Investment Advisor Securities Roundup: Two Firms Settle SEC Claims That They Impeded with Examinations, FINRA Defends SRO Model, IA Allegedly Duped Private Equity Investors, & CDO Misrepresentation Accusations Against GSCP Executive Are Dismissed

Investment advisory firms EM Capital Management and Barthelemy Group have settled SEC administrative charges that they got in the way of Commission staff examinations. Both cases were settled without the parties involved denying or admitting to the allegations.

According to the SEC, Barthelemy Group and Evens Barthelemy allegedly misled examiners by inflating claimed assets under management to make it appear as if the firm qualified for SEC legislation. To settle the claims, Barthelemy has consented to a securities industry bar. He can reapply for admission again in two years. His firm consented to a censure.

As for the proceedings against Em Capital Management and Freeman, they allegedly waited a year and a half to produce the records and books for the firm’s mutual fund advisory business. Both have consented to pay a $20,000 penalty and be censured.

In SEC v. Steffelin, the Commission has dismissed its case against GSCP executive Edward Steffelin, who was accused of making misrepresentations in marketing the Squared CDO 2007-1, a 2007 collateralized debt obligation connected to the domestic housing market. (A separate but related lawsuit was filed against J.P. Morgan Securities, LLC (JPM), which the financial firm has resolved by agreeing to pay $153.6M.) Steffelin led the team that put into effect the process for purportedly choosing the CDO’s investment portfolio.

The Squared CDO 2007-1, contends the SEC, was structured mainly with credit default swaps referencing other CDO securities connected to the residential market. Although marketing materials for the CDO noted that that GSCP selected the investment portfolio, the SEC claims that no one notified the investors that Magnetar Capital LLC played an important role in selecting the securities and even had a short position in more than half the assets. The Commission believed that it was Steffelin who let the hedge fund participate in choosing the assets even though he knew that it was going to short the assets. However, because of information that has since come to light, the regulator has dropped its case against him.

In another civil case, the SEC is suing Joseph Hennessy and his firm Resources Planning Group Inc. for allegedly duping clients so they would invest in a failing private equity fund. The Commission is accusing the two of them of promising high returns to those that decided to invest in Midwest Opportunity Fund while failing to tell them that the fund was in poor financial health.

The SEC says that Hennessy issued a $1.65 million promissory note that he guaranteed in 2007 to finance the fund’s biggest portfolio company. Ultimately, however, the fund couldn’t pay back the notes and that is when Hennessy allegedly began to seek investors. He is denying the allegations.

Recently, Thomas Selman, FINRA’s executive vice president for regulatory policy, defended a move to a self-regulatory organization model for investment advisor oversight. While some have raised questions about this regulatory model’s value, and pushback from lawmakers and the industry has been strong, Selman gave assurances that were FINRA to take on this role, it would not impose broker-dealer regulations on investment advisors and the SRO would not become prisoner to the industry it would regulate. Selman made his comments at an Investment Program Association event in Washington on November 15.

If you suspect that you may have been the victim of investment fraud, contact our securities law firm today.

In re EM Capital Management LLC, SEC, Admin. Proc. File No. 3-15101, 11/20/12, SEC (PDF)

FINRA Official Defends SRO Model for Investment Advisers, Bloomberg/BNA, November 26, 2012


SEC v. Steffelin, S.D.N.Y., No. 11-4204 (MGC) (PDF)

More Blog Posts:
FINRA Provides Guidance As It Opens Up Arbitration Process to Investment Advisers, Stockbroker Fraud Blog, November 9, 2012

House Financial Services Committee Hears Arguments Over Who Should Oversee Investment Advisers, Stockbroker Fraud Blog, June 9, 2012

Private Fund Advisers Have Fiduciary Duty to Client Funds, Says SEC’s Di Florio, Institutional Investor Securities Blog, May 10, 2012