SEC Busts 3 Advisors for Falsifying State Registrations.
The Securities and Exchange Commission recently issued cease-and-desist orders against three advisors for misrepresenting their principal place of business in order to maintain their SEC registration.
Firms based in Wyoming must register with the SEC because the state does not regulate investment advisors. According to the orders issued on Wednesday, the firms willfully misrepresented their places of business on their Forms ADV. The three firms are New Line Capital, Wyoming Investment Management Services and Arete Ltd.
New Line Capital is based in Santa Fe, New Mexico, but the firm's owner and chief compliance officer, David Nagler, reorganized his company as a Wyoming limited liability company and filed an amended Form ADV in March 2012. Despite continuing to live and work in New Mexico, Nagler continued to claim Wyoming as his main place of business on Forms ADV from April 2013, February 2014 and March 2014.
The SEC's order claims Nagler went so far as to rent a small office space in Wyoming, but "rarely" used it and "never met clients in Wyoming."
Nagler also misrepresented New Line's assets under management by including assets that were not securities portfolios, like real estate and operating enterprises, and portfolios that he didn't provide regular and continuous supervision for, according to the order. "Although New Line did not charge advisory fees on these assets, by including these assets, New Line materially misrepresented its AUM," the SEC wrote.
The SEC further claims that New Line's financial and trading records were inadequate.
The SEC claims Nagler was solely responsible for preparing and filing the firm's Forms ADV, calculating assets under management and maintaining books and records. As a result of his actions, "New Line willfully violated, and Nagler willfully aided and abetted and caused New Line's violations of" Sections 203A, which outlines which authority an advisor must register with; 207, which make it illegal to make material misstatements on any application or report filed with the SEC; and 204(a), which requires advisors to "make and keep" certain records.
In addition to the cease and desist, Nagel must pay $25,000 within 10 days of the order.
In the case of Wyoming Investment Management Services and its president and sole employee, Craig Scariot, the SEC claims that in December 2012, Scariot formed WIMS as a Wyoming limited liability company, and rented an office and opened a bank account for the firm in Cheyenne. He filed an initial Form ADV the following February, naming Cheyenne as the firm's principal place of business.
However, Scariot lived and worked in Fort Collins, Colorado, while he was "completing graduate school and undergoing intensive physical therapy," according to the SEC. He did not meet with clients in Cheyenne and conducted business in the Wyoming office on an "infrequent basis."
Furthermore, books and records were maintained in Santa Fe, New Mexico, according to the SEC's cease and desist order.
The SEC is charging WIMS and Scariot with violating Sections 203A and 207 of the Advisers Act.
As part of an offer submitted by Scariot and accepted by the SEC, Scariot has pledged to move his business to Wyoming and to provide in writing a narrative of his steps toward compliance. He is also being fined $10,000.
Brenda Ridley is the sole employee and chief compliance officer of Arete Ltd., a Wyoming limited liability company doing business as Sky Peak Capital Management. However, the SEC claimed in separate orders for Ridley and Arete that Ridley is a resident of Bakersfield, California, and that Arete's principal place of business is nearby Irvine.
As such, and because Arete had "no other basis" to register with the SEC, "it was prohibited from registering with the Commission as an investment advisor," according to the cease-and-desist order.
After Arete's initial Form ADV in November 2012, Ridley filed three more that maintained Cheyenne as the principal place of business. The order states that Arete stopped conducting business in late 2013.
In February 2013, though, the securities commissioner for Colorado filed a complaint against Ridley and other advisors claiming they were "carrying out a scheme to defraud investors through the use of investments in a so-called Cyprivate equity fund,'" and that they were violating Section 11-51-301, C.R.S, for offering or selling unregistered securities; Section 11-51-401, C.R.S., for acting as an unlicensed sales representative; and Section 11-51-501(1), C.R.S., for securities fraud.
Arete did not file a new Form ADV disclosing the complaint, or a Dec. 30, 2013 order granting permanent injunction against Ridley.
Consequently, Ridley is being charged with violating Sections 203A, 207 and 204(a).
The cease-and-desist order against Ridley shows that the SEC accepted an offer wherein Ridley agreed to abide by the cease-and-desist, and to refrain from associating with any "broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization."
Furthermore, the order notes, should Ridley ever reapply for association, she may be subject to paying any disgorgement, even if partially or fully waived by the SEC; arbitration awards, including those to a customer imposed by a self-regulatory organization, even if that award is not related to the current order; and any restitution order imposed by an SRO, even if not related to the current order.
Despite that offer being accepted by the SEC, the cease-and-desist order against Ridley's firm, Arete, states a public hearing will be held next month to determine whether all the claims against the firm are true, what action may be appropriate, including the possibility of a civil penalty, and whether a further cease-and-desist should be issued against the firm.
"These investment advisors made false filings to become SEC-registered and risked giving investors the misleading appearance that they were larger firms with more assets than those required to register at the state level," Julie Lutz, director of the SEC's Denver Regional Office, said in a statement. "Investment advisors must base their business where they say it is or face the consequences."
--- Check out BD Audits Failing to Meet New Standards on ThinkAdvisor.
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|Date:||Feb 4, 2015|
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