Recent actions by the SEC include shutting down two Ponzi schemes, one that brought in $100 million and another that collected $42 million and actually paid out some of its profits—both focused on real estate; charging a Malaysian advisor firm with breach of duty and the founder of an equity research firm with insider trading; and charging a Long Island software company in connection with bribery.
$100 Million Real Estate Ponzi Scheme Halted
A Utah man who told investors that their money was "completely secure" and that his company had a "perfect record" of payments in a real estate-based Ponzi scheme was the target of a temporary restraining order and an asset freeze by the SEC, after being charged with bilking investors across the country of $100 million.
The SEC's complaint, filed in U.S. District Court for the District of Utah, names Wayne L. Palmer and his firm, National Note of Utah, both of West Jordan, Utah. In the complaint, the SEC alleged that Palmer told investors that their money would be used to buy mortgage notes and real estate assets, or to make real estate loans, and that more than 600 individuals invested, lured by promises of annual returns of 12%.
National Note and Palmer are charged with violating the antifraud and securities registration provisions of U.S. securities laws. Palmer also faces charges that he operated as an unregistered broker-dealer.
National Note, the SEC alleged, used most of the money it took in from new investors to pay earlier investors, making it a classic Ponzi scheme. The agency said that since 2009, National Note would not have been able to survive without new investor funds coming in, and that in October investor payouts had all but stopped. Despite that, said the SEC's complaint, Palmer reassured investors that they would be paid while he continued to solicit new investors in National Note without telling them that the company was delinquent in its payments to existing investors.
Malaysia Advisory Firm Sued for Not Advising
The SEC sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment advisor, alleging that for more than 10 years, AMC charged U.S.-registered Malaysia Fund Inc. for advisory services that AMC did not provide, and that by doing so, AMC breached its fiduciary duty with respect to compensation under the Investment Company Act of 1940. Without admitting or denying the allegations, AMC agreed to pay $1.6 million to settle the SEC's charges.
Kuala Lumpur-based AMC served as a subadvisor to the Malaysia Fund, which is a closed-end fund that invests in Malaysian companies and whose principal investment adviser is Morgan Stanley Investment Management (MSIM).
MSIM was charged in November with violating securities laws in a fee arrangement that repeatedly charged a fund and its investors for advisory services they weren't actually receiving from a third party, and agreed to pay more than $3.3 million to settle those charges. Both cases are part of an inquiry into the investment advisory contract renewal process by the SEC Enforcement Division's asset management unit. The SEC alleges that AMC misrepresented its services during the fund's annual advisory agreement review process for each year for more than 10 years, and AMC collected fees for advisory services that it did not provide.
Chad Alan Earnst, assistant regional director of the asset management unit, said in an interview, "In this case, the advisor and subadvisor had a complete disconnect."
The SEC alleged that AMC submitted a report to the Malaysia Fund's board of directors each year falsely claiming that AMC was providing specific advice, research, and assistance to MSIM for the benefit of the fund, when AMC's actual services were limited to providing two monthly reports based on publicly available information that MSIM did not request or use.
"The whole ability of the board to function as an independent check upon the advisor is really dependent on full and fair information flowing from advisor to board," Earnst said. "Attention has to be paid to be sure this kind of conduct doesn't happen."
