SEC OBTAINS FREEZE AGAINST ASSETS OF INVESTMENT ADVISERS CHARGED WITH MISAPPROPRIATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23178 / January 22, 2015

Securities and Exchange Commission v. Daniel Thibeault, et al., Civil Action No. 1:15-cv-10050 (D. MA)

SEC Obtains Asset Freeze Against Massachusetts-Based Investment Advisers Charged with Misappropriation of Money from an Investment Fund'

The Securities and Exchange Commission yesterday announced that a federal court has imposed an asset freeze against a group of Massachusetts-based investment advisory companies and their President/CEO, based on the alleged misappropriation of at least $16 million from an investment fund.

Judge Nathaniel Gorton of the United States District Court for the District of Massachusetts granted the SEC's request for an emergency court order to freeze the assets of the following defendants, who are charged in a complaint filed by the SEC on January 9, 2015:

Daniel Thibeault of Framingham, Massachusetts;
Graduate Leverage, LLC, an asset management and financial advisory firm based in Waltham, Massachusetts, of which Thibeault is the principal owner, president and Chief Executive Officer;
GL Capital Partners, LLC, an investment adviser based in Waltham, Massachusetts that is controlled by Thibeault;
GL Investment Services, LLC, an investment adviser based in Waltham, Massachusetts that is indirectly owned by Thibeault;
Taft Financial Services, LLC, which is based in Texas and is believed to be controlled by Thibeault; and
two other parties as relief defendants based on their receipt of investor funds: GL Advisor Solutions, Inc., a corporation based in the Philippines that is controlled by Graduate Leverage, LLC and Thibeault; and Shawnet Thibeault, who is Daniel Thibeault's wife.
In addition to the asset freeze, the court also ordered certain preliminary relief against the defendants, including, variously, preliminary injunctions, an accounting of investor funds and all assets in their possession, a repatriation of all foreign assets that were obtained directly or indirectly from investors, and a prohibition from soliciting or accepting additional investments.

The SEC's complaint alleges that GL Capital Partners, LLC and its principal, Daniel Thibeault, were the investment advisers to a fund called the GL Beyond Income Fund, and that they misappropriated at least $16 million of the money that belonged to this fund. The GL Beyond Income Fund's assets consisted primarily of individual variable rate consumer loans. According to the complaint, Thibeault and other defendants solicited investments in the GL Beyond Income Fund by representing that investors' money would be pooled and used to make or purchase consumer loans. These consumer loans would then constitute assets of the GL Beyond Income Fund, and would provide a return to the investors when interest and principal payments were made on the loans. The SEC alleges that beginning in 2013 or earlier, Thibeault and the other defendants engaged in a scheme to create fictitious loans to divert investor money from the GL Beyond Income Fund, and to report these fake loans as assets of the GL Beyond Income Fund. This scheme was designed to conceal the fact that Thibeault and the other defendants had misappropriated millions of dollars from the GL Beyond Income Fund. According to the SEC's complaint, the scheme involved the fabrication of paperwork purporting to reflect numerous six-figure consumer loans using the names and personal information of individuals who were unaware that loans were being originated in their names. The complaint further alleges that money from the GL Beyond Income Fund was disbursed to fund these fictitious loans, but the borrowed money did not go to the purported borrowers whose names appeared on the documentation. Instead, it went to Thibeault and other defendants. The SEC alleges that Thibeault and other defendants misappropriated the money from the fake loans and used it for personal expenses and to run businesses other than the GL Beyond Income Fund, as well as to perpetuate the scheme by making "interest payments" on fake loans.

The SEC charges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933 and that Thibeault, GL Capital Partners, LLC, and GL Investment Services, LLC, also violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against each of these defendants. The SEC also seeks disgorgement plus prejudgment interest from relief defendants GL Advisor Solutions, Inc. and Shawnet Thibeault.

SEC ANNOUNCES CHARGES AGAINST TWO INVESTMENT ADVISERS FOR FAILURE TO DISCLOSE COMPENSATION

FROM;  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission announced charges against two Tampa-area investment advisers accused of committing fraud by failing to truthfully inform clients about compensation received from offshore funds they were recommending as safe investments despite substantial risks and red flags.

The advisers also are charged with contributing to violations of the “custody rule” that requires investment advisory firms to establish specific procedures to safeguard and account for client assets.

The SEC’s Enforcement Division alleges that Gregory J. Adams and Larry C. Grossman solicited and directed clients of their investment firm Sovereign International Asset Management to invest almost exclusively in funds controlled by an asset manager named Nikolai Battoo, who the SEC charged in a separate enforcement action last year.  Grossman and Adams failed to inform clients about the conflict of interest in recommending these investments as Battoo was paying them millions of dollars in compensation for steering investors to his funds.

“Investment advisers have a fiduciary duty to act in utmost good faith when recommending investments, and they must fully disclose all of the relevant facts to their clients,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Adams and Grossman breached this duty when they misstated their compensation and failed to disclose serious conflicts of interest.”

According to the SEC’s order instituting administrative proceedings, Grossman was paid approximately $3.3 million and Adams received $1 million in the undisclosed compensation arrangements.  Grossman and Adams promoted the investments as safe, diversified, independently administered and audited, and suitable for the investment objectives and risk profiles of their clients who were often retirees.  However, Battoo’s funds were in fact risky, lacked diversification, and lacked independent administrators and auditors.  Grossman and Adams also failed to investigate – and in some cases wholly disregarded – numerous red flags surrounding Battoo and his funds.

The SEC’s Enforcement Division alleges that Grossman and Adams aided and abetted Sovereign’s violations of the custody rule when they instructed clients to transfer their investment funds to a bank account controlled by a related entity.  Grossman and Adams pooled clients’ money in this bank account before investing it in Battoo’s offshore funds.  Sovereign failed to comply with the custody rule, which requires an investment adviser to comply with surprise examinations or certain other procedures to verify and safeguard client assets.

According to the SEC’s order, Grossman and Adams willfully violated Section 17(a)(2) of the Securities Act of 1933, Section 15(a) of the Securities Exchange Act of 1934, and Sections 206(1), 206(2), 206(3) and 207 of the Investment Advisers Act of 1940.  They willfully aided and abetted violations of Section 15(a) of the Exchange Act and Section 206(4) of the Advisers Act and Rules 204-3 and 206(4)-2.

The SEC’s investigation was conducted by Andre J. Zamorano, Sunny H. Kim, and Kathleen Strandell in the SEC’s Miami office.  The case was supervised by Thierry Olivier Desmet, and the litigation will be led by Patrick R. Costello.  The SEC examination of Sovereign that led to the investigation was conducted by Roda A. Johnson and Jean M. Cabot under the supervision of John C. Mattimore.