SEC CHARGES NEW YORK INVESTMENT FIRMS WITH FRAUD

Fraud is a common crime in the world of finance. The excerpt from the SEC website below covers a case where a company allegedly had officers that misled investors, misused funds and obtained fraudulent loans to cover the misuse of funds:

“Washington, D.C., Jan. 20, 2011 — The Securities and Exchange Commission today charged three affiliated New York-based investment firms and four former senior officers with fraud, misuse of client assets, and other securities laws violations involving their $66 million advisory business.

The SEC alleges that the operation’s investment adviser William Landberg and president Kevin Kramer — through the firms West End Financial Advisors LLC (WEFA), West End Capital Management LLC (WECM), and Sentinel Investment Management Corporation — misled investors into believing that their money was in stable, safe investments designed to provide steady streams of income. However, in reality West End faced deepening financial problems stemming from Landberg’s failed investment strategies. When starved for cash to meet obligations of the West End funds or for his personal needs, Landberg misused investor assets, fraudulently obtained more than $8.5 million from a bank, and used millions of dollars from an interest reserve account for unauthorized purposes.
The SEC also charged West End’s chief financial officer Steven Gould and controller Janis Barsuk for their roles in the scheme.
“The investment advisers here grossly abused the trust of their clients,” said George S. Canellos, Director of the SEC’s New York Regional Office. “They misappropriated and commingled their clients’ assets and sustained the illusion of a viable and successful business through a range of false representations.”
David Rosenfeld, Associate Director of the SEC’s New York Regional Office, added, “West End raised millions from investors by touting false positive returns while concealing fraudulent bank loans, cash flow problems, and the misappropriation of investor assets.”
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, the misconduct occurred from at least January 2008 to May 2009. The SEC alleges that Landberg used substantial amounts of fraudulently-obtained bank loans to make distributions to certain West End fund investors, thereby sustaining the illusion that West End’s investments were performing well. During the same period, Landberg also misappropriated at least $1.5 million for himself and his family. Landberg’s wife Louise Crandall and their family partnership are named as relief defendants in the SEC’s complaint.
The SEC further alleges that Gould and Barsuk knew, or were reckless in not knowing, that Landberg was defrauding a bank that provided loans to a West End fund by misusing funds in a related interest reserve account. Both officers nevertheless participated in the fraud by facilitating Landberg’s misappropriations from that account. The SEC alleges that Gould conceived and used improper accounting methods to conceal aspects of the fraud, and he issued account statements to investors showing false investment returns. Barsuk facilitated Landberg’s uses of investor money to cover his personal obligations. Similarly, Kramer knew, or was reckless in not knowing, that West End faced severe financial problems and had difficulty obtaining sufficient financing to sustain its investment strategy. Nevertheless, Kramer failed to disclose those material facts to investors as he continued to market the funds to new and existing investors through April 2009.
The SEC charged Landberg, Kramer, Gould, WEFA, WECM, and Sentinel with violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. In addition, Landberg, WEFA, WECM, and Sentinel are charged with violating the antifraud provisions of the Investment Advisers Act of 1940. Kramer, Gould, and Barsuk are charged with aiding and abetting violations of the Advisers Act. Barsuk is also charged with aiding and abetting violations of the antifraud provisions of the Exchange Act. The SEC seeks to enjoin each defendant from future violations of the securities laws as well as monetary relief, the imposition of an independent monitor, and certain other sanctions.
The SEC acknowledges the assistance of the U.S. Attorney for the Southern District of New York, the Federal Bureau of Investigation, and the U.S. Commodity Futures Trading Commission.”

It should become clear that a lot of people who run financial organizations may not have their clients best interest at heart. It is not just corruption that makes organizations and individuals unfit in carrying out fiduciary obligations to their clients but, many times incompetence not fraud is the real problem.