9.23.2002 The SEC has alleged Oxford Capital Management, Inc., an adviser located in Towson, Maryland, and John Danz, its President, from June 1998 through May 2001, submitted false and inflated performance results and the amount of assets in Oxford's Enhanced Equity composite to various third parties, including clients and prospective clients, and also failed to correct false and inflated figures submitted to Danz for review by various reporting services. In particular, the SEC alleges that during this time frame, Danz inflated the Equity composite's performance figures for the years 1991 through 1997, thereby fraudulently raising the Equity composite's long-term returns. As a consequence of these inflated figures, third party reporting services inaccurately portrayed Oxford as a highly ranked investment adviser that provided superior investment results for its advisory clients. Moreover, Oxford was unable to demonstrate how its advertised performance claims were calculated, and failed to maintain a variety of required books and records, including internal working papers or other records that would substantiate its advertised performance claims.
The SEC also alleged that Oxford and Danz failed to use previously audited performance figures and amount of assets managed when submitting long-term quarterly performance results of, and amount of assets managed in, Oxford's Equity composite to clients, prospective clients, reporting services, brokers, and consultants. Based on the false information provided by Oxford and Danz, the reporting service Nelson Investment Manager Database ranked Oxford's Equity composite among its Top 20 Money Managers for the periods ended December 31, 1998, December 31, 1999, June 30, 2000, and September 30, 2001.
In addition, the SEC alleged that Oxford, through Danz, provided various brokers and consultants with materially false and misleading performance figures.
As a result of these actions, Oxford is alleged to have willfully violated, and Danz caused and willfully aided and abetted Oxford's violations, of Sections 204, 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rules 204-2(a)(7), (11), (16), and 206(4)-1(a)(5) thereunder.
Please click http://www.sec.gov/litigation/admin/ia-2061.htm for the release announcing the administrative action.
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SEC PROPOSES PROXY VOTING DISCLOSURE RULES FOR MUTUAL FUNDS AND ADVISERS
9.20.2002 The SEC proposed a new rule under the Investment Advisers Act that would require an investment adviser that exercises voting authority over client proxies to adopt and implement policies and procedures that are reasonably designed to ensure that the adviser votes proxies in the best interest of clients, disclose to clients information about those procedures and policies and how clients may obtain information on how the adviser has voted their proxies, and retain certain records relating to proxy voting. Specifically, under proposed Rule 206(4)-6, it would be a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Act for an investment adviser to exercise voting authority with respect to client securities, unless:
- the adviser has adopted and implements written policies and procedures that are reasonably designed to ensure that the adviser votes proxies in the best interest of its clients,
- the adviser discloses to clients how they may obtain information on how the adviser voted their proxies, and
- the adviser has disclosed its proxy voting procedures to its clients.
In a separate release, the SEC proposes to require investment companies to provide disclosure about how they vote proxies relating to portfolio securities they hold. Under the proposed amendments, investment companies would be required to disclose the policies and procedures that they use to determine how to vote proxies relating to portfolio securities. The proposals also would require investment companies to file with the SEC and to make available to their shareholders the specific proxy votes that they cast in shareholder meetings of issuers of portfolio securities.
Please click http://www.sec.gov/rules/proposed/ia-2059.htm for the release announcing the proposed rule under the Advisers Act.
Please click http://www.sec.gov/rules/proposed/33-8131.htm for the release announcing the proposed rule under the Investment Company Act.
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HEDGE FUNDS ARE TO BE SUBJECT TO ANTI-MONEY LAUNDERING RULES
9.18.2002 The Financial Crimes Enforcement Network (FINCEN) of the Department of Treasury proposed a rule that will require hedge funds, commodity pools, REITs, and other unregistered investment companies to establish anti-money laundering program as specified under section 352 of the USA PATRIOT Act. Under the rule, these non-registered investment companies must establish an anti-money laundering program that includes, at a minimum, (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs.
Please click http://www.treas.gov/press/releases/docs/352investmentcompanies.pdf for the release announcing the administrative action.
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SEC INSTITUTES ADMINISTRATIVE ACTION AGAINST ADVISER FOR FRAUD
9.17.2002 The SEC issued an administrative order against John Clain who allegedly misappropriated approximately $965,400 from sixteen clients of Saint James Asset Management, Inc. ("Saint James"). The SEC alleged that Clain procured the funds by representing that he would use the funds to purchase securities for the clients. In reality, Clain used $110,000 to buy two cars and a diamond ring and the remaining funds to pay business and personal expenses, including monthly mortgage payments on his house. Clain concealed his conduct by giving his clients account statements, stock certificates and other documents that falsely indicated that Saint James had purchased securities on their behalf.
Please click http://www.sec.gov/litigation/admin/ia-2057.htm for the release adopting the new certification rules.
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SEC BRINGS FRAUD CHARGE AGAINST ADVISER
9.17.2002 The SEC issued an order against Louis Lazorwitz that directs him to pay disgorgement, prejudgment interest thereon, and a civil penalty. The SEC's complaint alleged that, during the period from at least March 1998 until at least September 1999, Lazorwitz, while acting as an investment adviser and broker-dealer, and others, used Tri-Star Investment Group, L.L.C. a/k/a Tri-Star Investment Group ("Tri-Star") to offer and sell securities to over 900 investors in at least 35 states and to raise over $15 million. It was alledged that Tri-Star initially stated that it would invest in bank debentures, and later that Tri-Star claimed it might invest in other international trade opportunities. Lazorwitz and others promoted Tri-Star directly and through approximately 35 agents around the United States known as "facilitators." Tri-Star promoters led investors to expect profits of 20% per month in so-called 13-month trading programs, after an initial 90-day waiting period. Lazorwitz and others made material misrepresentations and omissions of fact to investors concerning, among other things, the use of investor funds, the expected returns and investment risks, and caused false account statements to be issued to the investors.
Please click http://www.sec.gov/litigation/admin/34-46504.htm for a copy of the administrative order.
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OCIE DIRECTOR OUTLINES KEY ISSUES IN BROKER-DEALER EXAMINATIONS
9.17.2002 Lori A. Richards, Director of the SEC's Office of Compliance Inspections and Examinations, gave a speech before the Legal and Compliance Division, Securities Industry Association in New York, New York, where she provided an overview of the areas the SEC is focusing on in its examinations of broker-dealers.
Director Richards stated that SEC examiners continue to focus on retail sales practices - unauthorized trading, suitability, disclosure of risks, costs and fees, churning and switching. The SEC has placed particular emphasis on reviewing sales practices for particular products that are new or are popular with retail investors -- mutual funds, variable annuities and limited partnerships, and in the coming months, securities futures products.
Another focus is compliance procedures. The SEC has recently initiated a series of special examinations to review the overall compliance systems of a number of large broker-dealer complexes. The SEC is looking at all compliance procedures and their implementation at all broker-dealers in a complex.
The SEC is conducting specialized reviews of firms' risk management and internal controls -- evaluating the processes and procedures that firms use to measure and manage risks relating to trading, credit, liquidity, and new products. Director Richards stated that the SEC is looking for a system of controls -- written guidelines, a clear delineation of responsibility, and independent and periodic oversight that the guidelines are being followed.
Other areas that the SEC is focusing on:
- Anti-Money Laundering
- Best Execution
- Net Capital and Customer Reserve
- Analysts' Conflicts of Interest
- Information Barriers
- Hedge Funds
- Regulation S-P and Identity Theft
Please click http://www.sec.gov/news/speech/spch581.htm for the speech.
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SECURITY FUTURES CONFIRMATION RULE ADOPTED
9.6.2002 The SEC adopted a new rule and an amendment to certain other rules clarifying the disclosures that must be made in confirmations sent by broker-dealers that effect transactions in securities futures. The amendments provide that broker-dealers effecting transactions in security futures products do not have to disclose all of the information required by the SEC's confirmation disclosure rule, but rather require that the transaction confirmations for these accounts disclose specific information and notify customers that certain additional information will be available upon written request. The new rule also exempts broker-dealers effecting transactions for customers in security futures products in a futures account from the disclosure requirements of Exchange Act Section 11(d)(2). The new rule and amendments are effective October 15, 2002.
Please click http://www.sec.gov/rules/final/34-46471.htm for the adopting release of the rule and rule amendments.
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MUTUAL FUND ADVISER SETTLES CASE INVOLVING DISCLOSURE VIOLATIONS
9.4.2002 Davis Selected Advisers-NY, Inc. ("DSA-NY") settled administrative charges brought by the SEC, which alleged that DSA-NY failed to disclose specifically in the prospectuses of a fund it advised (GO Fund) and the GO Fund's 1999 and 2000 annual reports a factor that materially affected the GO Fund's performance during its previous fiscal year. In particular, DSA-NY did not disclose the nature or extent of the GO Fund's short-term IPO trading. In addition, DSA-NY never disclosed the material impact that the short-term IPO trading had on the Fund's performance despite the fact that the IPO flipping was not only a new technique that the GO Fund was experimenting with, but also was easily isolated and separately identifiable from other performance factors.
As a result of the conduct described above, DSA-NY willfully violated Section 34(b) of the Investment Company Act which makes it "unlawful for any person to make any untrue statement of a material fact in any registration statement, application, report, account, record, or other document filed or transmitted pursuant to this title...or to omit to state therein any fact necessary in order to prevent the statements made therein, in light of the circumstances under which they were made, from being materially misleading." The adviser was fined $10,000.
Please click http://www.sec.gov/litigation/admin/ia-2055.htm to access a copy of the administrative order.
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ADVISER ACCUSED OF MISAPPROPRIATING $5,000,000
9.4.2002 In an administrative action, the SEC alleged that Fred Schluep, an investment adviser formerly doing business as CRA Financial Partners, misappropriated more than $5 million from 26 of his clients. Schluep carried out his fraud by forging clients' signatures on checks and fund transfer authorizations. Schluep also lied to induce his clients to loan money or allow Schluep access to their investment funds. Schluep used the money he improperly obtained to invest primarily in local real estate and business ventures. He also used about $100,000 of improperly obtained funds to pay for his personal living expenses.
Schluep concealed his fraud from his clients by repaying some of them with funds that he stole from other clients, and by giving other clients bank checks drawn on accounts with insufficient funds. As a consequence of Schluep's fraudulent conduct, his clients lost more than $3 million, including funds they now need to pay for housing, retirement, and medical expenses.
The SEC filed a complaint in the U.S. District Court for the Northern District of California seeking disgorgement of the illegal profits and the imposition of a civil fine.
Please click http://www.sec.gov/litigation/complaints/comp17711.htm to access a copy of the administrative order.
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SEC BRINGS FAILURE TO SUPERVISE CHARGE AGAINST ADVISER
9.3.2002 The SEC brought an administrative action against Vanderbilt Capital Advisors LLC, a registered adviser, finding that the firm failed to reasonably supervise its senior portfolio manager. The SEC imposed a fine of $125,000. The SEC also ordered the firm to maintain supervisory procedures, retain an independent review person to conduct a comprehensive review of its supervisory and trade review procedures, and adopt and implement procedures recommended by the independent review person.
The SEC order found that Vanderbilt (formerly called ARM Capital Advisors) failed to supervise its senior portfolio manager who made a series of "adjusted trades." "Adjusted trading" is a fraudulent trading practice where a person sells a security at a price above the prevailing market price and purchase another security at a corresponding price above the prevailing market price to offset the overpayment in the first transaction.
On March 30 and 31, 1998, the senior portfolio manager caused certain accounts managed by ARM Capital Advisors to sell $100 million of investment-grade corporate bonds to the registered representative's broker-dealer at prices negotiated by the senior portfolio manager and the registered representative. These prices were above prevailing market prices for the bonds. Accordingly, these accounts benefited. The senior portfolio manager and the registered representative knew that these prices were above prevailing market prices.
On April 2 and 3, 1998, the senior portfolio manager caused different accounts managed by ARM Capital Advisors to repurchase the same bonds from the broker-dealer at prices negotiated by the senior portfolio manager and the registered representative. These prices were lower than the prices at which ARM Capital Advisors had sold the bonds to the broker-dealer.
As a result, the broker-dealer suffered losses to the extent that it purchased the bonds from certain accounts managed by Vanderbilit at prices above the prevailing market prices and sold the same bonds back to different accounts managed by Vanderbilt at lower prices.
Thus, the senior portfolio manager caused certain accounts managed by Vanderbilit to suffer unrealized losses to pay for the gains he procured for different accounts managed by Vanderbilit by trading bonds above the prevailing market prices.
Vanderbilit had procedures that required compliance personnel to review trades to ensure that its senior portfolio manager purchased securities that were consistent with its clients' investment objectives and account characteristics. Here, the compliance personnel complied with those procedures. ARM Capital Advisors, however, did not have procedures that required compliance personnel to review before settlement the prices at which the senior portfolio manager transacted trades. As a result, the senior portfolio manager was able to transact the trades described above at prices above the prevailing market prices.
Please click http://www.sec.gov/litigation/admin/ia-2053.htm to access a copy of the administrative order.
The SEC brought actions against the senior portfolio managers in separate actions.
Please click http://www.sec.gov/litigation/admin/33-8125.htm to access a copy of the administrative order.
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