An outside compliance consultant and the COO of two advisers have agreed to settle SEC charges that they caused the advisory firms to make misstatements regarding assets under management and account totals in Commission filings and to fail to maintain accurate books and records. Both parties agreed to cease-and-desist orders and industry bars, and the outside consultant also agreed to pay a $30,000 penalty (In the Matter of David I. Osunkwo and In the Matter of Diane W. Lamm, Release Nos. IA-4744 and 34-81405, August 15, 2017).
Reporting, recordkeeping failures. In 2010 and 2011, SC Consulting was contractually obligated to provide compliance consulting and outsourced CCO services to then-registered investment advisers Aegis Capital, LLC and Circle One Wealth Management, LLC. Under the contract, SC Consulting was obligated to make a principal of the firm available to be appointed and serve as registrants’ CCO, who would be responsible for, among other things, preparing and filing amendments to the advisers’ Forms ADV. In the spring of 2011, the consultant filed an annual amendment to Circle One’s Form ADV intending to reflect the merger between the two affiliated investment advisers and encompassing both Aegis Capital’s and Circle One’s AUM and number of advisory accounts ($182,000,000 in AUM and 1,289 advisory accounts).
In determining these numbers, the SEC stated, the consultant reviewed information from the advisers and estimates provided to him by an internal officer, adopting them without ascertaining their accuracy and listing the officer as signatory certifying the Form ADV without confirmation. As a result of the consultant’s conduct, the Commission alleged, the AUM and number of advisory accounts claimed were false; the SEC filings overstated combined AUM by more than $119 million and total client accounts by at least 1,000 accounts, according to the SEC.
The advisers’ COO provided the consultant with inaccurate information concerning AUM and client accounts, resulting in the material overstatements in the Forms ADV, the Commission alleged. Moreover, the SEC noted that the advisers’ books and records were not segregated and that the advisers were unable to provide adviser-specific books and records in response to the SEC staff’s request. The COO was responsible for accounting and keeping and maintaining the registrants’ books and records, according to the Commission.
By this conduct, the SEC alleged, the consultant violated Advisers Act Sections 204 and 207 and Rule 204-1, which together require annual, accurate Form ADV filings. The COO violated Section 204(a) and Rule 204-2 by failing to make and keep reports and records as prescribed by the Commission. The officer also violated Section 207 by approving an inaccurate Form ADV filing during the relevant period.
Sanctions. Without admitting or denying the SEC’s findings, the consultant agreed to cease and desist from further violations and consented to a 12-month suspension from association, serving as an officer or director, and participating in a penny stock offering. He also agreed to pay a $30,000 civil penalty.
In February 2016, the COO pleaded guilty to two counts of securities fraud and now agreed to a cease-and-desist order and to officer/director and associational bars.
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