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Investment Adviser Barred, Fined $60,000 And Ordered To Pay Disgorgement For Kickback Scheme - Following Orders Defense Rejected

Brendan E. Murray, IA Act Release 2809, November 21, 2008

Time since appeal - 1 year 3 months 1 day
Time since last brief         - 1 year 8 days
Pages - 21
Footnotes - 55


Murray was the managing director of a registered investment adviser and secretary to investment companies advised by the adviser. The law judge barred him, fined him $60,000, entered a cease and desist order and ordered disgorgement of $27,200. The funds ceased offering shares to the public in 2000. Murray became the adviser's compliance officer in 2001. He reviewed all third party invoices for services performed for the funds. He forwarded them to a service company for payment and began approving the payments in November 2001. Murray and the adviser's CEO began a scheme of inflating invoices from a firm they owned that provided various administrative services to the funds. The CEO previously consented to a bar from association (disgorgement was waived and no penalty imposed due to his financial condition.) A total of $122,000 of excess payments were made to the firm owned by Murray and the CEO between November 2001 and February 2002 as a result of twelve inflated invoices. Among other things, Murray prepared fictitious invoices from suppliers. In some instances Murray admitted he knew invoices were inflated and in others he admitted he approved them without inquiring whether the amounts were actually owed.

The Commission sustained the sanctions.


Murray was found to have violated the anti-fraud provisions of the adviser's violations of IA Act Sections 206(1) and (2). Section 206(1) prohibits the employment by an adviser of "any device, scheme, or artifice to defraud any client or prospective client." Section 206(2) prohibits advisers from engaging in "any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client." The Commission has previously ruled that recklessness satisfies the scienter requirement of aiding and abetting liability. Misappropriation of client funds is a violation of both Sections 206(1) and (2).

The Commission rejected Murray's argument that he lacked scienter because he was only following instructions from the adviser's CEO. Following orders is no defense when the fraud is obvious. For example, Murray faked invoices on fake letterhead and approved for payments invoices he knew were inflated. Further, he personally profited from the scheme.

Murray was also charged with violation of IC Act Section 37 which makes it a crime to steal or convert to personal use funds or assets of an investment company. Despite its wording, courts have permitted the Commission to bring civil actions and administrative proceedings based on violations. The willful misapplication of corporate funds by fiduciaries is conversion. Murray as secretary of the funds and hence owed a fiduciary duty to the funds. He therefore also violated Section 37.

The Commission rejected Murray's claim that the hearing was unfair because it did not seize all of the funds' or adviser's business records. He did not identify any relevant evidence that was thus lost. Murray's claim that various persons testified falsely at the hearing is irrelevant as the Commission's decision did not rely on that testimony, but instead was based on Murray's admissions.

A bar is an appropriate sanction because Murray's conduct harmed fund shareholders and was for his personal benefit. A cease and desist order was imposed due to the seriousness of his conduct and because Murray could become active in the securities industry in another capacity. The $60,000 penalty was upheld without significant discussion.


I seem to have spoken too soon about the Commission speeding up its opinion writing. This one had no substantive issues and took more than a year. The case of an adviser who engages in a kickback scheme that harms the funds he is advising certainly doesn't doesn't seem to raise difficult issues.

The Commission offered no explanation of why it was imposing a single $60,000 second tier penalty when it has the ability to impose a separate penalty for each individual violation. It offers nothing more than an ipse dixit pronouncement that it has discretion to impose penalties but never discusses why a separate penalty should not be imposed based on each individual fraudulent invoice.

Unfortunately, as is too often its practice, the Commission justifies the sanctions because Murray defended himself and therefore claims he poses a risk of recurring violations if not barred. The facts of the case clearly justify the sanction without relying on the fact that Murray defended himself. I continue to predict that some court of appeals will eventually take a very jaundiced view of this argument by the Commission. It is unnecessary to invoke such rhetoric when a fiduciary steals.