The Securities and Exchange Commission recently settled four enforcement actions that involved utilizing the internet to disseminate unlawful client testimonials, more specifically a testimonial program sold by a third-party marketing firm that solicited client testimonials for publication on social media websites.
According to Cipperman Compliance Services, the testimonial rule prohibits advertisements that refer to any testimonial about advice, analysis,or services.
"It's hard to believe that advisors could violate the testimonial rule, a clear prohibition that has been in effect for decades," the regulatory compliance firm said in a blog post.
According to one of the SEC's orders, Leonard Schwartz, a marketing consultant based in Richboro, Pennsylvania, owned several companies that offer marketing-related services to investment advisors and other investment professionals.
One service that Schwartz — and one of his companies, Create Your Fate — offered is called Squeaky Clean Reputation. Through this service, Schwartz and Create Your Fate solicit testimonials on behalf of professionals, including investment advisors and broker-dealers, and post the testimonials on a variety of websites, including YouTube, Google, Facebook, Twitter and Yelp.
Squeaky Clean Reputation's website represented that the program was "100% compliant for investment advisors."
In 2015, a client sent Schwartz an email informing him that the testimonial rule prohibited RIAs from distributing advertisement containing testimonials.
Despite this, the SEC says Schwartz did not seek any legal advice or other guidance about the testimonial rule's applicability to investment advisory clients and instead continued marketing their services to other investment advisers and investment professionals.
The next three SEC orders — against HBA Advisors, an investment advisor based in California, and its founding member Jaime Enrique "Ricky" Biel; Brian Eyster, an investment advisor representative and registered representative based in Michigan; and William Greenfield, an investment advisor representative and registered representative based in New Jersey — all used Schwarz's Squeaky Clean Reputation services.
SEC Charges Convicted Felon, Others in $5M Offering Fraud
The SEC charged Maryland-based Owings Group, three of its related companies and four individuals in an offering fraud that raised more than $5 million from approximately 50 investors.
The SEC's complaint alleges that Mark Johnson, a convicted felon, orchestrated and operated a fraudulent investment scheme through entities that he controlled — The Owings Group and its related companies. The SEC says he did this with the assistance of three salesmen — Kevin Drost, Brian Koslow and David Waltzer — who were paid substantial sales commissions from the principal invested.
According to the complaint, the defendants deceived investors into believing that Owings was successfully bringing companies public using a quick and efficient streamlined approach, called the Initial Registration Program.
In reality, as the SEC alleges, Owings had only an untested idea for a streamlined approach that it was trying out and an inexperienced team.
When Owings failed to bring any companies public in the first year, Johnson created two investment funds as a stalling tactic to placate concerned investors and to raise new money to "buy out" the Initial Registration Program investments from disgruntled early investors, according to the SEC.
The scheme eventually collapsed.
The SEC seeks civil monetary penalties and disgorgement with prejudgment interest from all defendants, as well as an injunction against future violations. The SEC also seeks disgorgement with prejudgment interest from three entities as relief defendants.
Massachusetts Regulators Charge Man With Defrauding Investors
Secretary of State William Galvin, the state's top securities regulator, charged Randall Fincke of Lincoln, Massachusetts, with defrauding investors.
