SEC faults RIA for cherry-picking as Senate looks to reduce fraud cases

A financial advisor barred from the industry over cherry-picking allegations and the wealth manager that once employed him agreed to pay $1.3 million to settle SEC cases against them.

Under separate Aug. 10 settlement agreements, the SEC ordered ex-advisor Richard K. Robertson to pay $920,000 in restitution and a penalty; and IFP Advisors, the registered investment advisor arm of Tampa, Florida-based Independent Financial Partners, to pay a fine of $400,000. Investigators accused the midsize firm of missing the red flags of Robertson's scheme — an all-too-common type in which an advisor uses "omnibus" or "master" accounts to make many trades at once and allocate the most profitable ones to personal portfolios.

The cases came after a U.S. Senate Committee on Banking, Housing and Urban Affairs  hearing with FINRA and a prominent state regulator explored how to cut down on fraud cases. Cherry-picking schemes remain alarmingly common and simple with master accounts. In terms of average first-day returns, Robertson's personal and family accounts surpassed his clients' by 193 basis points in stocks and 686 bps on options trades, leading to "ill-gotten gains" in his personal holdings of at least $592,000 over nearly a decade, according to the SEC. 

"The disparity between the first-day returns on trades allocated to Robertson and his family accounts as compared to trades allocated to other client accounts is statistically significant," according to both settlement agreements. "The probability that such an uneven allocation of first-day gains and losses occurred by chance is nearly zero."

Robertson and IFP Advisors didn't confirm or deny the allegations as part of their settlements, and the latter received credit in its agreement for its cooperation with the investigation. Efforts to reach Robertson weren't successful.

Regulation and compliance

SEC tells advisors to rein in conflicts of interest under Reg BI

August 3, 2022 5:56 PM

In a rarity for wealth managers often loathe to discuss compliance openly, Independent Financial CEO Bill Hamm spoke with Financial Planning about the case. The firm has fired its chief compliance officer, hired a third-party consultant to verify that it's completed the required undertakings under the SEC case and revamped its procedures, Hamm said.

"We changed everything to make sure that doesn't happen again," he said. "We discovered that there were still some areas that we needed to strengthen, and so we did."

Hamm believes that the SEC's investigation stemmed from a sweep of third-party custodians aimed at detecting potential cherry-picking schemes, he said. Robertson had been one of about 550 advisors at IFP Advisors until he left the firm in 2018, when Hamm's firm announced it would be dropping LPL Financial as its brokerage to launch its own broker-dealer. Robertson then worked at Triad Advisors from 2019 to 2021, according to FINRA BrokerCheck.

Robertson, 56, operated a Del Mar, California-based practice, where investigators say he placed trades earlier in the day and gave himself and his family the most profitable ones between January 2011 and October 2020. The SEC ordered him to pay disgorgement of $592,000, prejudgement interest of $28,000 and a civil penalty of $300,000. 

"Because allocations from the omnibus account occurred later in the day, Robertson could observe intraday price movements of the securities purchased before determining the accounts to which he would allocate the shares or options," according to the settlement document. 

Regulation and compliance

$3M fraud scheme displays how states refer criminal cases to the feds

August 10, 2022 7:01 PM

The Senate hearing probed how best to prevent this and other kinds of fraud cases in the future, with testimony from FINRA Senior Vice President of Investor Education Gerri Walsh and Melanie Senter Lubin, the Maryland securities commissioner and president of the North American Securities Administrators Association. A recent study by FINRA and the AARP suggests that a stigma toward the victims of scams and distrust in the justice system often plays a role in late or nonexistent reporting of schemes.

In addition, the advocacy group for state regulators is calling on Congress to pass an array of legislation including: the Empowering States to Protect Seniors from Bad Actors Act, which would provide annual SEC grants totaling $10 million to states to bulk up fraud protection; the Financial Exploitation Prevention Act of 2021, which would require investment firms to identify a trusted contact in case of potential financial scams targeting a client; and the Stronger Enforcement of Civil Penalties Act of 2021, which would hike the top tier of fines per violation of the law to $1 million for individuals and $10 million for companies.

The House has passed two of the bills, but neither it nor the Senate has voted on the third one. Partly as a result of fraud cases and cryptocurrency scams, as well as the continuing impact of the 2008 financial crisis, distrust in capital markets and institutions is rising, Senter Lubin said in her testimony at the hearing. That lack of faith is growing especially among Americans who are Black, Latino, Asian American or members of other minority groups, Senter Lubin pointed out.

"In my view, we may be at a tipping point in the history of our capital markets," she said. "Promoting lasting trust starts with making improvements in how we prevent and detect investor harm and how we ensure that those charged with enforcing the laws have the tools needed to do the job."

Regulation and compliance

FINRA stirs expungement debate with latest arbitration reform proposal

August 10, 2022 3:42 PM

For his part, Hamm said the responsibility for supervising Robertson lay with Independent Financial during the time he was employed with the firm. The SEC accuses the firm of failing to conduct a single branch office audit of Robertson's practice for eight years while taking an approach of "limited supervision" that fell short of "actually reviewing his trading as required by the [firm's] compliance manuals." 

After hundreds of recruiting losses in the wake of its move out of LPL, Independent Financial is growing again these days. The firm's annual revenue jumped 31% in 2021 to $83.5 million, according to data it submitted to Financial Planning's IBD Elite survey. It currently spans about 260 advisors with $12.5 billion in client assets, according to Hamm. Wealth managers of all sizes need to invest in the right compliance personnel and vendors, he said.

"Make sure you've got the systems in place to detect it, because it's out there," Hamm said. "This guy slipped through the cracks in this one case."