BD to Pay Nearly $2 Million for Allowing Reverse Repo that Furthered Fraud
A broker-dealer that acted as a repo counter-party to an RIA that the SEC allegedly defrauded clients agreed to pay nearly $2 Million in disgorgement and interest to settle SEC charges. The SEC charges that the respondent engaged in reverse repo transactions that allowed the RIA to move certain illiquid securities off the RIAâ€™s books in order to dress up its financial statements and thereby reduce disclosed bank borrowing. The SEC charges that the RIAâ€™s efforts were intended to defraud clients by hiding investments in risky securities. The SEC alleges that the respondent knew that the transaction was intended to further the fraud. The SEC brought the enforcement case under its authority (Section 203(k)) to issue a cease-and-desist order against any person that is the cause of another personâ€™s violation of the Advisers Act.
OUR TAKE: How much due diligence must a transaction counterparty undertake to verify that the transaction is not intended to further an underlying fraud? How is the broker-dealer a cause of the fraud?