Adviser’s Lacking Due Diligence Leads to Industry Bar and $1 Million in Penalties
A federal court ordered an investment adviser and its principal to pay over $1 Million in disgorgement, fines and penalties, and barred the principal from the industry, for receiving undisclosed compensation. The defendants did not disclose that they received 5% commissions on sales of promissory notes and an additional 20% of the note coupon. Unbeknownst to the defendants, the underlying issuer operated a Ponzi scheme and ultimately pled guilty to criminal wire fraud and other charges. The failure to disclose the compensation came to light because investors lost significant funds when the Ponzi scheme failed.
The SEC could have also charged the adviser with failing to conduct adequate due diligence on recommended investments. Since the Madoff scandal, the SEC has raised the bar on the obligations of both advisers and broker-dealers to conduct some investigation on third-party products. You can’t just stick your head in the sand and hope for the best.