FROM: U.S. DEPARTMENT OF JUSTICE
Friday, November 30, 2012
Former Director of Accounting and Outside Auditor of American Mortgage Specialists Inc. Plead Guilty to Roles in Fraud Against BNC National Bank
The former director of accounting and the former outside auditor of Arizona-based residential mortgage loan originator American Mortgage Specialists Inc. (AMS) pleaded guilty in Arizona to conspiracy to defraud BNC National Bank and obstruction of justice, respectively, Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; U.S. Attorney Timothy Q. Purdon of the District of North Dakota; Christy Romero, Special Inspector General for the Troubled Asset Relief Program (SIGTARP); and Steve A. Linick, Inspector General of the Federal Housing Finance Agency Office of Inspector General (FHFA-OIG) announced today.
Lauretta Horton, 45, and David Kaufman, 69, both residents of Arizona, pleaded guilty yesterday before U.S. District Judge Daniel L. Hovland of the District of North Dakota, who took the pleas in Arizona federal court. Horton and Kaufman were charged in separate criminal informations unsealed on Oct. 2, 2012, for their roles in the fraud scheme against BNC.
"While the nation was reeling from a financial downturn, Lauetta Horton conspired with AMS executives to deceive BNC Bank about AMS’s true financial stability, and AMS auditor David Kaufman lied to federal investigators to impede their investigation," said Assistant Attorney General Breuer. "Horton and Kaufman’s guilty pleas reflect our continued vigilance in investigating and punishing criminal conduct relating to the financial crisis."
"Banks in North Dakota were not immune from illegal conduct related to the mortgage crisis that impacted banks all across the country," said U.S. Attorney Purdon. "These guilty pleas are the result of close collaboration with our federal investigative partners and the Justice Department’s Criminal Division and should send the message that the Department of Justice is committed to prosecuting cases such as these wherever they might arise."
"As the controller and director of accounting of mortgage originator AMS, Horton sent to TARP-recipient BNC National Bank false financial statements she had prepared so that BNC would continue to fund AMS," said Special Inspector General Romero. "In a cover-up and an attempt to impede the federal grand jury investigation, AMS’s external auditor Kaufman lied to SIGTARP agents about his telling an AMS executive that he had changed the financial statements so that BNC would not discover the truth. Kaufman is the third person convicted of lying to SIGTARP agents, which shows that SIGTARP will aggressively pursue those who fail to tell the truth and impede our investigations."
"This is a significant case because it holds accountable an individual who participated in a scheme to defraud a member bank of the Federal Home Loan Bank System, and another individual who lied to federal investigators," said Inspector General Linick. "This case is a reminder that there are consequences for giving investigators false information and manipulating numbers."
AMS was in the business of originating residential real estate mortgage loans to borrowers and then selling the loans to institutional investors. In 2006, AMS entered into a loan participation agreement with BNC whereby BNC provided funding for the loans issued by AMS. According to court documents, Horton, the director of accounting at AMS, conspired from February 2009 to April 2010 to defraud BNC by making false representations regarding the financial well-being of AMS in order for AMS to continue to obtain funding from BNC. Specifically, Horton admitted to inflating asset items and altering financial information in the AMS balance sheet provided to BNC to falsely reflect that AMS had substantial liquid assets when, in fact, it did not.
According to court documents, Kaufman, a certified public accountant and the outside auditor of AMS’ annual financial statements, lied to federal agents during the criminal investigation and obstructed the grand jury investigation. Specifically, Kaufman admitted denying to agents that he had a conversation with an AMS executive in which Kaufman explained to the AMS executive that Kaufman had combined two expenses on AMS’s financial statements in order to conceal the true nature and extent of AMS’s financial condition from BNC.
Although BNC’s holding company had received approximately $20 million under the TARP and had injected approximately $17 million of the TARP funds into BNC, BNC incurred losses exceeding the millions received from TARP. BNC then did not make its required TARP dividends to the Department of Treasury for nearly two years.
At sentencing, scheduled for May 6, 2013, Kaufman and Horton face a maximum penalty of 10 years and five years in prison, respectively.
The investigation was conducted by agents assigned to the Offices of the Inspector General of SIGTARP and of FHFA. The case is being prosecuted by Trial Attorney Robert A. Zink and Senior Litigation Counsel Jack B. Patrick of the Criminal Division’s Fraud Section and by Assistant U.S. Attorney Clare Hochhalter of the District of North Dakota, with the assistance of Trial Attorney Jeannette Gunderson of the Criminal Division’s Asset Forfeiture and Money Laundering Section.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Nov. 29, 2012 — The Securities and Exchange Commission today charged two retail brokers who formerly worked at a Connecticut-based broker-dealer with insider trading on nonpublic information ahead of IBM Corporation’s acquisition of SPSS Inc.
The SEC alleges that Thomas C. Conradt learned confidential details about the merger from his roommate, a research analyst who got the information from an attorney working on the transaction who discussed it in confidence. Conradt purchased SPSS securities and subsequently tipped his friend and fellow broker David J. Weishaus, who also traded. The insider trading yielded more than $1 million in illicit profits. The SEC’s investigation uncovered instant messages between Conradt and Weishaus where they openly discussed their illegal activity. The SEC’s investigation is continuing.
"When licensed professionals who are privileged to work in the securities industry violate legal duties and enrich themselves at investors’ expense, it undermines public confidence in the integrity of the markets," said Daniel M. Hawke, Director of the SEC’s Philadelphia Regional Office. "As industry professionals, Conradt and Weishaus clearly understood that what they were doing was wrong, but did so anyway while knowing the consequences they would face if caught."
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Conradt and Weishaus, who live in Denver and Baltimore respectively.
According to the SEC’s complaint filed in federal court in Manhattan, the scheme occurred in 2009. Conradt revealed in instant messages that he received the information from the research analyst and warned Weishaus that they needed to "keep this in the family." Weishaus agreed, typing "i don't want to go to jail." They went on to discuss other people who have been prosecuted for insider trading. In another series of instant messages, Conradt bragged that he was "makin everyone rich" by sharing the nonpublic information. Weishaus later noted, "this is gonna be sweet."
The SEC alleges that the research analyst’s attorney friend sought moral support, reassurance, and advice when he privately told the research analyst about his new assignment at work on the SPSS acquisition by IBM. In describing the magnitude of the assignment, the lawyer disclosed material, nonpublic information about the proposed transaction, including the anticipated transaction price and the identities of the acquiring and target companies. The associate expected the research analyst to maintain this information in confidence and refrain from trading on this information or disclosing it to others.
The SEC alleges that Conradt, Weishaus, and other downstream tippees purchased common stock and call options in SPSS. A call option is a security that derives its value from the underlying common stock of the issuer and gives the purchaser the right to buy the underlying stock at a specific price within a specified period of time. Typically, investors will purchase call options when they believe the stock of the underlying securities is going up. Conradt, Weishaus, and other downstream tippees invested so heavily in SPSS securities that the investments accounted for 76 percent to 100 percent of their various brokerage accounts. Conradt and Weishaus both hold law degrees. Conradt is admitted to practice law in Maryland, and he passed the Colorado bar examination administered in February 2012.
The SEC alleges that Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.
The SEC’s investigation is being conducted by Mary P. Hansen, A. Kristina Littman and John S. Rymas, in the SEC’s Philadelphia Regional Office. G. Jeffrey Boujoukos and Catherine E. Pappas in the Philadelphia office are handling the litigation. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Nov. 28, 2012 — The Securities and Exchange Commission today charged three top executives at a New York-based publicly-traded fund being regulated as a business development company (BDC) with overstating the fund’s assets during the financial crisis. The fund’s asset portfolio consisted primarily of corporate debt securities and investments in collateralized loan obligations (CLOs).
An SEC investigation found that KCAP Financial Inc. did not account for certain market-based activity in determining the fair value of its debt securities and certain CLOs. KCAP also failed to disclose that the fund had valued its two largest CLO investments at cost. KCAP’s chief executive officer Dayl W. Pearson and chief investment officer R. Jonathan Corless had primary responsibility for calculating the fair value of KCAP’s debt securities, while KCAP’s former chief financial officer Michael I. Wirth had primary responsibility for calculating the fair value of KCAP’s CLOs. Wirth, a certified public accountant, prepared the disclosures about KCAP’s methodologies to fair value its CLOs, and Pearson reviewed those disclosures.
The three executives agreed to pay financial penalties to settle the SEC’s charges.
"When market conditions change, funds and other entities must properly take into account those changed conditions in fair valuing their assets, said Antonia Chion, Associate Director in the SEC’s Division of Enforcement. "This is particularly important for BDCs like KCAP, whose entire business consists of the assets that it holds for investment."
This is the SEC’s first enforcement action against a public company that failed to properly fair value its assets according to the applicable financial accounting standard — FAS 157 — which became effective for KCAP in the first quarter of 2008.
According to the SEC’s order instituting administrative proceedings against the fund and the three executives, KCAP did not record and report the fair value of its assets in accordance with Generally Accepted Accounting Principles (GAAP) and in particular FAS 157, which requires assets to be fair valued based on an "exit price" that reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
The SEC’s order found that Pearson and Corless concluded that any trades of debt securities held by KCAP in the fourth quarter of 2008 reflected distressed transactions, and therefore KCAP determined the fair value of its debt securities based solely on an enterprise value methodology. However, this methodology did not calculate or inform KCAP investors of the FAS 157 "exit price" for that security. Wirth calculated the fair value of KCAP’s two largest CLO investments to be their cost, and did not take into account the market conditions during that period.
According to the SEC’s order, in May 2010, KCAP restated the fair values for certain debt securities and CLOs whose net asset values had been overstated by approximately 27 percent as of Dec. 31, 2008. Moreover, KCAP’s internal controls over financial reporting did not adequately take into account certain market inputs and other data.
"KCAP should have accounted for market conditions in the fourth quarter of 2008 in determining the fair values of its assets," said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. "FAS 157 is critically important in fair valuing illiquid securities, and funds must consider market information in making FAS 157 fair value determinations and comply with their disclosed valuation methodologies."
KCAP’s overvaluation and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Pearson, Corless, and Wirth caused KCAP’s violations and directly violated Exchange Act Rule 13b2-1 by causing KCAP’s books and records to be falsified. Pearson and Wirth also directly violated Exchange Act Rule 13a-14 by falsely certifying the adequacy of KCAP’s internal controls.
Pearson and Wirth each agreed to pay $50,000 penalties and Corless agreed to pay a $25,000 penalty to settle the SEC’s charges. KCAP and the three executives, without admitting or denying the findings, consented to the SEC’s order requiring them to cease and desist from committing or causing any violations or any future violations of these federal securities laws.
The SEC’s investigation was conducted by Adam Aderton of the Asset Management Unit, Noel Gittens, and Richard Haynes, and was supervised by Assistant Director Ricky Sachar
FROM: FEDERAL DEPOSIT INSURANCE CORPORATION
Remarks by Thomas M. Hoenig, Director, Federal Deposit Insurance Corporation - Financial Oversight: It’s Time to Improve Outcomes to the AICPA/SIFMA FSA National Conference; New York, NY
November 30, 2012
Introduction
Many remain skeptical of claims that the financial system has been reformed and that taxpayer bailouts are relics of the past. Such skepticism is understandable. For nearly a century, the public has been told repeatedly that stronger regulations and supervision, greater market discipline, and enforced resolution will ensure that financial crises will be less likely, and, should they occur, will be handled effectively.
Despite these assurances, the public remains at risk of having to pick up the pieces when the next financial setback occurs. The safety net continues to expand to cover activities and enterprises it was not intended to protect, resulting in subsidized risk taking by the largest financial firms and fueling their leverage. At the same time, the tolerance for leverage remains essentially unchanged, leaving us in a situation that is little different than before the recent crisis. We can be confident that as time passes, this leverage again will be a problem and the public again will be left holding the bag.
To change this outcome, we must change the framework and related incentives.
Defining the Problem
The structure of the system, the rules of the game, and the methods of accountability are all keys to the success or failure of any market system. They determine incentives and, of course, performance outcomes. As you would expect following this most recent crisis, various commissions attempted to sort out what went wrong and offered remedies to prevent such a crisis from recurring.
But for all this effort, incentives around risk remain mostly unchanged and leave the industry vulnerable to excesses. While there are no perfect solutions, there are actions that, taken together, can more effectively improve outcomes.
First, we must change the structure of the industry to ensure that the coverage of the safety net is narrowed to where it is needed, and stop the extension of its subsidy to an ever-greater number of firms and activities.
Second, we must simplify and strengthen capital standards to contain the impulse for excessive leverage and to provide a more useful backstop to absorb unexpected losses.
Third, we must reestablish a more rigorous examination program for the largest banks and bank holding companies to best understand the risk profile of both individual firms and financial markets.
Narrowing the Safety Net
Commercial banking in the United States has been protected for decades by a public safety net of central bank lending, deposit insurance and, more recently, direct government support. This has been done because commercial banks are thought essential to a well-functioning economy. Their operations involve providing payment services, taking short-term deposits, and making loans. In other words, conducting activities that intermediate the flow of credit from savers to borrowers, transforming short-term deposits into longer-term loans. This funding arrangement requires that the public and business have confidence that they can access their money on demand. The safety net helps provide that assurance.
The intended purpose of this government support is well understood. However, less understood is its unintended consequence: providing banks a subsidy in raising funds. As a result, they are less subject to economic or market forces, and their funding costs are less than that of firms outside the safety net. This subsidy, in turn, creates incentives to leverage their balance sheets and take on greater asset risk.
In the United States, this financial subsidy was greatly expanded in 1999 with the enactment of the Gramm-Leach-Bliley Act (GLB), which eliminated prohibitions that kept banks from affiliating with broker-dealer and securities firms. By allowing such cross ownership, the safety net and, therefore, its subsidy was expanded to more and ever-larger financial firms, conducting ever more complex and risk-oriented activities. Subsidies are valuable, and once given are hard to take away and once expanded are hard to restrict.
Despite repeated assurances following GLB that no firm would be too big to fail, the actions of governments have only confirmed that some firms -- the largest or most complex -- are simply too systemically important to be allowed to fail. Under such circumstances, market discipline breaks down since creditors are confident that they will be bailed out regardless of what the bank does. The deposit subsidy and the lack of market discipline from the consequences of failure create an incentive to take on excessive risk.
Narrowing the safety net, limiting its coverage, and realigning incentives, therefore, must be among the highest priorities following this recent crisis. Governments would be wise to limit commercial banking activities to primarily those for which the safety net’s protection was intended: stabilizing the payments system and the intermediation process between short-term lenders and long-term borrowers. That is, it should be confined to protecting our economic infrastructure.1
Trading activities do not intermediate credit. They reallocate assets and existing securities and derivatives among market participants. When they are placed within the safety net, they create incentives toward greater risk-taking and cause enormous financial distortions. Protected and subsidized by the safety net, complex firms can cover their trading positions by using insured deposits or central bank credit that comes with the commercial bank charter. Non-commercial bank trading firms have no such access and no such staying power. The safety net provides the complex organizations an enormously unfair competitive advantage. Thus, while such activities are important to the success of an economy, there is no legitimate reason to subsidize them with access to the safety net.
The mixing of commercial banking and trading activities also changes incentives and behavior within the firm. Commercial banking works within a culture of win-win, where the interests and incentives of banks and their customers are aligned. If a customer is successful, the payoff to the bank means success as well. In contrast, trading is an adversarial win-lose proposition because the trader’s gains are the counterparty’s losses -- and oftentimes the counterparty is the customer. Trading focuses on the short-term, not on longer-term relationship banking. Culture matters, and as we have seen in recent years, the mixing of banking and trading tends to drive organizations to make short-term return choices.
It is sometimes suggested that had broker-dealer and trading activity been separated from commercial banking, the recent financial crisis would have been just as severe. Lehman Brothers was not a commercial bank, and yet it brought the world to its knees. However, following GLB, just as commercial banks enjoyed the special benefit of the safety-net subsidy, firms like Lehman enjoyed the benefits from the special treatment given to money market funds and overnight repos to fund their activities. They were essentially operating as commercial banks and enjoying an implied subsidy very similar to that of commercial banks. Thus, a fundamental change needed to encourage greater accountability and stability is to correct the rules giving special treatment to money market funds and repos, thereby ending their treatment as deposits.
Market discipline works best when stockholders and creditors understand they are at risk and when the safety net is narrowly applied to the infrastructure for which it was intended.
Capital and Bank Safety
Capital is fundamental to any industry’s success, both as a source of funding and as a cushion against unforeseen events. This is especially the case for financial firms, as they are, by design, highly leveraged. But what is the right amount of capital, and how should it be measured and enforced to assure a more stable financial environment?
Basel standards have for more than two decades been the focal point of discussion in defining adequate capital for the financial industry. A new version of Basel standards is out for comment as supervisors struggle to find a system that properly defines capital, appropriately allocates it against risk, and results in a more stable financial system. However, the Basel proposal remains extremely complex and opaque as it attempts to anticipate every contingency and to assign risk weights to every conceivable asset that an institution might place on or off its balance sheet. The unfortunate consequence is ineffective capital regulation due to confusion, uncertainty about the quality of the balance sheet, and added costs imposed on a firm’s capital program.
Past attempts at defining the correct amount and distribution of capital have uniformly failed. For example, in 2007 as the financial crisis was just emerging, Basel’s measure of total capital to risk-weighted assets for the10 largest U.S. financial firms was approximately 11 percent -- a very impressive level of capital. But the ratio, using the more conservative tangible-equity-to-tangible-assets measure, was a mere 2.8 percent2. Had this been the primary capital measure in 2007, it is likely that far more questions would have been asked about the soundness of the industry, resulting in a less severe banking crisis and recession.
Today, this same tangible-equity measure for the largest U.S. banks, while double the 2.8 percent number, remains far below what history tells us is an acceptable market-determined capital level. We should learn from past experience and turn our attention from using a capital rule that gives what in the end is a false sense of security to one that is effective because of its simplicity, clarity, and enforceability. Before the safety net was in place in the United States, the market demanded that banks on average hold between 13 and 16 percent tangible equity to tangible assets -- a far cry from the 2.8 percent held by these largest firms in 2007 or the 6 percent they hold today.
Therefore, as an alternative to the unmanageably complex Basel risk-weighted standards, the emphasis should be shifted to a tangible-equity-to-tangible-asset ratio, of say 10 percent. With this simple but stronger capital base, bank management could then allocate resources in a manner that balances the drive for return on equity with the discipline of greater amounts of tangible equity. Moreover, global supervisors would have a clear benchmark to test against and enforce a minimum level. Behind this tangible measure we could use a simplified risk-weighted measure as a check against excessive off-balance sheet assets or other factors that might influence firms’ safety.
Some argue that a high minimum would be too much capital, and would impede credit growth and eventually economic growth. However, this level of capital remains well below what the market would most likely require without the safety net and its subsidy. Recall that because so little tangible capital was available to absorb loss when the last crisis emerged, the industry had to resort to a violent shedding of assets and downsizing of balance sheets as it grasped to maintain even modest capital ratios. The effect of too little capital was far more harmful in the end than the effect of a strong capital framework.
Finally, it should be noted that except for the very largest U.S. commercial banks, most banks are currently near this minimum level for tangible equity. For example, while the tangible equity capital to tangible assets for the 10 largest bank holding companies in the U.S. is 6.1 percent, for the top 10 regional banks with less than $100 billion in assets, it is 9 percent. This ratio for the 10 largest banks with less than $50 billion in assets is 9.4 percent, and for the top 10 community banks with less than $1 billion in assets it is 8.3 percent.
Only the largest, most complex banks are too big to fail as evidenced by the capital numbers presented here. When the public and the market are at risk, they demand more -- not less -- capital.
Bank Examinations and Financial Stability
Relying on a single tangible measure as a minimum capital standard begs the question of whether it will assure an adequate capital level for the industry. In other words, under a straight leverage ratio, would banks load their balance sheet with the most risky assets because all assets are weighted equally?
First, such a question fails to recognize that a system that underweights high-risk assets and overweights low-risk assets is even more dangerous. This has been the experience with the Basel system going back almost to its start. Also, a minimum tangible-equity-to-tangible-asset ratio, of 10 percent for example, would bring more tangible capital to the balance sheet than current Basel III calculations.
Second, we need to remember that Basel has three pillars: capital, market discipline, and an effective bank supervision program. Effective bank supervision requires that authorities systematically examine a bank and assess its asset quality, liquidity, operations, and risk controls, judging its risk profile and whether it is well managed. Done properly, therefore, the best way to judge a firm’s risk profile is through the audit and examination process.
If, following an exam, a bank is judged to carry a higher risk profile, then the minimum capital, it should be judged inadequate for the risk and capital required. Moreover, in this instance the bank’s dividend and capital redemption programs would be curtailed until the adjusted minimum is achieved. For example, a 10 percent minimum tangible capital ratio would be adequate for a 1-rated bank, while a bank whose risk profile is 2 rated might require a higher ratio, say 11 percent, and similarly a 3 rating might require say 13 percent. A bank rated more poorly would be under a specific supervisory action.
Such an approach would most affect the largest banks where full-scope examinations have been de-emphasized in favor of targeted reviews, financial statement monitoring, model validations, and, more recently, the use of stress tests. These activities can be useful, but they are limited in scope and have been adopted because the largest firms are judged simply too large and complex for full scope examinations. However, full exams are doable. Statisticians, for example, have long been designing sampling methodologies for auditing and examining large bank asset portfolios and other operations, providing reliable estimates of their condition, and at an affordable cost.
And finally, commissioned examiners as a rule are highly skilled professionals, able to effectively assess bank risk and to do so in a more thorough manner than a static risk-weighted program. Their success, however, is tied not only to their skills but, as always, to the leadership of the supervisory agency. The examination process, effectively conducted and effectively led, holds the best potential to identify firm-specific risks and adjust capital levels as needed. In the end, an industry with strong individual firms is a strong industry.
Conclusion
The remarks and suggestions outlined here are not new. We have long been aware of the destabilizing effects of broadening the coverage of the financial safety net to an ever-expanding list of activities. There is a long history of the danger of confusing strong capital with complex capital rules, and of confusing strong supervision with monitoring instead of full examinations.
We would be wise to think beyond added rules to fundamental change. We must narrow the safety net and confine it to the payments system, deposit taking, and the related intermediation of deposits to loans. We must simplify and strengthen the capital standards and then subject all banks to the same standard of measurement and performance. And finally, we must reintroduce meaningful examination programs for the largest firms. These steps, taken together, would do much to assure greater stability for our financial system.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Nov. 20, 2012 — The Securities and Exchange Commission sanctioned two investment advisory firms for impeding examinations conducted by SEC staff.
An SEC investigation found that Evens Barthelemy and his New York-based firm Barthelemy Group LLC misled SEC examiners by inflating the firm’s claimed assets under management (AUM) ten-fold in an apparent attempt to show that the firm was eligible for SEC registration. Another SEC investigation found that Seth Richard Freeman and his San Francisco-area firm EM Capital delayed nearly 18 months in producing books and records related to the firm’s mutual fund advisory business.
Both firms agreed to settle the SEC’s charges against them.
"Barthelemy was not truthful and Freeman was not responsive during their respective interactions with SEC examiners," said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. "We will continue to pursue enforcement actions against firms that obstruct or delay the SEC’s critical work in overseeing investment advisers."
Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, added, "Examinations of SEC-registered firms play a vital role in protecting markets and investors, and we expect their candor and prompt cooperation as SEC staff works to promote compliance, monitor risk, and prevent fraud."
According to the SEC’s order against Barthelemy and his firm, when examiners asked for a list of client assets, Barthelemy misrepresented his firm’s AUM as $26.28 million instead of the actual $2.628 million. He downloaded client account balances from the firm’s online custodial platform onto a spreadsheet, and then manually moved the decimal points for each client one place to the right before providing it to the SEC staff. From July 2009 to early 2011, Barthelemy improperly registered Barthelemy Group with the SEC on the basis of the aspirational AUM that was 10 times higher than reality. Barthelemy Group, through Barthelemy’s actions as chief compliance officer, also failed to adopt reasonable compliance policies and procedures or to maintain required books and records concerning codes of ethics and providing the firm’s disclosure brochure to clients.
Barthelemy agreed to be barred from the securities industry and from associating with an investment company, with the right to reapply after two years. Without admitting or denying the allegations, Barthelemy and his firm consented to cease-and-desist orders, and the firm was censured. Barthelemy and his firm also will provide a copy of the proceeding to their clients and appropriate state securities regulators, will post a copy on the firm’s website, and will disclose the proceeding in an amended SEC Form ADV filing.
According to the SEC’s order issued today against Freeman and his firm, they failed to immediately furnish the required books and records upon request by SEC staff in December 2010. EM Capital and Freeman repeatedly promised to provide the records including financial statements, e-mails, and documents related to their management of a mutual fund. However, they did not fully comply until September 2012, months after learning that SEC staff was considering enforcement action against them.
Freeman and EM Capital agreed to pay a combined $20,000 penalty. Without admitting or denying the SEC’s findings, Freeman and EM Capital also agreed to censures and cease-and-desist orders.
The SEC’s investigation of Barthelemy Group was conducted by David Neuman and Scott Weisman of the SEC’s Asset Management Unit. The examination of Barthelemy Group was conducted by Dawn Blankenship, Kristine Geissler, Arjuman Sultana, Margaret Pottanat, and Anthony Fiduccia of the New York Regional Office’s investment adviser/investment company examination program. The SEC’s investigation of EM Capital was conducted by Sahil W. Desai and Erin E. Schneider of the San Francisco Regional Office, who are members of the SEC’s Asset Management Unit. The examination of EM Capital was conducted by Tom Dutton, Ada Chee, and Ed Haddad of the San Francisco Regional Office’s investment adviser/investment company examination program.
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