"We have a different view of what it means to be entrusted with your future."
Those ambiguous words posted on the homepage of a Houston brokerage, meant to assure wary investors, may have a quite opposite meaning if charges of self-dealing with millions in client funds, announced Tuesday by the Securities and Exchange Commission, are ultimately upheld.
The SEC announced administrative proceedings against two Houston investment advisor firms and four executives — Parallax Investments and its owner, John P. Bott II, and chief compliance officer, F. Robert Falkenberg; and against Tri-Star Advisors and its CEO, William T. Payne, and president, Jon C. Vaughan.
In a statement accompanying the two SEC orders, the commission says the two firms engineered "thousands of principal transactions through their affiliated brokerage firm without informing their clients."
A principal transaction essentially means the investment professional is trading on his own behalf with the client. Because of the inherent conflict of interest, the advisor is required to disclose his financial interest in the transaction and obtain the client's consent.
The SEC says that Parallax and Tri-Star fulfilled neither of these requirements before Parallax's Bott initiated and executed at least 2,000 trades on behalf of uninformed clients, and Tri-Star supplied mortgage-backed bonds from its own inventory to the Parallax accounts. Tri-Star's Payne and Vaughan reaped more than $2 million for the illicit trades, and Bott garnered nearly half the $1.9 million in sales credits for the transactions, the SEC charges.
Over the same 2009-2011 period, Tri-Star — from whose website the above quote is taken — performed the same hustle with its own clients, according to the SEC, with Payne and Vaughan receiving nearly half of $1.9 million in sales credits on these transactions.
While both firms are accused of violating the principal transaction and compliance provisions of the Investment Advisers Act of 1940, the SEC is also leveling a third charge against Parallax for violating the "custody rule" requiring firms to maintain certain standards when maintaining client funds or securities.
To custody client assets, a firm must either undergo a surprise annual SEC exam or it may elect a Public Company Accounting Oversight Board (PCAOB)-registered audit, delivering results to clients within 120 days after the fiscal year ends.
The SEC order charges Bott and Parallax's chief compliance officer, F. Robert Falkenberg, with violating these rules. The firm did not obtain audits of its private fund Parallax Capital Partners LP after 2010, and the two executives knowingly retained an auditor not registered with PCAOB to perform its 2010 audit.
Attempts to reach both firms' executives were met with a referral to the parties' attorney,
Dona Szak, part of the legal team representing Tri-Star Advisors, told ThinkAdvisor that her client and Parallax, who she is not representing, "are completely separate businesses," though "They have some of the same principals and some of the same personnel."
However, this reporter's phone call to Parallax rang through, automatically, to Tri-Star, seemingly indicating a strong affiliation between the two firms in terms of day-to-day activities.
