who responded to mass-mailing offers of a free dinner at a Tampa restaurant, the SEC alleged.
Quay was convicted of tax fraud in 2005 and found liable for securities fraud in a 2012.
Quay, who used the alias Stephen Jameson, and Ellison raised $1.3 million from 14 investors in 2011 and 2012. But they used some of the funds to pay for personal and business expenses and to satisfy margin calls, the SEC said.
The SEC is seeking return of the funds.
An advisor's mortgage, overseas trips and vehicle leases were paid through overbilling clients and stealing assets from their trusts, the SEC alleged.
Marc D. Broidy and his firm Broidy Wealth Advisors, based in Los Angeles, were charged on Oct. 27 with siphoning off more than $1.4 million in ill-gotten gains since February 2011. Broidy did that by billing clients $643,000 in excess fees and concealing the transactions by altering the amount of management fees recorded on forms issued by brokerage firms before sending the forms to clients, the SEC alleged.
In addition, Broidy is charged with misappropriating about $865,000 in assets from clients’ trusts for which he was the trustee. He also was charged with misleading advisory clients about investments they made in privately-held companies when he failed to inform them he was connected to those companies.
SEC officials said they wanted permanent injunctions and penalties against Broidy and his firm.
Wrap fee programs landed some advisors in hot water.
Raymond James & Associates and Robert W. Baird & Co., two large broker/dealers, settled changes related to compliance failures within their wrap fee programs, the SEC said in a Sept. 8 news release.
The companies were charged with neglecting to establish policies and procedures necessary to determine the amount of commissions their clients were being charged when subadvisors “traded away” with a broker/dealer outside the wrap fee programs. This practice incurs commissions in addition to the wrap fee.
Advisors were, therefore, unable to “provide the magnitude” of these costs to clients and did not consider these commissions when determining if the subadvisors or the wrap fee programs were suitable for clients, the SEC said.
Some clients were unaware they were even paying additional costs beyond the single wrap fee they paid for bundled investment services, the SEC alleged.
Raymond James agreed to pay a $600,000 penalty and Baird agreed to pay a $250,000 penalty to settle the charges.
In a July 14 news release, the SEC said RiverFront Investment Group in Richmond, Va., neglected to prepare clients for transaction costs beyond the wrap fees clients paid to cover the cost of financial services bundled into the wrap fee.
In wrap fee programs, subadvisors typically use a sponsoring brokerage firm to execute their trades on behalf of clients, and the costs of those trades are included in the annual wrap fee that each client pays.
But the SEC said RiverFront used brokers outside of the wrap program sponsor to execute many of RiverFront’s wrap program trades, resulting in more costs to clients.
In client disclosures, RiverFront said some “trading away” from the sponsoring broker could occur. But the SEC said the company inaccurately described the frequency with which it might occur. This rendered its disclosures misleading.
RiverFront agreed to settle the charges for $300,000 and post quarterly trade volumes on its website, the SEC said.
Some advisory firms learned the hard way that if you can't say something nice about someone, you shouldn't say anything at all.
Thirteen investment advisory firms were found guilty of spreading false claims about another investment company’s product, the SEC announced on Aug. 25.
The 13 companies relied on claims by F-Squared Investments that its AlphaSector strategy for investing in exchange-traded funds had outperformed the Standard & Poor’s index for years.
The investment advisors repeated many of F-Squared’s claims while recommending the investment to their own clients without sufficient documentation to back up the information being advertised.
The claims came back to haunt them when F-Squared admitted that what was purportedly its real, historical track record was only back-tested performance that turned out to be substantially inflated, the SEC said.
The advisories each agreed to fines ranging from $100,000 to $500,000 based upon the fees each firm earned from AlphaSector-related strategies.
Steering client investment funds into his own companies led to charges against an investment advisor.
A 39-year-old North Carolina-based investment advisor defrauded investors by secretly steering portions of real estate-related investments into deals with companies that he owned or operated himself, the SEC charged in a June 2 news release.
In a breach of fiduciary duty, Richard W. Davis Jr. kept his conflicts of interest secret using funds from investors to execute financial transactions with companies Davis owned or controlled, the SEC said.
After raising millions of dollars by convincing investors to roll over 401(k) retirement account assets into unregistered investment funds, Davis misled investors and neglected to inform them of their real estate-related losses as his companies failed to pay the loans, the SEC alleged.
He also received at least $1.5 million — more than 10 times the management fee to which he was entitled — from bank accounts in which investor funds were comingled, the SEC said.
Davis agreed to settle the charges by returning the ill-gotten gains along with interest and penalties.
Performing brokerage activity without properly registering landed an advisory firm a spot on the SEC's naughty list.
A Maryland-based private equity fund advisory firm and its owner have agreed to pay more than $3.1 million to settle charges that they engaged in brokerage activity and charged fees without registering as a broker/dealer, the SEC announced June 1.
Blackstreet Capital Management and Managing Partner Murry N. Gunty performed in-house brokerage services rather than using properly licensed investment banks or broker/dealers to handle the buying and selling of portfolio companies for two private equity funds Blackstreet advised, the SEC said.
The SEC alleged that Blackstreet, which bills itself as a turnaround specialist for small and midsize companies, told the funds that it would provide brokerage services in exchange for a fee, but it never complied with registration requirements to operate as a broker/dealer.
The SEC’s investigation, which stemmed from an examination of Blackstreet, also found that the firm and Gunty engaged in conflicts of interest, inadequately disclosed fees and expenses and failed to adopt policies and procedures.
Marketing Materials Misstatements
False information on advisor commissions carried a $4 million price tag for one brokerage business.
J.P. Morgan’s brokerage business agreed to pay $4 million to settle charges that it stated – falsely – on its private banking website and in marketing materials that advisors are compensated based on client performance and that advisors aren’t paid a commission.
J.P. Morgan Securities did not pay commissions to registered representatives in its U.S. Private Bank,but the compensation paid to the sales reps was not based on client performance, the SEC announced in a Jan. 6 news release.
Instead, advisors were paid a salary and received a discretionary bonus based on other factors, the SEC said.
The broker compensation misstatements were alleged to have occurred between 2009 and 2012 and were included in a prospecting card, a pitch book and a marketing letter.
Even when the misstatements were brought to the attention of management of J.P. Morgan Securities, the company dragged its feet in making changes, the SEC said, and then made changes only on some of the marketing materials.
The SEC said it considered the company’s remedial actions before determining the amount of the settlement.
One RIA harvested some charges from the SEC as a result of a practice known as cherry-picking.
Laurence I. Balter and his Kihei, Hawaii-based registered investment advisor Oracle Investment Research were charged in connection with three distinct schemes between 2011 and 2015, according to an Oct. 4 SEC news release.
Batter was charged with allocating, or cherry-picking, profitable trades to his own accounts instead of for his clients' accounts. He told his separately managed account clients that they would not pay advisory fees and fund management fees, and he executed trades for the fund inconsistent with the fund’s investment guidelines, the SEC said.
He then lied to clients invested in his affiliated mutual fund they would not pay advisory fees and fund management fees, yet he charged both fees anyway, the SEC alleged. Balter also allegedly made trades for the mutual fund that strayed from its investment goals. This resulted in a narrow, non-diversified portfolio that caused investors big losses.
Balter siphoned more than $500,000 in the process and the case was scheduled before an administrative law judge, the SEC said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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