Two Tampa-area investment advisors have been charged by the SEC with fraud for failing to truthfully inform clients about compensation they received from offshore funds they were recommending as safe investments despite the risky nature of the funds, the SEC announced Wednesday.
The advisors also are charged with contributing to violations of the custody rule that requires investment advisory firms to establish specific procedures to safeguard and account for client assets.
Gregory J. Adams and Larry C. Grossman are charged with soliciting and directing clients of their investment firm, Sovereign International Asset Management, to invest almost exclusively in funds controlled by asset manager Nikolai Battoo. Grossman and Adams failed to inform clients that Battoo was paying them millions of dollars in compensation for steering investors to his funds.
The SEC alleged Battoo claimed to manage $1.5 billion on behalf of investors around the world, including at least $100 million for U.S.-based investors. But contrary to Battoo’s proclaimed track record of exceptional risk-adjusted returns for his investors, he actually suffered major losses in 2008 due to his investments in the Bernard Madoff Ponzi scheme and a failed derivative investment program, the SEC said.
According to the SEC’s order instituting administrative proceedings, Grossman was paid approximately $3.3 million and Adams $1 million by Battoo. Grossman and Adams promoted the investments in the offshore fund as safe, diversified, independently administered and audited. They said the funds were suitable for the investment objectives and risk profiles of their clients who were often retirees.
Battoo’s funds were in fact risky, lacked diversification, and lacked independent administrators and auditors. Grossman and Adams also failed to investigate, and in some cases wholly disregarded, numerous red flags surrounding Battoo and his funds, the SEC says.
Battoo himself was charged by the SEC in September with boasting remarkable investment success throughout the global financial crisis while allegedly exaggerating the value of the assets he managed and concealing major losses from investors.