The SEC has filed an order for administrative and cease-and-desist proceedings against Horter Investment Management and its CEO, Drew K. Horter.
According to the SEC, an investigation following the 2019 conviction of Kimm C. Hannan, an investment advisor representative at Horter Investment who misappropriated more than $728,000 from the firm’s clients, found that both Horter Investment and Drew Horter failed to reasonably supervise Hannan during the course of his employment.
In addition, both the Cincinnati-based firm, which has approximately $400 million in assets under management, and Drew Horter failed to heed multiple red flags and even disregarded their own policies and procedures, which, while in place, were inadequate and failed to meet industry standards, according to the filing.
The filing set a public hearing within 60 days to review Horter Investment’s response to the allegations, review the allegations and rule on what remedial action, if any, would be appropriate. A call placed to Horter Investment was not returned as of this writing.
Hannan, who held Series 7 and 63 licenses, worked for Horter Investment from December 2014 through March 2017. Like most of Horter Investment’s investment advisor representatives, he worked remotely as an independent contractor. Just at around the time Hannan started with the firm, the SEC’s examination staff had issued a deficiency letter unrelated to his work saying that Horter Investment had “failed to conduct adequate annual compliance reviews [and] failed to implement an effective compliance program.” In addition, the consultant Horter Investment hired to review its compliance program following that examination noted the firm’s growth had “obviously outpaced its supervisory, compliance and operation capabilities.” That consultant advised that the firm should develop more detailed procedures for supervising its remote IARs, according to the filing.
The filing alleged, however, that neither Horter Investment nor Horter took any significant steps to remedy the shortcomings of its compliance program from December 2014 to March 2017, during which time Hannan misappropriated more than $728,000 by diverting funds from Horter Investment client accounts into two of his own outside business activities and used the money for a variety of expenses unrelated to those businesses, including gambling; alimony and support payments for his ex-wife; personal credit card bills; rent on the building for his investment advisory services businesses; and his utilities, car payments and insurance. Published reports at the time of his conviction noted that the case involved Ponzi-like payments to olf investors with new investor money. Hannan is currently serving a 20-year prison term at the Lorain Correctional Institution in Grafton, Ohio, following his conviction in this matter.
Overall, more than half of the IARs hired by Horter Investments since November 2014 were identified as high or moderate risk, the filing said. In March 2015, a consultant warned the firm that higher risk IARs required a program of closer supervision, especially during their first years. Similarly, in September 2016, Horter Investment’s compliance officer reminded the firm it needed to develop its supervision program. Despite these warnings, Horter Investment and Drew Horter did not institute such supervision procedures until right after they became aware of Hannan’s misappropriation and right before they terminated him, according to the filing.
The filing states that Horter and his firm failed to reasonably supervise Hannan in four areas: by establishing supervisory policies and procedures, by implementing those policies and procedures, by following up on red flags and by delegating supervisory authority.
At one point, following an inquiry by the Financial Industry Regulatory Authority into Hannan’s behavior at a previous firm, the compliance office recommended that Horter terminate Hannan, but Horter rejected that recommendation, according to the filing. In addition, red flags had been raised by 17 distribution requests from Hannan’s Horter Investment clients to Hannan Properties, one of the rep’s outside business activities, and all those flags went uninvestigated.
And finally, the filing said, Horter delegated responsibility to the compliance officer for annual reviews in 2016 and 2017 (and to the officer and a consultant in 2015), but did not supervise the reviews or ask for the results.