by T. GormanPosted on Posted in SECActions

The Commission filed another action in which admissions were required as part of the settlement. The action centeres on an investment adviser who misappropriated just under $2 million from his clients. As part of the settlement he admitted the theft. SEC v. Donnelly, Civil Action No. 15 6873 (E.D. Pa. Filed October 19, 2015).

Michael Donnelly has been a registered investment adviser and registered representative since the mid-1990s. He formed Donnelly Advisors Group, Inc. in 2005 where he was the President, CEO and sole employee. Two years later he formed a new firm called Donnelly Steen & Co. which did business as Coastal Investment Advisors, Inc. In 2012 Coastal Equities, Inc., a registered broker-dealer was acquired. Mr. Donnelly became president of that firm.

Mr. Donnelly began misappropriating client funds in 2007. To effectuate his scheme he typically told clients that he planned to invest their funds in various financial instruments. He then had the client write a check to Donnelly Advisors Group to fund the transaction. Most had been clients for years and trusted him. Clients were familiar with the Donnelly Advisors Group and thus did not question the point. At the same time using that name shielded the transactions from Donnelly & Steen and Coastal IA. The funds were then misappropriated. Subsequently, Mr. Donnelly would tell the clients that the investments had been made and were doing fine. Frequently documents were fabricated to support the lies told to the client.

From 2007 through 2014 Mr. Donnelly defrauded at least thirteen clients. Most of the clients were in their 80s. The amounts ranged from a low of $25,000 to a high of $800,000, totaling $1,990,150.54.

The scheme began to unravel with a transaction for Victims A&B in late 2008. Mr. Donnelly advised the couple that he intended to invest their funds in one-year institutional CDs. He claimed those instruments would be issued by PNC Bank and Bank of America. The Victims initially wrote two checks payable to Donnelly Advisors for $100,000 each. Over the next 16 months the couple wrote six additional checks. None of the investments were made. Nevertheless, over the next five years Mr. Donnelly prepared and sent the couple account statements reflecting the investments.

In July 2014 Victims A&B told Mr. Donnelly that they were moving their investments to a different adviser. To conceal his wrongful conduct the adviser misappropriated funds from another client. In connection with that transaction he had the client wire funds to a private business account of a Coastal IA employee. Subsequently, that firm’s senior officers learned about the transactions and terminated Mr. Donnelly.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

Mr. Donnelly settled the charges by admitting the conduct and consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. In addition, he was ordered to pay disgorgement of $1.9 million and prejudgment interest. Those obligations will be deemed satisfied by the entry of an order of restitution in the parallel criminal case. He also consented to the entry of an order permanently barring him from the securities business.

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by T. GormanPosted on Posted in SECActions

The SEC brought another enforcement action predicated on the failure of the firm to comply with its operating documents. In this instance the advisers to a fund failed to inform investors that it effectively changed the investment strategy by altering the composition and risk of its portfolio. In the Matter of UBS Willow Management L.L.C., Adm. Proc. File No. 3-16909 (October 16, 2015).

UBS Willow Management, which ceased operations in 2014, was a registered investment adviser. The firm was a joint venture between registered investment adviser UBS Fund Advisor, L.L.C., and Bond Street Capital L.L.C., a third part portfolio manager. Fund Adviser, a subsidiary of UBS AG, is also a Respondent. Willow Management advised UBS Willow Fund L.L.C., a closed-end Fund. UBS Fund Adviser was the controlling member of Willow Management.

Willow Management began offering the Fund in May 2000 and continued through mid-2012. The Offering Memorandum stated that the Fund primarily invested in distressed debt. The document also specified that the Fund invested in other types of securities, including derivatives for hedging and speculation.

Through 2008 the Fund invested primarily in distressed debt – long credit investments which drove the fund’s performance. In some instances it purchased and sold derivatives, including credit default swaps in modest amounts. Bond Street however believed that in 2008 the credit markets would deteriorate. It changed the composition of the investment portfolio by significantly increasing the short exposure through the purchase of CDS. Indeed, by the end first quarter of 2009 25% of the portfolio was composed of those instruments compared to one year earlier when it held about 2.6%. That switch changed the risk profile of the Fund. It also contributed to significant losses starting in early 2009 and eventually led to the liquidation of the Fund in 2012.

The OM did not reflect the change in portfolio composition. Likewise, investor letters disseminated by Willow Management did not record the change. Nor did the filings made with the Commission.

Fund Advisor was aware of the change. Nevertheless, it never directed Willow Management to reduce the Fund’s CDS exposure. Fund Advisor thus failed to reasonably supervise Willow Management. The Order alleges violations of Securities Act Sections 17(a)(2), 17(a)(3), Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Section 34(b).

To resolve the proceedings Respondents will compensate Fund investors. In addition, Willow Management consented to the entry of a cease and desist order based on the Sections cited in the Order. Both Respondents were censured. Respondents, jointly and severally, will pay disgorgement of $8,223,110 and pay prejudgment interest.