Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, February 16, 2012

SEC Says Adviser Stole from Clients to Pay SEC Settlement

If the SEC's allegations against Robert Pinkas are true, the investment adviser has a lot of chutzpah. According to its order instituting an administrative proceeding (In Re Pinkas, IA Rel. 3371),

Pinkas misappropriated $173,000 from a fund client to pay the costs of defending himself in an unrelated Commission investigation. Pinkas subsequently made material misrepresentations to the fund’s investors about the misappropriation, telling them that multiple law firms had reviewed the fund’s indemnification provisions and concluded that his use of fund assets to cover his attorney’s fees in the other matter was appropriate. Pinkas then misappropriated $632,000 from the same client to cover the disgorgement he agreed to pay as part of a settlement in the other matter with the Commission. After misappropriating these funds, Pinkas violated an investment adviser bar imposed in the other matter by continuing to associate with an investment adviser.

Pinkas agreed to a settlement in a previous SEC enforcement action, SEC v. Brantley Capital Management, which ordered him to pay a $325,000 civil penalty and $632,729 in disgorgement and interest, and barred him from associating with any investment adviser with a right to reapply after one year.

February 16, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Tightens Rules on Advisory Performance Fee Charges

The SEC tightened its rule on investment advisory performance fees to raise the net worth requirement for investors who pay performance fees, by excluding the value of the investor’s home from the net worth calculation.

Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements.

The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1.5 million. These rule changes conform the rule’s dollar thresholds to the levels set by a Commission order in July 2011. The Commission-ordered increase in the thresholds was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, the revised rule will exclude the value of a client’s primary residence and certain property-related debts from the net worth calculation; the change was not required by the Dodd-Frank Act, but is consistent with changes the Commission approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.

A new grandfather provision to the performance fee rule will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

Finally, the revised rule provides that every five years, the Commission will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.

February 16, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, February 13, 2012

District Court Will Decide Dispute between SEC and SIPC in Summary Proceeding

The federal district court for the D.C. Circuit moved a step closer to resolving the unprecedented dispute between the SEC and the Securities Investor Protection Corp. (SIPC) over whether the customers of the Stanford Group Company (SGC), the defunct broker-dealer that was part of Robert Allen Stanford's ponzi scheme, are entitled to the protection from SIPC.  SIPC takes the position that the SGC customers are not covered by the statute because SGC did not perform a custody function for the customers who purchased the CDs issued by the Stanford International Bank.  The SEC originally held this position, but changed its mind in mid-2011, when it delivered to SIPC an analysis that the SGC customers were in need of protection and that SIPC should seek to commence a liquidation proceeding under SIPA.  

On Feb. 9, the court held that the statute authorizes the SEC to bring a summary proceeding for a protective decree and that the full, formal procedures of the Federal Rules of Civil Procedure are not required.  The court asked the parties to brief fully what procedures should apply in the summary proceeding.  SEC v. SIPC (D.D.C. Cir. Feb. 9, 2012)

The district court did address the SEC's contention that its "preliminary determination that SGC has failed or in danger of failing to meet its obligations to customers is not subject to judicial review by this Court."  The court found the SEC's contention "untenable:" "the plain meaning [of the statute] makes the relief available to the SEC contingent upon an affirmative determination that SIPC has refused to commit funds or otherwise protect customers."

February 13, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)