The Securities and Exchange Commission has charged a San Francisco-area investment advisor with fraud for allegedly lying to clients about how brokerage commission rebates were being used and then providing phony documents to cover up the so-called “soft-dollars” scam during an SEC examination.

In its complaint, the SEC claims Kurt Hovan, the principal at Hovan Capital Management in upscale Belvedere, Calif., misappropriated more than $178,000 in soft dollars that he falsely said were being used to pay for legitimate investment research on his clients’ behalf.

Soft dollars are credits or rebates from brokerage firms on commissions paid by clients for trades executed in the client accounts of an investment advisor. If properly disclosed, an investment advisor may keep the soft dollar credits to pay for a limited category of brokerage and research services that benefit clients.

In this case, however, SEC investigators said Hovan was actually spending those funds to pay his brother’s salary, purchase computer equipment and pay the firm’s office rent.

When SEC examiners asked Hovan to provide documentation to back up his claim that the soft dollars were being used for investment research endeavors, he allegedly manufactured phony research reports on his own.

The SEC also charged Hovan’s wife, Lisa Hovan, the firm's chief financial officer and chief compliance officer, and brother, Edward Hovan, a portfolio manager at HCM, for their roles in the scheme.

“The SEC’s ability to review the records of investment professionals is a cornerstone of our investor protection mission,” Marc Fagel, director of the SEC’s San Francisco regional office, said in a statement. “We take a particularly dim view of those who compound their fraud on investors by providing false information to our examiners.”

Hovan Capital Management officials were not immediately available to comment on the SEC complaint.

According to the SEC’s complaint filed in federal court in San Francisco, the Hovans falsely disclosed to clients that their firm would use soft dollars only for certain research services. But in reality, they used $166,667 to pay Edward Hovan’s salary during a 10-month period in 2008 and 2009.

To cover up these payments, the three Hovans created a shell company -- Bolton Research -- which was secretly controlled by Edward Hovan. Through this bogus company, the Hovans invoiced HCM’s brokerage firms for research services that were never rendered.

The scam’s cycle was completed, the SEC complaint alleges, when Edward Hovan kicked back 40% ($65,000) of the payments to his brother and sister-in-law. Kurt and Lisa Hovan also instructed a research provider paid with soft dollars to pad its invoices by an additional $12,000 and kick back this amount to help HCM pay for a new computer server, the complaint said.

In January 2010 during an SEC examination, SEC staff asked HCM to provide copies of the research reports prepared by “Bolton Research.” In response, the SEC claims Kurt Hovan “quickly drafted numerous research reports and doctored materials to make them appear as if they had been prepared by Bolton.”

The complaint charges the Hovan trio and HCM with violating the antifraud provisions of federal securities laws and asserts additional recordkeeping violations against Kurt Hovan and the firm. The complaint seeks injunctive relief, disgorgement with prejudgment interest and other financial penalties.

On Wednesday -- the same day the SEC compliant was filed in federal court in San Francisco, the U.S. Attorney's Office for the Northern Districut of California charged Kurt Hovan with one count of mail fraud and one count of obstruction.

Hovan's initial appearance in federal court has not been scheduled. The maximum statutory penalty for mail fraud, in violation of Title 18, United States Code, Section 1341, is 20 years in prison, a $250,000 fine, and five years of supervised release.  The maximum statutory penalty for obstruction is five years in prison, a $250,000 fine, and three years of supervised release