A Phoenix registered investment advisor has agreed to pay nearly $275,000 to the SEC in a case stemming from the sale of a stake in his firm -- at an allegedly inflated price -- to a client.
And he'd like other RIAs to know: The SEC is watching you.
The SEC alleged that Walter Clarke sold 7.5% of his firm, Oxford Investment Partners, to a client at a fraudulently inflated price, causing the client to overpay by at least $112,000. In addition, the SEC charged that Oxford and Clarke also did not disclose conflicts of interest in other investments that clients made on the firms recommendations.
Clarke settled an administrative proceeding with the commission last week, neither admitting nor denying the commissions finding regarding the 2008 sale.
As a result of the settlement, Clarke and Oxford, which had $224 million in assets under management, agreed to pay nearly $275,000 in disgorgement (restitution), interest and civil penalties to the SEC. The commission also barred Clarke from any association with the financial services industry for two years.
According to the SEC, Clarkes acute financial problems caused him to sell a portion of his interest in Oxford in late 2007. In spring 2008, the SEC alleged, Clarke convinced an Oxford client to purchase another interest in the firm on the basis of false and misleading information. "
Clarke deliberately inflated Oxfords value by applying an excessive and baseless multiple to the firms 2007 annual revenue, the SEC said. He allegedly calculated that figure by quadrupling fourth-quarter revenue (the year's highest), ignoring the lower proceeds from the previous three quarters.
Citing the firm's amazing growth trajectory, Clarke then added a $1 million premium to the valuation, according to the SEC.
In an interview with Financial Planning, Clarke urged RIAs to be aware of aggressive SEC scrutiny and to invest time and money in getting the best possible compliance advice.
RIAs need to understand that the SEC is a completely different organization than it was in 2008, he said. Risk management cant be compromised for emerging RIAs with finite resources. The SEC has zero tolerance at this stage of the game.
NEED FOR CONTROLS
The need for quality third-party compliance assistance is paramount, Clarke stressed. What happened to us was very, very avoidable, he said. If we had better guidance and risk controls none of this would have happened.
Advisory firms need to be very proactive, Clarke said, and adhere strictly to written policies and procedures; he also suggested they seek out either a qualified chief compliance officer or third-party vendor. Small firms with limited resources like Oxford can, he warned, find themselves in the cross-hairs of a newly aggressive, post-Bernie Madoff SEC, and risk serious financial loss.
Oxford, Clarke asserted, had a false illusion of its risk management controls, and paid dearly for its mistake.
REGULATORY RED FLAG
But other observers said that Clarke's problems were of his own making, and not due to particularly aggressive enforcement. Todd Cipperman, managing principal of Cipperman Compliance Services, in Wayne, Pa., argued that the sale of equity in an advisory firm to a client is a perennial regulatory red flag -- and is a really bad idea no matter what you do or when you do it.
While there is no law prohibiting a principal from selling a stake in a firm to a client, Cipperman said, regulatory agencies cant resist examining such transactions. It really is a no-win situation, he said It will always be second-guessed.
Self-interest notwithstanding, Cipperman did agree with Clarkes admonition to advisors to find a good third-party risk management advisor. It doesnt matter if its a lawyer, an auditor or a compliance firm, he said. Theyre all dealing with multiple clients, and can help a firm view the situation through the lens of a regulator. Its really a matter of passing the smell test.
Clarke said he is unsure if he will apply for re-entry into the financial services business in two years. But he does plan to describe what happened to him and speak out about his experience at industry conferences as a cautionary tale for other advisors, he said.