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News January 19, 2015 Issue

SEC and FBI Investigations Lead to Civil and Criminal Charges Against Adviser

If anyone doubts that the SEC and the FBI work together, hereís a case in point.

The SEC on January 9 filed a civil complaint in U.S. District Court for the District of Massachusetts against Daniel Thibeault, owner, president and CEO of an asset management firm that allegedly stole at least $16 million from a fund managed by a related investment adviser. The asset management firm, the adviser and several other related companies, all allegedly controlled by Thibeault, also were charged.

The complaint relies on the FBIís execution of a search warrant at the advisory firmís offices, its interview with a victim of the alleged scheme, as well as an examination by the SECís Office of Compliance Inspections and Examinations.

Separately, on January 11, the U.S. Attorneyís Office for Massachusetts charged Thibeault with securities fraud. This criminal charge, also made in the U.S. District Court, relies largely on an affidavit submitted by an FBI special agent. The affidavit lays out a version of actions by Thibeault that are similar to those in the SECís civil complaint. Court documents show that Thibeault was arrested, released and had to pay a $700,000 bond to ensure his appearance in court. The attorney representing Thibeault did not respond to either a voice mail or email seeking comment.

Multiple hats

Thibeault, in addition to holding the top positions at the asset management firm, also had numerous other responsibilities there, including directing its marketing, investment strategy, investment selection, and serving as the fundís co-portfolio manager.

"These types of allegations reinforce the importance, where feasible, of separating an adviserís investment functions from ownership and control of funds," said

DLA Piper partner Nicolas Morgan. "Thatís a lot of hats. This arrangement, while not impermissible, does little to inhibit a concerted effort to defraud investors."

The SEC and the FBI

The FBI has been working with the SEC for several years now (ACA Insight, 10/28/13

). FBI agents in New York meet with their SEC counterparts several times each week, said David Chaves, an 18-year veteran of the Bureau with 14 yearsí experience investigating securities crimes. The bureau has a full-time agent embedded at the SECís national office in Washington.

There is a benefit in the arrangement to both parties. "The SEC cannot put someone in jail. But when someone is a major perpetrator, it is more than happy to work with the Department of Justice," said Chaves. "When the SEC uncovers something with a criminal aspect to it and brings it to the FBI right from the start, then the bureau might put someone undercover." The FBI, in turn, gets to draw on the SECís financial and quantitative analytical expertise to help with securities cases it is involved in.

The cooperation is part of a larger movement toward cooperation among law enforcement bodies in recent years. It includes cooperation within the SEC, such as between the enforcement and examination divisions, and the creation of special units within the SEC, such as the asset management unit. Nor is the SEC the only regulatory body cooperating with the FBI. The bureau has a similar arrangement with the CFTC, Chaves said.

The arrangement

The SEC charged that Thibeault and

GL Capital Partners, the adviser that managed the fund, "from at least 2013 to the present," solicited money from investors that they said would be pooled and used to make or purchase consumer loans. The investors would then receive returns when interest and principal payments were made on the loans.

In reality, the SEC alleged, Thibeault and his companies "engaged in a scheme to create fictitious loans to divert investor money from [the fund], and to report these fake loans as assets of [the fund], thereby concealing the fact that Thibeault and the other defendants had misappropriated millions of dollars from [the fund]." The parties involved went so far as to fabricate paperwork showing six-figure consumer loans "using the names and personal information of individuals who were unaware that loans were being originated in their names," according to the agency.

Some of the loan money was actually disbursed, but not to the borrowers whose names were on the documents, the SEC said. The money instead "went to Thibeault and other defendants Ö for personal expenses and to run businesses Ö , as well as to perpetuate the scheme by making Ďinterest paymentsí on fake loans."

Violations and requests

The SEC, in its civil complaint, charged Thibeault, GL Capital Partners, and other related companies with four counts, including violating Section 10(b) of the Exchange Act and its Rule 10b-5, Section 17(a) of the Securities Act, and Sections 206(1) and (2) of the Advisers Act. It asked the court to require the defendants to disgorge whatever money they improperly gained, and to impose a civil money penalty.

In the criminal case, the U.S. Attorneyís Office charged Thibeault with violating Sections 78j(b) of the U.S. Code, which outlaws the use of manipulative and deceptive devices in the sale of securities; and Section 78ff, which provides penalties for willful violations and false and misleading statements. Penalties listed under the Section include a fine of up to $5 million and imprisonment of not more than 20 years.

How it happened

Thiibeault, who is described in the FBI agentís affidavit as a graduate of Harvard Business School, created the fund involved in the case in March, 2012, according to the SEC complaint. At some point in time, the SEC said, GL Capital Partners "became unprofitable and began losing money." It was then that he "began a scheme to use the fundís money to support his faltering financial advisory businesses," according to the agency.

To help ensure his issuance of loans to individuals who never requested them was not detected, the complaint said, Thibeault prepared forged promissory notes in the names of those individuals. In some cases, he allegedly directed that periodic interest payments be made on some of the loans "to give the appearance that the borrowers were current on the loans," the SEC said.

In its complaint, the SEC provided a table of 26 of the 40 allegedly fraudulent loans, which total approximately $16 million. Most of the loans have a listed principal of between $300,000 and $500,000, with the average value of approximately $399,000, the agency said.

For legitimate loans, the fund would wire money to its custodian bank. That bank would then wire the loan funds to a transactional bank which, for a fee, would issue the loans to borrowers. The bank would receive copies of the promissory notes within about one week of each loanís closing, and maintain them.

With the allegedly fraudulent loans, however, the bank did not receive copies of any promissory notes associated with loans issued in 2013, the SEC said, until January 2014, "months after those loans had been issued." And the bank still has not received copies of promissory notes for loans issued January 2014.

Examination and documentation

On December 8, 2014, during an OCIE examination of GL Capital, examination staff asked to see promissory notes and other loan documents relating to the loans in question. But, during the first two days of the exam, GL Capital produced promissory notes only for loans made before January 31, 2014. On the third day of the exam, the advisory firm produced five promissory notes or supporting loan documents, but did not produce any additional ones "as of the close of business on December 10, 2014," according to the complaint.

"On December 11, 2014, the Federal Bureau of Investigation executed a search warrant on [GL Capital Partnersí] offices," the SEC said. The complaint did not say whether the search produced anything useful for the examiners.

The loan documents that GL Capital did produce, however, contained false information about the
purported borrowers listed, the SEC said. Most listed incorrect birth dates for the borrower on each promissory note, which had the effect of making it "virtually impossible to obtain accurate, or indeed, any, commercial credit scores for a purported borrower."

At least one of the purported borrowers, a number of whom the SEC said were friends or associates of Thibeault, was unaware that a loan had been issued in his name, the agency said. Identified only as "Z.W.," the individual had been inadvertently sent a loan statement by GL Capital staff on or about July 2014, according to the complaint. The loan statement he was sent,
according to the agency, had a balance of $342,000 and a maturity date of May 5, 2021.

Z.W. had his accountant contact GL Capital, which then sent an email to Thibeault, who allegedly told Z.W.ís accountant, "Tell [Z.W.] not to worry about it."

But that was before an FBI agent interviewed Z.W. on December 11, 2014, and Z.W. "stated, in substance, that he had never conducted business with, obtained a loan from, or borrowed money from Thibeault."