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News October 5, 2015 Issue

Inflated AUM and Claims of High Returns May Lure Investors … and the SEC

Don’t think the SEC won’t notice a firm that puffs up its assets under management and/or any exaggerated returns it promises investors. Puffery in such cases will likely result in exposure and enforcement action.

The Commission takes investor protection very seriously, and will come down hard on firms that tout themselves as being more than they really are, or that can do more than they say they can do. "The investing public is entitled to a level of confidence that information they receive about brokerage and advisory services is accurate," said SEC Philadelphia Regional Office director Sharon Binger.

Dually registered firms – those registered as both an adviser and a broker-dealer – are likely to come under even more scrutiny, as the SEC’s Office of Compliance Inspections and Examinations has twice listed such firms as among its targets. The agency’s concern is that firm’s with dual registration may seek the fixed fees advisers charge without always meeting the fiduciary duty to clients that comes with being an adviser.

Bennett Group Financial Services and its owner, Dawn Bennett, are in such a fix right now. A dually registered adviser from 2008 through most of 2013, Bennett Group now faces a November administrative proceeding after being charged by the agency last month with inflating both its assets under management and the returns it offered investors, and with promoting both of these allegedly fictitious figures on Bennett’s radio show, as well as in publications like Barron’s.

"We allege that in a calculated effort to inflate their profile and prestige, Bennett and her firm overhyped the amount of assets they manage for customers and the actual returns on their investments," said Binger. … "This case shows that so-called financial experts on the radio are often merely advertisers who may not be doing so truthfully."

Adding salt to this self-inflicted wound, Bennett and her firm, during the course of the SEC’s investigation, "in an effort to substantiate their prior fraudulent claims about the assets they managed," allegedly made still more false statements to investigators – a move that cooked their goose even further, as the agency listed these claims in its administrative order instituting proceedings, as well.

"The allegations here are pretty consistent with many of the other AUM misrepresentation cases that the SEC has brought in the last few years," noted Mayer Brown attorney Adam Kanter. "This further emphasizes the importance of keeping accurate records of a firm’s AUM. While most firms aren’t going to be engaged in the type of gross exaggerations that the SEC has alleged in this case, compliance officers should be vigilant against the temptation to be over-inclusive in calculating AUM."

"Even if it takes years, materially false statements will come home to roost and cost you and the firm in a big way," said Eaton & Van Winkle partner Paul Lieberman. "Intentional lies/false statements about the firm’s AUM, client relationships and its performance involving either model portfolios or actual transaction results is a serious violation."

One claim leads to another

Bennett and Bennett Group started out as broker-dealers. From at least 2009 through 2011, the firm’s employees were registered representatives associated with another broker-dealer, and almost all of Bennett Group’s revenue was generated by commissions earned by these representatives. In 2008, the firm registered with the SEC as an investment adviser, and it held dual registration from then until October 2013, when it withdrew its advisory registration.

Somewhere along the way, if what the SEC claims is true, Bennett and her firm went off the reservation in terms of touting its holdings and success. From at least 2009 through 2011, Bennett and Bennett Group claimed they had assets under management of $1.1 billion to $2 billion, when "in reality, the most Bennett and her firm could, in any sense, be said to be managing during the relevant period was approximately $407 million," the agency said. Bennett and Bennett Group made these claims in Barrons, a nationally circulated industry periodical than ranks financial investors, as well as through other advertisements and communications to existing and prospective customers and clients, including the Bennett-owned radio show, the SEC alleged.

Bennett and her firm did this "in order to inflate their stature and thereby attract new customers and clients to the firm by creating the impression that they were larger and more successful players that they in fact were," the agency said. "At the time respondents made these misstatements, they had a fledgling advisory business that they hoped to bolster by attracting new advisory clients, lured by their claims of industry success and impressive investment returns."

Apparently, the alleged ruse worked. Following the claims, "prospective customers and clients became customers and clients, thereby generating compensation for Bennett and Bennett Group, including in the form of brokerage commissions generated through the purchase or sale of securities," the SEC said. Existing customers also bought or sold securities through Bennett and her firm after receiving the communications, there providing the firm with additional commissions, according to the agency’s administrative order.

Examples

Here’s how the allegedly false claims played out:

  • Rankings in Barron's. As a result of Bennett and Bennett Group’s submissions, the periodical ranked Bennett fifth in its category of "Top 100 Women Financial Advisors" in its June 9, 2009 issue; 26th in its category of "Top 100 Independent Financial Advisors," also in its June 9, 2009 issue; and second in its listing of the "2011 Top Advisors" in Washington, DC, the SEC said.
  • Statement in Barron's. "In 2011, Bennett and her firm claimed that the typical size of a Bennett Group account was $3 million. In reality, at the time, only 1 percent of Bennett Group customers and clients had account values of $3 million or more," the agency said. Beyond that, the SEC claimed that although Bennett and her firm claimed in 2011 that the firm’s minimum account size was $2 million, 98 percent of customer and client accounts were for less than that.
  • Spreading the word. The SEC alleged that Bennett and Bennett Group then promoting their Barron’s rankings and claims through email, the firm’s web site, social media, article reprints and other means.

The radio show

In early May, 2010, Bennett began hosting her weekly radio program, "Financial Myth Busting with Dawn Bennett," on a Washington, DC-area radio station, according to the administrative order. The show, the order said, was paid for by the Bennett Group, and Bennett determined all its content.

During at least 18 radio programs in 2010 and 2011, "Bennett falsely claimed that she and Bennett Group managed assets ranging from $1.5 billion to over $2 billion," the SEC said. But contrary to these claims, the assets under management were allegedly limited to "at most" approximately $407 million, and of those, only $1.1 million was in advisory assets. The remainder was comprised of $67 million in pension consulting assets, and $338 million in brokerage assets, the agency said.

Examination and investigation claims

The hole got deeper during the SEC examination and subsequent investigation. When questioned during these periods, the SEC said, Bennett and Bennett Group "made a series of false statements in an effort to substantiate the claims and to obstruct the staff’s examination and investigation."

"Among other things, Bennett and her firm asserted that the claims of approximately $2 billion of assets managed were defensible because she provided uncompensated short-term cash management advice to three corporate clients, ‘Company A,’ ‘Company B’ and ‘Company C,’" the SEC said. Bennett allegedly identified individuals at these companies with whom she had discussed short-term cash management, and allegedly produced copies of project request forms and other documents that provided additional information.

But, the agency said, the claims made in this regard by Bennett and her firm "were entirely fictitious. … Individuals at companies A, B and C … either did not know her or her firm, did not communicate with them regarding short-term cash management, were not at the respective company at the time, or were incapacitated or dead."

Investment returns

Bennett also "touted" her firm’s investment returns and performance during her radio show – but, according to the SEC, did so "without disclosing that the returns were for a Bennett Group ‘model portfolio’ and were not representative of actual investor performance. She would do this by comparing her group’s model returns to benchmarks such as the Standard & Poor’s 500 Index, such as 6.06 percent for the Bennett Group compared with a negative 37 percent for the S&P 500 in 2008, or 42.48 percent for the Bennett Group versus 26.47 percent for the S&P 500 in 2009, the agency said.

Nor did the SEC find her compliance policies and procedures up to snuff, noting that the Bennett Group had used an off-the-shelf compliance manual that it did not tailor to the firm’s specific operations and needs.

"Bennett was essentially able to operate Bennett Group unchecked, and her firm’s policies and procedures otherwise were not implemented with respect to her claims about assets managed and investment returns," the SEC said. "She exploited that circumstance to make outlandish claims to bolster her reputation and that of her firm, so that existing customers and clients would be kept and new ones could be obtained. Once caught, she dissembled further, citing nonexistent conversations with a departed CFO and an incapacitated former executive, regarding fictitious assets."

Violations

Bennett and Bennett Group were charged with willfully violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and its Rule 10b-5, as well as Sections 206(1) and (2) of the Advisers Act, all of which prohibit fraud. In addition, the Bennett Group was accused of willfully violating, and Bennett of willfully aiding and abetting, violations of Section 206(4) and its Rule 206(4)-1(a)(5), which makes it unlawful for an adviser to directly or indirectly publish, circulate or distribute any advertisement containing untrue statements of material fact.

Finally, the Bennett Group was accused of willfully violating Section 206(4) and its Rule 206(4)-7, the Compliance Program Rule, for failing to adopt and implement written compliance policies and procedures. Bennett was charged with willfully aiding and abetting these violations. An attorney representing the Bennett Group and Bennett could not be reached for comment.