According to the SEC, Houston-based advisory firms Tri-Star Advisors and Parallax Investments LLC made thousands of principal transactions through the broker-dealer they are affiliated with but did not disclose that they were doing this to clients even though they are obligated to notify customers/get their permission beforehand. Also facing Texas securities charges over the transactions are three executives: John P. Bott II, who owns Parallex, and Jon C. Vaughan and William T. Payne, who are Tri-Star officials.
The regulator’s orders of administrative proceedings say that Bott made a minimum of 2,000 undisclosed principal transactions without the permission of Parallex clients. Meantime, for each one (executed between 2009 to 2011) its affiliate broker-dealer Tri-Star Financial employed its inventory account to buy bonds backed by mortgages for these clients and moved the bonds into the accounts of clients. Bott received close to half of the $1.9 million in sales credits that Tri-Star Financial received on the transactions.
Vaughan and Payne are also accused of making over 2,000 undisclosed principal transactions during the same timeframe without the permission of their Tri-Star Advisor clients. The same broker dealer provided similar third-party services as it did for Parallex, and Vauhan and Payne got close to half of the $1.9 million in gross sales credits. SEC Enforcement Division’s Asset Management Unit co-chief Marshall S. Sprung says that Tri-Star and Parallex prevented clients from knowing that their advisers could benefit from “running the trades through an affiliated account.”
Principal transactions typically involve an investment adviser acting on behalf of its account via an affiliate brokerage firms. Because conflicts of interest can arise between the client and adviser, the latter must provide written disclosure about any conflicted role or monetary interest when offering advice to the client involved in the trade, as well as obtain their permission.
Failure to disclose and failure to obtain consent can be grounds for Texas securities claims if a client sustains investment losses. Contact our Houston securities fraud lawyers at Shepherd Smith Edwards and Kantas, LTD LLP today.
SEC charges advisory firms and executives with not disclosing transactions, InvestmentNews, November 26, 2013
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