The
SEC and DOJ brought a slew of cases against IAR's and RIA's in the
first half of 2015. At least six cases were filed just last month
alone. Here is a brief summary of a sampling of those cases.
On
January 21, 2015, the SEC filed fraud
charges and an asset freeze against a Fort Lauderdale, Florida-based
investment advisory firm, its manager, and three related funds in a
scheme that raised more than $17 million. The SEC’s complaint filed
in federal court in the Southern District of Florida charged Elm Tree
Investment Advisors LLC, its founder and manager, Frederic Elm, and
Elm Tree Investment Fund LP, Elm Tree “e”Conomy Fund LP, and Elm
Tree Motion Opportunity LP. According to the complaint, Elm, formerly
known as Frederic Elmaleh, his unregistered investment advisory firm,
and the three funds misled investors and used most of the money
raised to make Ponzi-like payments to the investors. The complaint
alleges that Elm used the funds to buy a $1.75 million home, luxury
automobiles, and jewelry, and to cover daily living expenses.
On
March 6, 2015, an investment adviser was hit with felony charges
alleging that he defrauded clients of more than $1 million while
running his own investment firm in Chicago. Philip E. Moriarty II is
accused of six counts of wire fraud related to allegations that he
defrauded investors of at least $1.1 million while he was the CEO of
First Street Capital Partners in Chicago from 2008 to 2010. He’s
accused of convincing four investors that they were investing in his
businesses through the use of fraudulent documentation, and then
spending the funds on personal expenses, including payments to a
golf, hunting and fishing club, and $23,000 to a boarding school in
New Hampshire.
Late
that month, the SEC filed fraud charges against an investment adviser
and her New York-based firms accusing them of hiding the poor
performance of loan assets in three collateralized loan obligation
(CLO) funds they managed. The SEC’s Enforcement Division alleged
that Lynn Tilton and her Patriarch Partners firms breached their
fiduciary duties and defrauded clients by failing to value assets
using the methodology described to investors in offering documents
for the CLO funds. Tilton and her firms allegedly have avoided
significantly reduced management fees because the valuation
methodology described in fund documents would have given investors
greater fund management control and earlier principal repayments if
collateral loans weren’t performing to a particular standard.
In
April, 2015, a former JPMorgan Chase investment adviser was arrested
on charges he stole $20 million from customers and spent the funds on
unprofitable trading and other personal expenses. Michael Oppenheim
allegedly took money from at least seven bank clients in a fraud
scheme he operated from March 2011 to March 2015. Oppenheim worked
as a JPMorgan investment adviser. He advised approximately 500
clients who collectively kept roughly $89 million in assets under his
management, according to a criminal
complaint filed
by Manhattan federal prosecutors.
Later
in April, a former Merrill Lynch and Smith Barney investment adviser
already serving a federal prison term for investment fraud pleaded
guilty to additional fraud charges in connection with a nearly
two-decade-long scheme to defraud clients of hundreds of thousands of
dollars. Jane E. O’Brien of Needham, MA, pleaded guilty to three
counts of mail fraud, two counts of wire fraud, and two counts of
investment adviser fraud. As alleged in the indictment, between 1995
and 2013, O’Brien defrauded several clients for whom she provided
investment advisory services. As part of the scheme, O’Brien
misappropriated funds entrusted to her through a variety of means,
including persuading clients to withdraw money from their bank and
brokerage accounts to invest. After gaining control of her clients’
money, however, O’Brien made no such investments. Instead, she used
the misappropriated client funds for a variety of improper purposes,
including paying personal expenses, paying purported investment
returns, or repaying personal loans to other clients. Finally, in
order to perpetuate her fraud and conceal it from her clients,
O’Brien made false statements and misrepresentations to clients,
including by making lulling payments to clients and otherwise
providing them with false assurances of their financial security.
On
May 15, 2015, Bryan Binkholder of St. Louis was sentenced to 108
months in prison on multiple fraud charges involving his financial
planning and investment strategy businesses. In addition to the
prison sentence, he was also ordered to pay $3,655,980 in restitution
to the victims. According to court documents, Binkholder labeled
himself “The Financial Coach” and provided investment and
financial planning advice to the public through his affiliated
websites and an investment related talk-radio show that aired on
local radio stations. In 2008, he developed a real estate investment
he termed “hard money lending.” Using his platform as an
investment advisor and financial talk show host, Binkholder solicited
his clients and others to invest in the hard money lending program.
As part of his sales pitch he represented that he had relationships
with developers who were not able to secure financing from
traditional banks. As part of the hard money lending program,
Binkholder told investors that they would invest money with him, and
he would act as a bank and provide short term loans to these
developers at a high rate of interest which would be shared with the
investor. Instead of exclusively making hard money loans as promised,
he took in millions of dollars of investor money, made only a small
number of hard money loans and caused investors to lose more than
$3,000,000.
On
May 21, 2015, The Securities and Exchange Commission filed fraud
charges against an Atlanta-based investment advisory firm and two
executives accused of selling unsuitable investments to pension funds
for the city’s police and firefighters and other employees. The
SEC’s Enforcement Division alleged that Gray Financial Group, its
founder and president Laurence O. Gray, and its co-CEO Robert C.
Hubbard IV breached their fiduciary duty by steering these public
pension fund clients to invest in an alternative investment fund
offered by the firm despite knowing the investments did not comply
with state law. Georgia law allows most public pension funds in the
state to purchase alternative investment funds, but the investments
are subject to certain restrictions that Gray Financial Group’s
fund allegedly failed to meet. The SEC alleged that Gray Financial
Group collected more than $1.7 million in fees from the pension fund
clients as a result of the improper investments.
On
June 3, 2015, the SEC filed two cases against purported investment
advisers who falsified their credentials. In one case, the SEC
charged that Todd M. Schoenberger of Delaware solicited at least a
dozen people to invest in promissory notes issued by LandColt
Capital, an unregistered advisory firm. According to the SEC, he
said the notes would be repaid from management fees. Just a few days
later, a Chicago investment adviser was arrested on federal charges
that he defrauded his clients of at least $1 million, some of which
he allegedly gambled away at local casinos. Alan Gold was charged in
a criminal complaint that was unsealed following his arrest.
On
June 11, 2015, the United States Attorney for the Western District of
Wisconsin announced the unsealing of a 21-count indictment charging
Pamela Hass with wire fraud and money laundering. The indictment also
contains a forfeiture allegation seeking $460,831.27 in criminal
proceeds. The indictment alleges that Hass engaged in a wire fraud
scheme to defraud investors by promising returns from an investment
in internet pop-up ads. According to the indictment, Hass falsely
told investors they would obtain a return of anywhere from five to 20
times their original investment, and that if the investment failed,
she would personally guarantee the return of the original investment
plus 7 percent interest.
Also
last month, The
Securities and Exchange Commission announced fraud charges against a
Washington D.C.-based investment advisory firm’s former president
accused of stealing client funds. The firm and its chief compliance
officer separately agreed to settle charges that they were
responsible for compliance failures and other violations. SFX
Financial Advisory Management Enterprises is wholly-owned by Live
Nation Entertainment and specializes in providing advisory and
financial management services to current and former professional
athletes. The SEC alleged that SFX’s former president Brian J.
Ourand misused his discretionary authority and control over the
accounts of several clients to steal approximately $670,000 over a
five-year period by writing checks to himself and initiating wires
from client accounts for his own benefit.
Just
a day later, Kenneth
Graves, a former investment adviser representative in Corpus Christi
whose license to sell securities was revoked last year by the Texas
Securities Commissioner, was indicted on fraud charges related to the
sale of investment contracts and excessive fees for his firm’s
services. The indictment
alleges
that Graves defrauded six clients of his firm, Warren Financial
Services LLC, through the sale of $420,720 in investment contracts.
The indictment alleges that in a separate fraud in 2013 and 2014,
Graves misapplied $128,918 in fees he had collected from clients of
Warren Financial.
Finally,
on June 17, 2015, the SEC announced fraud charges against a
Massachusetts-based investment advisory firm and its owner for
funneling more than $17 million in client assets into four
financially troubled Canadian penny stock companies in which the
owner had an undisclosed financial interest. The SEC alleged that
clients at Interinvest Corporation may have lost as much as $12
million of their $17 million investment based on the recent trading
history of shares in the penny stock companies, some of which were
purportedly in the business of exploring for gold or other minerals.
Interinvest’s owner and president Hans Black served on the board of
directors of these companies, which have collectively paid an entity
he controls approximately $1.7 million. Black’s involvement with
these companies and his receipt of payments from them created a
conflict of interest that he and Interinvest failed to disclose to
their advisory clients.
On
a final note--Investors and accountants should take the time to read
Brian Carroll's article regarding investment advisory fraud in
the Journal of Accounting.
In
addition to founding the Investment Adviser Rep Syndicate, David
Cosgrove, a former regulator and prosecutor, is the founding Member
and Manager of Cosgrove Law Group, LLC. The law firm represents both
investors and investment advisers across the nation. In doing so,
the firm's members have a unique strategic advantage and insight when
it comes to litigation or conflict resolution in the financial
services and investment arena.
