Charles F. Parisi, a California financial services executive, allegedly worked with his brother and a colleague to dupe fund board members, insurance companies and portfolio managers about Parisi's troubled past and conceal Parisi's role in a firm which managed a trust used in variable annuities, the SEC alleged last week.
Parisi, of San Diego, controlled Palladian Advisers of LaJolla, Calif. from 1992 to 1997 using another employee and his brother, Mark Parisi, as fronts to conceal Parisi's control of Palladian, according to a lawsuit which the SEC filed against Parisi in U.S. District Court in San Diego Sept. 27. Palladian served as the manager of the Palladian Trust, a trust which included five funds that served as the investment options for variable annuities offered through at least two companies, Security Life of Denver Insurance Co. of Denver, Colo. and Allmerica Financial of Worcester, Mass., according to SEC filings and executives at the two firms.
Parisi concealed his role with Palladian Advisers and the Palladian Trust after the SEC in 1992 had barred him for one year from associating with any investment adviser, mutual fund or annuity trust, the SEC said. Under the terms of the 1992 order, Parisi had to apply to the SEC before being permitted to work again with investment advisers, funds or annuities. Parisi never reapplied, the SEC alleged last week.
The text of the SEC's 1992 order entered against Parisi is available to the public from the SEC and can be found through computerized legal search services. Parisi's history, however, was not disclosed as required on Palladian Adviser's Form ADV - the disclosure form which investment advisers file with federal and state regulators - the SEC alleged.
From at least 1993 to 1997, Parisi held himself out to third parties, including portfolio managers and insurance companies, as representing Palladian Advisers and the Palladian Trust, according to the SEC complaint. Parisi interviewed potential portfolio managers for the Palladian Trust and, through another company, negotiated agreements with insurance companies to receive payments for sales of annuities that included the Palladian Trust, the SEC alleged. The SEC's complaint does not identify the money managers or insurance companies by name.
In addition to dealing with third parties on behalf of the adviser and the trust, Parisi attended and participated in eight meetings of the Palladian Trust's board of directors, the SEC alleged.
It was unclear from the SEC's allegations who eventually discovered Parisi's past record. Allmerica became manager of the Palladian Trust on Feb. 12, 1998, according to SEC filings. The trust has since been renamed The Fulcrum Trust, according to SEC filings. The trust had approximately $27.3 million in assets under management as of June 30, according to a spokesperson for Allmerica. It is unclear if Palladian Advisers remains in business.
The SEC is seeking unspecified monetary damages in the case. Parisi did not return calls seeking comment. The chairman of the board of directors for the Palladian Trust did not return a call.
Anthony G. Petillon, a lawyer for the SEC, declined to identify by name the insurance companies, portfolio managers and individuals Parisi allegedly contacted directly on Palladian's behalf. Petillon also declined to say whether Parisi, on behalf of the adviser or the trust, directly contacted Tremont Partners of Rye, N.Y., a consulting firm that evaluates portfolio managers. Palladian had hired Tremont to help select portfolio managers, according to SEC filings.
Mutual fund manager Mario Gabelli held a 24 percent stake in Tremont at the time Tremont was working for Palladian, according to SEC filings. Gabelli also served as portfolio manager for two of the funds in the Palladian Trust, according to SEC filings. Executives from Tremont and Gabelli Funds, LLC of Rye, N.Y. did not return calls seeking comment. Tremont was dropped as an adviser for the Palladian Trust after Allmerica took over management of the trust, according to SEC filings.
In addition to suing Parisi, the SEC on Sept. 27 filed suit against and settled with one of Parisi's alleged accomplices, Harry Michael Schwartz. Schwartz, without admitting or denying the SEC's allegations, agreed to pay a $10,000 fine and be suspended from associating with an investment adviser or investment company for one year. Schwartz either knew or should have known that Parisi had been barred from the industry, the SEC alleged. Schwartz was president of Palladian Advisers and worked with Parisi from 1990 to December, 1997, according to the SEC.
Schwartz's attorney, James Sanders of Los Angeles, declined to comment. Mark Parisi, whom the SEC described as a former cab driver, bouncer and pizza chef who became the largest shareholder in Palladian Advisers, was not named as a defendant in the SEC's actions. An attempt to locate Mark Parisi for comment was unsuccessful.
In addition to charging Schwartz for his conduct with respect to Parisi, Schwartz violated the federal laws when Palladian Advisers defaulted in paying approximately $525,000 in expense reimbursements due to the Palladian Trust, the SEC alleged.
Palladian Advisers had promised it would reimburse the Palladian Trust if the trust's expenses exceeded certain limits. Such arrangements are common in the mutual fund industry, where advisers subsidize expenses in an effort to keep costs down. That, in turn, helps investment performance.
Palladian Advisers had promised to make the reimbursement payment by Dec. 31, 1997, the SEC alleged. Palladian Advisers was not able to make the payment for approximately six weeks after that date, the SEC said. That delay constituted a borrowing by the adviser from the trust and that arrangement was illegal, the SEC alleged.
Palladian Advisers was able to make the reimbursement payment only after an unnamed third party loaned Palladian the money, the SEC alleged in the Schwartz complaint. Michael Buckley, a spokesperson for Allmerica, said Allmerica paid the "vast majority" of what turned out to be approximately $590,000 in unreimbursed expenses to the Palladian Trust. No investors lost money as a result of the incident, Buckley said. Allmerica has not been repaid for its loan, Buckley said.
Allmerica executives checked the background of the legal entities registered with the SEC - Palladian Advisers, the Palladian Trust and the trust's distributor - before doing business with all three, Buckley said. Parisi contacted Allmerica as a representative of the trust's marketing group, Buckley said. Allmerica executives had no knowledge of Parisi's 1992 sanction from the SEC, Buckley said.
Alan Singer, vice president of customer relations and regulatory compliance for Security Life, citing the SEC action, declined to comment on whether Security Life had business dealings with Parisi. Security Life sold fewer than 50 contracts that included the Palladian Trust, Singer said. By Dec., 1997, all Security Life contract holders had switched out of the Palladian Trust variable annuity or surrendered their policies, Singer said. Security Life waived all fees and surrender charges with respect to those transactions, Singer said.