Securities America Advisors Inc. (SSA) has agreed to pay $1.75 million for failing to safeguard investment advisory client accounts from fraudulent activity, the Securities and Exchange Commission announced.
At issue is SSA’s failure to implement policies and procedures to prevent the misappropriation of funds from investment advisory client accounts, which caused one owner of a New York independent state-registered investment advisor to swindle clients out of millions of dollars, the SEC said.
La Vista, Neb.-based SAA, which is owned by Securities America Financial Corporation, establishes investment advisory relationships with advisory clients through its employees and through remote independent state-RIA firms and independent state-registered investment advisors, the SEC said.
The SEC said SAA had adopted the safeguarding policies and procedures of Securities America Inc. (SAI), a Nebraska broker-dealer, also owned by Securities America Financial Corporation, which is owned by Advisor Group Holdings Inc. SAI served as the introducing broker for SAA’s advisory clients after the merger, the SEC said.
The SAI’s safeguarding policies comprise three units: A financial investigations unit (FIU) that oversees anti-money laundering activity; an operations cashiering unit responsible for reviewing outgoing client disbursements to ensure client signatures were updated; and an operation trade support unit that reviews and verifies outgoing wire requests in amounts of $50,000 or greater, the SEC said.
From November 2014 to March 2018, SAA did not follow through with the proper procedures, the SEC said. “SAA failed to implement policies and procedures for the review of automatically generated surveillance alerts after client disbursements had occurred. SAA also lacked policies and procedures for reviewing client disbursement requests for possible misappropriation before the disbursements occurred,” the regulator said.
Due to such failures, Hector May, the owner of Executive Compensation Planners Inc. (ECP), an Orangeburg, N.Y.-based independent state-RIA, was able to pilfer about $8 million from the SAA advisory accounts of at least 15 clients, the SEC said.
May was charged by the SEC in U.S. District Court in December 2018 with securities fraud for running a Ponzi scheme and he subsequently pleaded guilty to one count of conspiracy to commit wire fraud and one count of investment advisor fraud. He was sentenced to 13 years on the first count and 60 months imprisonment on the second count, to run concurrently, and ordered to make restitution of $8,041,233.17.
The SEC said May encouraged some of his clients with SSA advisory accounts to separately buy bonds, “falsely claiming that he could obtain the bonds at a better price and avoid certain fees if they did so.” Clients were told to remove the money from their SAA advisory accounts into their personal bank accounts and to approve the transfer if contacted for confirmation.
May further instructed clients to transfer the money to a custodial account with his firm once the funds arrived in their bank accounts. He then diverted the funds for his own personal use. To cover up the fraud, the SEC said, May sent fictitious advisory account statements to the clients “that purported to contain all their SAA advisory program investments including the phony bonds, their returns, and valuations.”
Under its agreement with the SEC, SSA will hire an independent consultant to review its policies and procedures and make recommendations for adoption and implementation. In addition to the fine, it consents to a censure and a cease and desist from committing or causing any violations and any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-7.