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
Summary
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.
Discussion
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.
Comment
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.
Lexisnexis
Showing posts with label investment adviser fraud. Show all posts
Showing posts with label investment adviser fraud. Show all posts
Enjoined Investment Adviser Barred With Right To Reapply In Five Years - No Explanation Provided
Robert Radano, IA Act Rel. 2750 (June 30, 2008)
Time since appeal filed - 2 years, 2 months, 16 days
Time since last brief filed - 1 year, 11 months, 27 days
Time since oral argument - 1 month, 25 days
Pages - 18
Footnote - 82
Summary
Rodano was the managing director and sole owner of an investment adviser registered with Connecticut. The ALJ barred him based on a previous injunction prohibiting anti-fraud violations. Rodano was enjoined because he knowingly allowed Steven Bolla, a barred individual to associate with the advisory firm and failed to disclose Bolla’s bar to clients. The D.C. Circuit upheld the injunction, but remanded to the district court after finding the injunctive order overly broad.
The district court found that Radano’s violations were “flagrant, deliberate, and part of a pattern.”
The Commission noted that in assisting clients in choosing investment managers and advised clients about asset allocations, Radano’s firm met the statutory definition of an investment adviser. Because Rodano managed and owned the firm and advised clients, he was an associated person of an adviser.
Rodano argued that his fraud was not so egregious as to justify a lifetime bar. It also found that Rodano betrayed the trust of his clients despite an adviser’s duty of “utmost good faith.” The Commission also rejected Rodano’s argument that because no investor funds were lost, the sanction should be lessened, finding that the quality of investment advice provided was not a relevant issue in the case. Despite noting that Rodano’s violations were egregious and demonstrated “a high degree of scienter” and demonstrated a “troubling lack of integrity” the Commission modified the lifetime bar to one permitting Rodano to reapply in five years.
After many pages of similarly stern rhetoric the Commission’s conclusion that a permanent bar is not appropriate is surprising to say the least. The Commission concludes that a bar with a right to reapply in five years will impress upon Rodano the seriousness of his misconduct and reduce the likelihood of recurrrence. It further concluded that removing him from the industry for a substantial period of time will “help to ensure his compliance.” No explanations for these conclusions is provided.
Comment
Can you say ipse dixit? The Commission prefaces its conclusions with literally pages of inconsistent rhetoric about the egregious nature of Rodano’s violations. The utter lack of explanation for the conclusion that less than a permanent bar is appropriate will inspire future litigation by other enjoined individuals and discourage ALJs from entering orders without holding hearings. The Commission owes some duty to explain its reasoning. This type of unexplained arbitrary decision making is disgraceful. Picking a number from a hat is simply not acceptable. Why five years and not four or three or two? If the word egregious has any meaning at all, why less than a permanent bar? Last, what explains the Commission’s scheduling oral argument a full ten months after the last brief was received?
Time since appeal filed - 2 years, 2 months, 16 days
Time since last brief filed - 1 year, 11 months, 27 days
Time since oral argument - 1 month, 25 days
Pages - 18
Footnote - 82
Summary
Rodano was the managing director and sole owner of an investment adviser registered with Connecticut. The ALJ barred him based on a previous injunction prohibiting anti-fraud violations. Rodano was enjoined because he knowingly allowed Steven Bolla, a barred individual to associate with the advisory firm and failed to disclose Bolla’s bar to clients. The D.C. Circuit upheld the injunction, but remanded to the district court after finding the injunctive order overly broad.
The district court found that Radano’s violations were “flagrant, deliberate, and part of a pattern.”
The Commission noted that in assisting clients in choosing investment managers and advised clients about asset allocations, Radano’s firm met the statutory definition of an investment adviser. Because Rodano managed and owned the firm and advised clients, he was an associated person of an adviser.
Rodano argued that his fraud was not so egregious as to justify a lifetime bar. It also found that Rodano betrayed the trust of his clients despite an adviser’s duty of “utmost good faith.” The Commission also rejected Rodano’s argument that because no investor funds were lost, the sanction should be lessened, finding that the quality of investment advice provided was not a relevant issue in the case. Despite noting that Rodano’s violations were egregious and demonstrated “a high degree of scienter” and demonstrated a “troubling lack of integrity” the Commission modified the lifetime bar to one permitting Rodano to reapply in five years.
After many pages of similarly stern rhetoric the Commission’s conclusion that a permanent bar is not appropriate is surprising to say the least. The Commission concludes that a bar with a right to reapply in five years will impress upon Rodano the seriousness of his misconduct and reduce the likelihood of recurrrence. It further concluded that removing him from the industry for a substantial period of time will “help to ensure his compliance.” No explanations for these conclusions is provided.
Comment
Can you say ipse dixit? The Commission prefaces its conclusions with literally pages of inconsistent rhetoric about the egregious nature of Rodano’s violations. The utter lack of explanation for the conclusion that less than a permanent bar is appropriate will inspire future litigation by other enjoined individuals and discourage ALJs from entering orders without holding hearings. The Commission owes some duty to explain its reasoning. This type of unexplained arbitrary decision making is disgraceful. Picking a number from a hat is simply not acceptable. Why five years and not four or three or two? If the word egregious has any meaning at all, why less than a permanent bar? Last, what explains the Commission’s scheduling oral argument a full ten months after the last brief was received?
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