by T. GormanPosted on Posted in SECActions

The Commission has filed a series of actions tied to investment advisers who have failed to disclose conflicts of interest. The conflicts typically focus on the investment advise being furnished to the client. The most recent case involving undisclosed conflicts focuses on vendors furnishing investment related services. Those charges are bolstered by claims that misleading tax advice was furnished and the firm’s compliance procedures were inadequate. In the Matter of Devere USA, Inc., Adm. Proc. File No. 3-18527 (June 4, 2018).

deVere is a registered investment adviser whose business centers on U.K. pension holders. Specifically, its clients hold interests in U.K. pension plans. The adviser furnished advice to the clients regarding the transfer of their U.K. pension assets to overseas retirement plans that qualified under the U.K. tax authority’s regulations as a Qualifying Recognized Overseas Pension Scheme or QROPS.

Until about March 2017 deVere’s primary business involved recommending that clients elect to take a cash equivalent transfer value from their U.K. plan to a QROPS. The process typically involved the use of third party vendors in the form of a Custodian Firm and a Trustee Firm for the assets. The adviser would recommend, for example, the Custodian Firm. That firm charged a fixed annual fee each year, certain fixed charges for each transaction in the account and an establishment fee – a fee charged as a percentage of the assets each year for 10 years with an early cancellation penalty.

When the client transferred the assets to a Custodial Firm recommended by the adviser 7% of the transfer value was paid to an overseas affiliate of deVere. The firm paid half of that amount to the recommending investment adviser representative or IAR. Additional bonus payments were made to the adviser’s affiliate if certain targets were met. While the Custodial Firm paid the fees from its assets, the establishment fee was ultimately, over time, its basis. Clients were aware of the fees they were charged but were not informed about the payments to the adviser or the IAR or the resulting conflict.

The Trustee Firm also charged the clients for its services. Certain “introduction” and annual fees were paid to an overseas affiliate of the adviser with respect to clients who established and maintained QROPS with a Trustee Firm. The payments to the adviser’s affiliate were not disclosed.

Similarly, for clients who elected to convert all or a portion of their U.K. pension from British Pounds to U.S. Dollars or Euros in connection with the transfer to a QROPS, additional fees were paid to a Foreign Exchange Provider. As with the other recommended vendors, the Foreign Exchange Provider paid a portion of the fees to the IAR making the recommendation. That arrangement was not disclosed. To the contrary, the section of the Form ADV discussing the adviser’s compensation, while discussing fees, failed to disclose those from the Foreign Exchange Provider, the Trustee Firms or the Custodial Firms.

Tax advise was often given to clients by the IAR in connection with the transfer to a QROPS. Frequently, the statements made were incorrect. For example, certain IARs told clients between 2014 and 2016 that U.K. pensions were subject to U.K. inheritance tax. Yet that tax had not applied since at least 2011.

Finally, the adviser’s policies and procedures were not reasonably designed since they were not tailored to the specific business model of the firm. Specifically, “prior to at least December 2015 DVU [the adviser] did not have policies and procedures to address its QROPS business and the conflict of interest posed by the receipt of compensation from third parties . . .” in connection with that business, according to the Order. The Order alleges violations of Advisers Act sections 206(1), 206(2), 206(4) and 207.

To resolve the proceedings the adviser agreed to implement certain undertakings. Those included providing notice of these proceedings to the clients, certain training and the retention of an independent consultant to review the firm’s policies and procedures and make appropriate recommendations which will be adopted. In addition, the firm consented to the entry of a cease and desist order based on the sections cited in the Order and to the entry of a censure. The adviser will also pay a penalty of $8 million. See also SEC v. Alderson, Civil Action No. 1:18-cv-04930 (S.D.N.Y. Filed June 4, 2018)(action naming as defendants Benjamin Alderson and Bradley Hamilton, respectively, the CEO and Area Manager of the firm; complaint is based on the facts and sections cited above; case is in litigation).

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by T. GormanPosted on Posted in SECActions

Societe Generale S.A. and Legg Mason, Inc. agreed to resolve FCPA charges tied to bribing Gaddafi-Era Libyan Officials. Society Generale also settled charges stemming from its manipulation of LIBOR. The FCPA resolutions suggest the overall impact of cooperation. Although both cooperated with the Department, neither firm self-reported. Legg Mason, however, fully cooperated, fully remediated and only mid to lower level employees of a subsidiary were involved. In contrast, Society Generale did not fully cooperate and maintained the contact with the corrupt broker.

Society Generale is a global financial services institution based in Paris, France. Together with its subsidiary, SGA Societe Generale Acceptance N.V., the firm agreed to settle charges tied to a multi-year scheme to pay bribes to officials in Libya. Legg Mason, a Maryland based investment management firm, and its subsidiary Permal Group Ltd., also agreed to settle charges tied to its participation in the Libyan bribery scheme with Societe Generale.

Beginning in 2004, and continuing until 2009, Societe Generale agreed to pay bribes through a Libyan broker related to 14 investments made by Libyan state-owned financial institutions. Over the period a total of $90 million in bribes were paid, portions of which were channeled to high-level Libyan officials to secure investments from various Libyan state institutions. The bribes were calculated as a percentage of the deal, typically ranging from 1.5% to 3%. Portions of the bribes were paid to benefit Legg Mason. Society Generale obtained a total of 13 investments and one restructuring loan from various Libyan state institutions valued at over $3.66 billion, yielding profits of $535 million. Legg Mason, through Permal, managed seven of the investments, reaping profits of about $31.6 million.

To resolve the case Society Generale entered into a deferred prosecution agreement tied to a criminal information charging one count of conspiracy to violate the anti-bribery provisions of the FCPA and one count of transmitting false commodity reports. Its subsidiary will plead guilty to a one-count criminal information alleging conspiracy to violate the anti-bribery provisions of the FCPA. The financial institution will pay a criminal penalty of $585 million and continue to cooperate with the investigations. The firm will also maintain enhanced compliance procedures. The resolution reflects the firm’s failure to self-report and substantial but not full compliance along with substantial remediation, all of which lead the Department to conclude that a monitor is not necessary. U.S. v. Society Generale (E.D.N.Y.); U.S. v. SGA Societe Generale Acceptance N.V. (E.D.N.Y.).

Legg Mason entered into a non-prosecution agreement, agreeing to pay $64.2 million. That amount is composed of a penalty of $32.625 million and disgorgement of $31.617 million. The amount of the disgorgement will be credited against disgorgement claims of other law enforcement agencies made within the first year of the settlement. The firm will also continue to cooperate and maintain an enhanced compliance program. The settlement reflects the fact that the firm did not self-report but did fully cooperate with the investigation and fully remediated. The misconduct also only involved mid- to lower level employees of the subsidiary while Society Generale maintained the relationship with the Libyan broker.

Finally, in an unrelated matter, Society Generale resolved charges tied to manipulating LIBOR. Specifically, between May 2010 and October 2011 the financial institution engaged in a scheme to deflate LIBOR to make it appear that the firm’s borrowing costs were lower than what was actually paid. The directives for the scheme emanated from senior executives at the firm and had wide impact. In 2006 employees of the firm in London and Tokyo worked together to manipulate the firm’s Japan Yen LIBOR submission. This was done to benefit the trading position of a firm employee. A $275 million fine was paid to resolve the matter.

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