False Credentials: SEC Brings the Issue Front and Center
The Commission wants advisers to know that while it cracks down on major fraud involving insider trading, expense allocation, fees, performance reporting and more, it continues to go after crimes as basic as misrepresenting one’s credentials. Just to make its point, the SEC settled two cases alleging exactly that, and issued an investor alert, to boot.
"Advisers looking to raise funds cannot lie about their backgrounds to lull investors into a false sense of security about their purported expertise or the profitability of a potential investment," said SEC Division of Enforcement Asset Management Unit co-chief Julie Riewe.
The two new settlements, each of which she said involved an adviser who "used false claims about his background to create trustworthiness and lend credibility to their offering schemes," were:
The top 25 rising business star who wasn’t. An adviser allegedly claimed that he was named as a "Top 25 Rising Business Star" by Fortune Magazine as he solicited investors through blast emails and the Internet for a private fund. In fact, not only was he not named to such a list, but no such list exists at the magazine, according to the agency. The adviser "also greatly exaggerated his own past investment performance, misrepresented that certain industry professionals would co-manage and advise the fund, and inflated the fund’s projected performance," the SEC said. No investors signed up, but that didn’t stop the agency from pressing charges. The adviser agreed in the settlement to pay a $25,000 civil money penalty and was barred from the industry for five years.
I’m a college graduate! Except that he wasn’t, according to the SEC. This adviser "misrepresented that he had a college degree from the University of Maryland and touted his appearances on cable news programs while soliciting investors to purchase promissory notes issued by his unregistered advisory firm," the agency said. The adviser allegedly told prospective investors that he would repay the notes through fees earned from managing a private fund. In truth, the adviser "never actually launched the fund, never had the commitments of capital to the fund that he claimed, and never paid investors the returns that he promised," the SEC said. In this case, four individuals – including two textile mill employees and a retired farmer – invested. The adviser agreed in this settlement to pay $65,000 in disgorgement plus interest, and was barred from the securities industry for five years.
The SEC is calling attention to this issue now because there has "increasingly been a problem with the proliferation of designations and a population that places trust in them, particularly in light of the aging population" said Stradley Ronon partner Lawrence Stadulis.
The alert and the cases "serve as a reminder that even advisers with the best of intentions should be exceedingly scrupulous when touting their experience," said Willkie Farr attorney Justin Browder. "Ultimately, this is a relationship-based business and investors, both retail and institutional, rely on the credibility of the people running their money."
Advisers would be wise to periodically check on the backgrounds of employees in a position to raise money from potential investors, said Mayer Brown attorney Adam Kanter. "Verify the person’s background. Did they go to that university? Did they earn that designation, such as CFA or CPA?" Anytime verifiable facts are checked and turn out to be untrue, advisers should consider that a huge red flag and take appropriate action, he said.
The investor alert issued by the SEC’s Office of Investor Education and Advocacy warns investors to "look out for unlicensed or unregistered sellers," and then lists problems to watch for. These include fraudsters who:
Misrepresent their education
Lie about having been awarded honors that they have not received or do not even exist
Pretend to hold certain professional titles that suggest they have certain expertise or qualifications
Tout their appearance as a guest commentator on financial television shows
Use traditional media, the Internet or social media to develop a public profile that gives them a false sense of legitimacy
Pretend to have a certain position or title at a company
Inflate their professional experience
The alert urges anyone who encounters an individual falsely depicting his or her background in order to sell an investment to submit a complaint and report the misrepresentation to the SEC.