CCO to Disgorge Compensation Related to Fraud at Firm
An Administrative Law Judge ordered a Chief Compliance Officer to disgorge over 55% of his compensation over a 4-year period and pay a penalty of $260,000, in addition to barring him from the industry in connection with his alleged failures related to a Ponzi scheme. The ALJ found that the CCO failed to follow up on possible red flags and instead embarked on a “damage control road show” to defend the firm. The ALJ also held that the CCO was negligent in allowing the use of misleading marketing materials. The 55% disgorgement related to the 55% of firm revenue over the period attributable to the Ponzi scheme. The ALJ found the CCO not liable for aiding and abetting because he did not create the misleading marketing materials but relied on counsel. The ALJ indicated that the CCO was a fiduciary because he was an associated person of a registered investment adviser.
OUR TAKE: This may be the most frightening case yet for Chief Compliance Officers. Neither the SEC nor the ALJ ever proved that the CCO knew about the fraud. Instead, they faulted the CCO for failing to follow up on red flags, which, following the firm’s downfall, appear obvious. Then, the CCO is condemned for defending his own firm. Additionally, we don’t agree that the CCO is a fiduciary just because he works for an investment adviser. We also question the disgorgement of a percentage of compensation based on some calculus of revenue based on fraudulent activity. Maybe, the SEC should just come right out and require firms to hire independent CCOs just like they hire third party law firms and auditors.