Tuesday, January 28, 2014

Illinois Securities Department Requests Hearing against Springfield Investment Adviser Rep for Alleged Fraud

On January 17, 2014, the Illinois Securities Department filed a Notice of Hearing against investment adviser representative, David Matthew Lisnek.  As of November 13, 2013, the Department suspended Lisnek’s registration and further prohibited him from offering or selling any securities or otherwise engaging in the business of rendering investment advice in the State of Illinois. Lisnek was registered as an LPL salesperson and an investment adviser representative since September 23, 2004 but was terminated from LPL when the State of Illinois suspended Lisnek’s registration.  Lisnek has also been charged with one count of Financial Exploitation of the Elderly – a class 1 felony.    
The Notice alleges that Lisnek engaged in fraud involving at least three clients who are either elderly or nearing retirement.  The alleged loss is $270,918 in client funds.  The Notice also alleges that Lisnek held himself out as “an expert in investments and retirement planning and authored multiple books and articles advising the public, including advice on how to avoid getting defrauded by your financial adviser…”  The purported fraud committed by Lisnek is detailed as follows.    

Lisnek allegedly approached an 84 year old client (“PC’) with an investment opportunity to provide funds to another customer of Lisnek’s (so that the customer could renovate her home) in exchange for the customer’s REIT stocks.  LPL specifically prohibits a rep’s involvement with any cross transactions between clients.   Despite LPL’s policy, between June and September of 2013, Lisnek instructed PC to write him eleven checks totaling $65,000.  Lisnek either deposited the checks into a personal account or cashed them rather than purchasing REIT stock on behalf of PC.  The Notice alleges that Linsek used the $65,000 for his own benefit.  After further investigation, it was discovered that in 2011, Lisnek advised the client to purchase other REIT stock at over 2.5 times its actual value.    

The second client in which Lisnek is purported to have defrauded is a 54 year old client (“RJ”).  Around 2010 and 2011 Lisnek advised RJ to purchase real property for $272,500 if he allowed Lisnek and his family to reside there.  Lisnek promised to purchase the residence from RJ a year and a day later for $321,550.  In the interim, Lisnek agreed to pay RJ $2,000 in monthly rent.  Lisnek apparently advised RJ to withdraw the funds to purchase the property from an annuity Lisnek sold him the year prior.  RJ incurred approximately $17,418.29 in surrender charges from the early withdrawal.  To date, Lisnek has never made any of the monthly rent payments or purchased the property from RJ as agreed. 

In December 2010, Lisnek also advised RJ to invest in Lisnek’s own publishing company whose only purported asset was the copyrights to a book written by Lisnek.  RJ invested $50,000 in the publishing company pursuant to the terms of a buy-sell agreement which Lisnek never abided by.  It was later discovered that the publishing company was not a legal entity and Lisnek’s book had no registered copyright.

Around 2010-2011, Lisnek approached RJ with an opportunity to loan $40,000 to another client of Lisnek’s.  The Notice states the client, who is referred to as AB, was 69 years old.  Around January 31, 2011, Lisnek drafted a Promissory Note between RJ and AB whereby RJ agreed to provide AB with a loan of $40,000 and that AB would repay RJ the principal plus $5,000 by May 31, 2011.  Lisnek advised AB to write the $45,000 check to Lisnek and that he would deposit the check into RJ’s account.  However, Lisnek only deposited $30,000 in RJ’s account and deposited the remaining $15,000 into Lisnek’s personal account.

From 2012 through 2013, Lisnek also convinced AB to write him nine checks totaling $80,000.  Lisnek purportedly gave AB two checks totaling $115,000 in payment for the loans but instructed her not to cash the checks.

The lesson to investors here, which may seem obvious to some, is never write a personal check to your financial advisor under any circumstance.  Entering into investment “opportunities” that involve your advisor is also extremely questionable and we recommend avoiding those types of transactions.      

Lisnek’s hearing is currently set for February 19, 2014 so stay tuned for updates relating to this matter. 

Wednesday, January 15, 2014

Investment Advisers Can Expect Increase in Exams as SEC Releases 2014 Exam Priorities

As the new year begins, Investment Advisors can expect an increase of compliance examinations. The SEC Office of Compliance Inspections and Examinations (“OCIE”) is aiming to target roughly 4,000 RIAs that have never been examined before.  While there is some skepticism whether the SEC has enough resources to increase examinations, Reps Maxine Waters, D-Calif., and John Delaney, D-Md. are sponsoring a bill, the Investment Adviser Examination Improvement Act of 2013, that would authorize the SEC to collect annual user fees from RIAs to increase the frequency of their exams.  Stay tuned for future updates about this bill’s progress.      

So that Investment Advisers can better prepare for upcoming exams, the National Examination Program (“NEP”), a division of OICE, recently published its 2014 examination priorities  to communicate with investors and registrants about areas perceived to have heightened risk.  This article will discuss the NEP’s market-wide examination priorities as well as specific priorities for Investment Advisers/Investment Companies (“IA-IC’s”).   

The most significant market-wide examination initiatives include the following areas:
  • Fraud Detection and Prevention
  • Corporate Governance, Conflicts of Interest, and Enterprise Risk Management
  • Technology
  • Dual Registrants
  • New Laws and Regulation (i.e. Rule 506(c) and crowdfunding)
  • Retirement Vehicles and Rollovers

In addition to the market-wide issues listed above, the NEP intends to address specific concerns in its IA-IC Program.  This Program has primary examination authority for approximately 11,000 registered investment advisers and 800 registered investment company complexes. Collectively, these entities manage nearly $55 trillion for investors.  The program’s initiatives are divided into core risks, new and emerging risks, and policy topics. 

The NEP has defined core risks as those “risk areas that are common to IA-IC’s and that have existed for a sustained period and are likely to continue for the foreseeable future.” New and emerging issues and initiatives are “issues and business practices that pose an increased risk due to changes and developments in the industry, including changes in financial conditions, products or investment strategies offered, technology, regulation, business combinations, and business practices.”  Policy topics are “areas in which the SEC has an interest in gaining a better understanding of business practices in a particular area or learning the practical application of previously adopted rules and guidance.”

The IA-IC core risks include the following:
  • Safety of Assets and Custody (particularly the “Custody Rule” under Rule 206(4)-2 of the Advisers Act)
  • Conflicts of Interest Inherent in Certain Investment Adviser Business Models
  • Marketing/Performance (i.e. marketing efforts from newly implemented JOBS Act rules)

IA-IC new and emerging risks include:
  • Never-Before Examined Advisers (aimed at IA-IC’s registered for over three years but not yet examined by the NEP)
  • Wrap Fee Programs
  • Quantitative Trading Models
  • Presence Exams
  • Payments for Distribution in Guise
  • Fixed Income Investment Companies

IA-IC policy topics are the following:
  • Money Market Funds
  • “Alternative” Investment Companies (particular focus on: (i) leverage, liquidity and valuation policies and practices; (ii) the staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and (iii) the manner in which such funds are marketed to investors.)
  • Securities Lending Arrangements

While the NEP plans to allocate substantial resources to the examinations of the issues outlined above, the list is not exhaustive and Investment Advisers should not limit their expectations to the topics discussed herein.   

Friday, January 10, 2014

AICPA Advanced Personal Financial Planning Conference

The American Institute of CPA's will be holding its Advanced Personal Financial Planning Conference in Las Vegas later this month. The AICPA promises that attendees will “learn about the latest regulations, tax law changes and market outlook, and how to respond to pertinent issues that impact your practice.” One of the “4 Tracks for Focused Learning” is centered upon “Retirement/Elder Planning” while another is intended to revolve around “Practice Management and Technology.” The AICPA specifically identifies investment advisers as potential beneficiaries of this conference.

The registration for the conference is $1,395 for non-members. Attending may certainly be worth the investment adviser representative's personal investment in the conference. Beyond the selection of focused presentations, the conference will have several keynote speakers, including best selling author Simon Sinek.

Tuesday, January 7, 2014

Missouri Securities Division Cancels the Registration of Missing Investment Adviser Rep

In late 2013, Missouri Commissioner of Securities ordered the cancellation of Joseph Jackson and J. Andrew Jackson & Co. LLC’s registration.  The company was a Registered Investment Adviser with Jackson registered as its investment adviser representative.  

According to the Missouri Order, in July 2012, a Missouri Resident (“MR”) opened an account with Interactive Brokers LLC, a Missouri registered broker-dealer, through J. Andrew Jackson & Co., LLC.  Jackson was listed as the representative of record on the account.  By August, 2012, Jackson, acting as the registered representative on the account, had lost over $83,000 in MR’s account due to his purchasing of options in MR’s account.  Jackson never discussed purchasing options with MR and MR had no knowledge about how options work.   Jackson told MR that he was attempting to “hit a home-run” with the purchases.  In September 2012, Jackson repaid MR $10,000 and agreed to pay MR $5,000 every other week until the losses were recouped.  MR has been unable to contact Jackson since September 21, 2012.  Jackson is believed to have other Missouri clients.    

Since June of 2013, investigators of the Missouri Securities Division made several attempts to contact Jackson at his last known addresses and phone numbers to no avail.  Thus, pursuant to Section 409.4-408(e) of the Missouri Securities Act,

(e) If the commissioner determines that a registrant or applicant for registration is no longer in existence or has ceased to act as a broker-dealer, agent, investment adviser, or investment adviser representative, or is the subject of an adjudication of incapacity or is subject to the control of a committee, conservator, or guardian, or cannot reasonably be located, a rule adopted or order issued under this act may require the registration be canceled or terminated or the application denied.

Therefore, in the interest of investors and because all means of contacting Jackson had been exhausted, the Commissioner ordered the cancellation of the registrations of both Jackson and J. Andrew Jackson & Co. LLC. 

It remains to be seen whether Jackson will resurface.  If that happens, we will likely see another Enforcement Action concerning his alleged neglect and mishandling of client accounts. 

While this advice is probably obvious to most of our readers, investment adviser reps should always maintain contact with their clients.  Finally, if you receive an inquiry from a State Securities Department or other related agency, contact the attorneys at Cosgrove Law Group, LLC immediately

Friday, January 3, 2014

It Is Time to Comply with the 2014 IARD Renewal Program

This is a good time for IAR firms to review the registration status of all of their representatives. Firms should have already made preliminary renewal payments out of their Renewal Accounts. FINRA's Renewal Program facilitates the renewal of registration/notice filings with participating jurisdictions. The program does not, however, assist SEC registered IA firms.

December 26th was the last day to submit filings before the end of 2013. Web CRD and IARD will be up and accessible again on the morning of January 2nd.  Final Renewal Statements are due January 10th.

Representatives should check in with their firm to make sure renewals have been filed in each state they have or anticipate soliciting new clients in 2014. IAR registration staff should be familiar with FINRA's Renewal Program Calendar and Bulletin.