INVESTMENT ADVISER BARRED FROM ADVISORY INDUSTRY
6.26.2002 The SEC barred William F. Branston from association with any investment adviser because of previous criminal and civil violations of the securities laws when he was employed by Tandem Management Inc. (Tandem), a registered investment adviser. Branston was previously subject to a civil injunctive action by the SEC that alleged that Branston misappropriated over $1 million in client assets, principally in the form of "soft dollar" credits and commission rebates; distributed false information concerning Branston's past performance returns and Tandem's performance returns and assets under management to clients, investors in a limited partnership fund advised by Tandem, and a national money management ranking publication; filed false Forms ADV; and failed to keep required books and records.
Please click http://www.sec.gov/litigation/admin/ia-2040.htm for the release announcing the administrative action.
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SEC PROPOSES NEW PRIVATE SECTOR REGULATORY SCHEME FOR AUDITORS
6.26.2002 The SEC proposes to form a new private sector organization that would:
- conduct reviews of accounting firms' quality controls;
- impose sanctions on accountants who engage in unethical or incompetent conduct; and
- set auditing, quality control and ethics standards for the accounting industry (or review such standards set by another private body).
Please click http://www.sec.gov/rules/proposed/33-8109.htm for the release announcing the proposal for auditor oversight.
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SEC REVOKES REGISTRATION OF ADVISER
6.21.2002 An SEC administrative law judge entered an order revoking the registration of Barr Financial Group, Inc. under the Investment Advisers Act of 1940. The order also barred Alfred E. Barr, the company's principal, from associating with any investment adviser. The SEC found that The Barr Financial Group,
Inc. (BFG) and Alfred E. Barr (Barr) violated Section 207 of the
Investment Advisers Act of 1940 by willfully making untrue statements of
material fact in BFG's registration application and amendments filed
with the Securities and Exchange Commission between 1996 and 1998.
Please click http://www.sec.gov/litigation/aljdec/id206lam.htm for the release announcing the administrative action.
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SEC FREEZES ASSETS OF HEDGE FUND
6.20.2002 The SEC obtained an injunction against House Edge, L.P., a hedge fund, House Asset Management, L.L.C., its adviser, and certain principals of the adviser freezing their assets. The SEC alleged that that, from at least March 2000
to the present, the defendants conducted an unregistered offering of
units in the Hedge Fund, raising approximately $2.9 million from
approximately 60 investors. The complaint alleged that House and Moore
controlled the Hedge Fund. The complaint further alleged that the
defendants, in Hedge Fund offering materials, falsely claimed that the
Hedge Fund had used a sophisticated securities trading program to
generate cumulative returns of 148% since its inception in March 2000.
In reality, the complaint alleged, the Hedge Fund had lost at least
$850,000 since its inception, and House and Moore had used more than
$400,000 in investor proceeds to buy real estate for themselves. The
Complaint also alleged that the defendants made false and misleading
statements about House's background in Hedge Fund offering materials.
Please click http://www.sec.gov/litigation/complaints/complr17583.htm for the release announcing the administrative action.
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ADVISER SANCTIONED FOR BEST EXECUTION AND INTERPOSITIONING VIOLATIONS
6.20.2002 The SEC sanctioned Portfolio Advisory Services, LLC (PAS), a registered investment adviser, and Cedd L. Moses, its President, for engaging in brokerage practices that led to clients being overcharged $1.7 million in commissions. Specifically, the SEC found that PAS failed to obtain best execution for clients. An investment adviser has a fiduciary duty to obtain "best execution" for its clients, which generally means it must seek to execute client trades on terms that are the most favorable to clients. The SEC found that PAS used the excess commissions to compensate five registered representatives for client referrals.
The SEC also found that PAS failed to disclose in Part II of its Form ADV that:
- those $1.7 million in commissions were paid after trades were already
completed on a principal basis;
- the referring broker-dealer provided no execution services; and
- the commissions paid to the referring broker-dealer exceeded the markups
or markdowns already charged by the market maker.
PAS earlier reimbursed its clients $1.7 million. PAS was also fined $50,000 by the SEC.
Please click http://www.sec.gov/litigation/admin/ia-2038.htm for the release announcing the administrative action.
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HEDGE FUND ADVISER MISAPPROIATES ASSETS OF FUND
6.18.2002 The SEC settled a charge against O'Donohue Fund Management, an investment adviser, and Michael O'Donahue, its principal, in connection with the alleged misappropriation of approximately $3 million of assets of hedge funds managed by the company.
The management company was the general partner of, and made investment decisions for, three limited partnerships. According to the SEC's complaint, According to the Commission's
complaint, O'Donohue diverted over $2 million of investor funds, falsely
stated to investors that their funds were invested, sent out false
account statements indicating that investors' funds were earning
returns, and otherwise engaged in a variety of conduct which operated as
a fraud and deceit on investors. The complaint also alleges that
O'Donohue and O'Donohue Fund Management sold unregistered securities.
O'Donohue was convicted of three counts of mail fraud involving this
same conduct. He was sentenced in the United States District Court for
the Northern District of Georgia to serve 48 months in prison, followed
by three years of supervised release, and was ordered to pay restitution
of $2,468,912.41.
Please click http://www.sec.gov/litigation/litreleases/lr17572.htm for the release announcing the administrative action. Click http://www.sec.gov/litigation/litreleases/lr17593.htm for the release announcing a related action.
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ADVISER TO UNION PENSION FUND SANCTIONED FOR IMPROPER DIRECTED BROKERAGE ARRANGEMENT
6.17.2002 The SEC sanctioned Performance Analytics, Inc. (Performance), an investment adviser, and Leslie Golembo, one of its former officers, for engaging in an improper directed brokerage arrangement.
The SEC found in or about 1994, a registered
representative of East West Institutional Services, Inc., a broker-
dealer, entered into an illegal kickback agreement with two trustees of
a union pension fund. The two trustees caused the pension fund to hire
investment advisers who were willing to direct brokerage trades to East
West, and East West then paid kickbacks of commissions to the two
trustees. In 1995, the pension fund hired Performance as a consultant
to provide advice concerning the retention of new investment advisers.
In fact, Performance, through Golembo, obtained the consultant position
by agreeing to recommend to the pension fund only those investment
advisers that were willing to direct brokerage to East West. Also in
1995, Golembo, on behalf of Performance, recommended to the pension fund
at least one investment adviser, Duff & Phelps Investment Management
Co., Inc., that he knew or was reckless in not knowing was willing to
direct brokerage to East West. In 1996, Performance entered into a
separate soft-dollar arrangement with Duff, whereby it received $100,000
annually in brokerage commission business directed by Duff for the
benefit of Performance, in exchange for a continuing recommendation of
Duff to the pension fund.
The Commission's Order finds that Performance and Golembo violated the
federal securities laws when they failed to disclose to the pension fund
their arrangement to recommend only those advisers that agreed to direct
brokerage to East West. They further failed to disclose to the pension
fund their arrangement to continue to recommend Duff's advisory services
to the pension fund in exchange for Duff's direction of $100,000 per
year in brokerage commission business for the benefit of Performance.
Performance and Golembo were order to pay fines of $75,000 and $50,000, respectively, and barred Golembo from associating with any investment adviser and broker-dealer, with a right to reapply after a certain period of time.
Please click http://www.sec.gov/litigation/admin/34-46081.htm to access the release announcing the administrative action.
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ADVISER CHARGED WITH FAILING TO HAVE INSIDER TRADING PROCEDURES
6.12.2002 The SEC settled proceedings against DePrince, Race & Zollo, Inc. (DRZ) and John D. Race, one of DRZ's principals, for failing to have insider trading procedures, which advisers are required to have under the Investment Advisers Act of 1940. The SEC also charged Race with causing DRZ to violate certain book and records requirements under the Advisers Act.
The SEC order stated that Race had joined the board of directors of a company and had purchased that company's stock. Race also purchased that company's stock for several clients. The SEC did find that Race disclosed his board position to clients. However, Part II of DRZ's Form ADV failed to disclose the fact that DRZ recommends securities of companies to clients that Race has a financial interest in. This conflict of interest should have been disclosed.
The SEC ordered DRZ to retain an independent consultant to conduct a review of the firm's procedures related to insider trading. In deciding not to impose further sanctions, the SEC considered remedial acts promptly undertaken by DRZ and Race, and the cooperation they afforded to the SEC staff.
Please click http://www.sec.gov/litigation/admin/ia-2035.htm to access a copy of the release announcing the administrative action.
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NASD ISSUES REPORT ON HOW TO IMPOVE ITS EXAMINATIONS
6.11.2002 The National Association of Securities Dealers (NASD) posted a report entitled "Improving Examination Results" on its website. According to the report the NASD will focus on the following areas in upcoming examinations:
- Anti-money laundering programs;
- Internal controls;
- Analysts' conflicts of interest;
- Branch office supervision; and
- Sale of variable annuities.
The Report also set forth the violations most frequently found by NASD examiners.
Please click http://www.nasdr.com/5200_improving_results.asp to access a copy of the NASD report.
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ICAA ASKS SEC TO NARROW PROPOPSED INTERNET ADVISER RULE
6.6.2002 The Investment Counsel Association of America (ICAA) submitted a comment letter to the SEC regarding proposed Rule 203A-2(f), which would require certain companies that provide investment advice via the Internet to register with the SEC and not any states. Under the proposed rule, such an adviser would register with the SEC if at least 90% of its clients obtained advice exclusively through the adviser's web site. The ICAA recommended that the SEC should narrow the rule to require that the clients in the 90% basket obtain all of their advice from adviser exclusively through the web site. The ICAA also recommended that the SEC revise the rule proposal to include in the 90% basket only those clients who are clearly identifiable (as opposed to anonymous clients).
Please click http://www.icaa.org/html/comments___statements.html to access a copy of the ICAA letter.
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FINANCIAL PLANNING ASSOCIATION RELEASES "REGULATION OF FINANCIAL PLANNERS" WHITE PAPER
5.30.2002 The Financial Planning Association (FPA), a trade organization for financial planners, issued a white paper on the historical, existing and possible future regulation.
Please click http://www.fpanet.org/ to access a copy of study.
The FPA also issued a news release urging the SEC to drop a proposed rule that would broaden an exisiting exemption available to broker-dealers that desire to provide financial advice without registering under the Investment Advisers Act of 1940.
Broker-dealers currently are exempt from having to register with the SEC as investment advisers by Section 202(a)(c) , provided the investment advice they provide is solely incidental to their brokerage business and
Under the proposed SEC rule, a broker-dealer would be exempt if:
- it provides advice on a non-discretionary basis;
- the advice is solely incidental to its brokerage business; and
- the broker-dealer discloses in its ads and customer account statements that the customer accounts are brokerage accounts.
The SEC proposed the rule two years ago.
The FPA believes that broker-dealers would be able to avoid provisions under the Advisers Act that would otherwise require them to disclose certain conflicts of interests to their clients, including selling securities to customers from the broker-dealer's inventory.
Please click http://www.fpanet.org/press/releases/pr_detail.cfm?id=141 to access a copy of the press release.
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