The Securities and Exchange Commission has charged a San Francisco-area investment advisor for fraudulently diverting brokerage commission funds to pay for office expenses and his brother's salary, and then lying to the SEC about it.
The SEC alleges that Kurt S. Hovan, 43, of Belvedere, Calif., misappropriated more than $178,000 in "soft dollars" that he falsely claimed to be using to pay for legitimate investment research on his clients' behalf. In reality, Hovan was secretly funneling the money to, among other things, office rent, computer hardware and his brother's salary. When SEC examination staff asked Hovan to provide documentation to back up his claims, he created phony research reports.
At the same time, the U.S. Attorney's Office for the Northern District of California in San Francisco on Wednesday filed criminal charges of mail fraud and obstruction of justice against Kurt Hovan.
If convicted of mail fraud, Hovan faces a possible 20-year prison sentence, a $250,000 fine and five years of supervised release. If convicted of obstruction, Hovan faces a possible five years in prison, a $250,000 fine and three years of supervised release.
Hovan's prosecution is the result of a five-month investigation by the Federal Bureau of Investigation, with assistance from the SEC's San Francisco Regional Office.
The SEC's complaint, filed in federal court in San Francisco, charges Hovan, his wife Lisa Hovan and his brother Edward Hovan, and HCM Capital Management LLC (HCM) with violating the anti-fraud provisions of federal securities laws, as well as additional record-keeping violations.
"The SEC's ability to review the records of investment professionals is a cornerstone of our investor protection mission," said Marc Fagel, director of the SEC's San Francisco Regional Office in a prepared statement. "We take a particularly dim view of those who compound their fraud on investors by providing false information to our examiners."
"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 appropriately disclosed, soft dollar credits may be retained by an investment advisor to pay for a limited brokerage and research services that benefit clients.
According to the SEC's complaint, Kurt and Lisa Hovan falsely disclosed to clients that HCM would use soft dollars only for certain research services. Instead, they used $166,667 in soft dollars to pay Edward Hovan's salary over a 10-month period in 2008 and 2009. To cover up these payments, the three Hovans created a shell company called Bolton Research that was secretly controlled by Edward Hovan.
Through this company, the Hovans invoiced HCM's brokerage firms for research services that had never been rendered, according to the SEC. Once Edward Hovan received the payments, he kicked back about 40 percent-$65,000-to Kurt and Lisa Hovan to pay the office rent.
The SEC further alleges that Kurt and Lisa Hovan instructed a research provider paid with soft dollars to pad its invoices by $12,000 and kick back this amount to help HCM pay for a new computer server.
During a January 2010 examination of HCM, SEC staff asked HCM to provide copies of the research reports prepared by Bolton Research in exchange for the soft dollar payments. The SEC said Kurt Hovan then quickly drafted numerous research reports and doctored materials to make them appear as if they had been prepared by Bolton. Hovan provided these phony documents to SEC examiners.
The SEC is seeking injunctive relief, disgorgement of assets with interest, and financial penalties against the Hovans and HCM.