by T. GormanPosted on Posted in SECActions

Conflicts of interest involving market professionals continue to be a focus of SEC enforcement. In many cases the conflict is uncovered by the inspection staff, OCIE. This time, however, the information came from an article published by the Wall Street Journal. In the Matter of BlackRock Advisors, LLC, Adm. Proc. File No. 3-16501 (April 20, 2015).

Respondent BlackRock Advisers is a registered investment adviser with about $452 billion in assets under management. Respondent Bartholomew Battista is the CCO of BlackRock. Daniel Rice III is a managing director and co-portfolio manager of energy sector assets held in BlackRock registered funds, private funds and separately managed accounts. His compensation derives in part from the management fees of the managed funds and separate accounts.

In December 2006 Mr. Rice formed Rice Energy Irrevocable Trust to hold interests in Rice Energy, a name given to a then projected series of entities that would be formed. Those entities would be funded with about $2.4 million in gifts and a $23.5 million term loan from Mr. Rice. The next month Mr. Battista reviewed and discussed the matter with Mr. Rice. BlackRock concluded that the proposal did not present any conflict of interest. In February Mr. Rice formed the series of companies which were collectively known as Rice Energy.

By March 2010 Rice Energy concluded a deal which traced to mid-2008 under which Foundation Coal, which has recently completed a merger with ANR, entered into a joint venture with Rice Energy. At the time of the deal funds and separate accounts managed by Mr. Rice held over two million shares of ANR stock. By the end of the second quarter of 2010 ANR acquired Massey Energy whose shares were already held by funds and separate accounts managed by Mr. Rice.

In January 2010 Mr. Rice told BlackRock that he wanted to serve on the board of directors of the joint venture. BlackRock’s Legal and Compliance Department reviewed the matter and concluded that there were potential conflicts of interest in entering into the joint venture in view of the portfolio holdings managed by Mr. Rice. The deal also raised concerns regarding access to ANR specific information that could be beneficial to Mr. Rice rather than his clients. Nevertheless, BlackRock permitted Mr. Rice to continue under certain restrictions. There was no follow-up by the firm.

BlackRock did not inform the boards of directors of the Rice-managed registered funds or advisory clients about Rice Energy. No disclosure was made. Disclosure came in June 2012 when the Wall Street Journal published three articles about Mr. Rice and Rice Energy.

The Order alleges violations of Advisers Act Sections 206(2), engaging in a course of conduct which constitutes a fraud and deceit, and Section 206(4)-7, failing to adopt and implement reasonable procedures to prevent the violation. In addition, Respondents caused certain BlackRock funds to violate Investment Company Act Rule 38(a)-1(a) which requires registered investment companies, through their chief compliance officer, to provide a report at least annually to the fund’s board of directors addressing each material compliance matter that occurred since the date of the last report.

To resolve the matter BlackRock agreed to a series of undertakings which include the retention of an independent compliance consultant who will prepare a report. The firm will adopt the recommendations. In addition, BlackRock consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Battista also consented to the entry of a cease and desist order but based on Advisers Act Section 206(4) and a related rule and Investment Company Act Rule 38a-1. The firm agreed to pay a penalty of $12 million while Mr. Battista will pay $60,000. This is the first case to charge a violation of Investment Company Rule 38a-1.

Tagged with: , ,

by T. GormanPosted on Posted in SECActions

The Commission filed two settled offering fraud actions centered in part around an entity engaged in the purchase and sale of thoroughbred horses called Raintree Racing. A second involved an offering of interests in a real estate investment firm known as Atlanta Rehab which had invested in Raintree Racing. In the Matter of Russell C. Schalk, Jr., Adm. Proc. File No. 31555 (April 17, 2015); In the Matter of Joseph John Labadia, Adm. Proc. File No. 3-16499 (April 17, 2015). Mr. Schalk is currently a vice president of sales for Travel International. He is also the sole control person and a one third owner of Raintree Racing and the control person and CEO of a related entity, Raintree Farm. Mr. Labadia was an unregistered investment adviser who was a one third owner and member of the management committee of Raintree Racing. He is also a certified financial analyst and holds certain securities licenses.

From 2007 through 2012 Messrs. Schalk and Labadia raised over $1.9 million from investors for Raintree racing. Investors were told that they were making short term principal protected investments in the venture which were characterized as loans. Investors were told that the current rate of return was 20% and that the venture was extremely low risk.

Raintree Racing, however, lacked cash flow and did not have the financial ability to pay the promised 20% return. In fact Raintree Racing was dependent on the infusion of funds from investors for the continuation of its operations. Nevertheless, investors did receive interest and principal payments.

While investors were assured that their funds was a safe, over a three year period beginning in 2007, Mr. Schalk transferred about $668,000 from Raintree Racing to Raintree Farm. These transfers were contrary to the representations made to investors and not authorized by the documents they were provided. Indeed, Raintree Racing suspended operations at the end of 2012.

Some Raintree Racing investors were also offered the opportunity to invest in Raintree Farm. Investors did in fact purchase shares. The PPM, prepared by Mr. Schalk, failed to tell those investors that the Farm was operating at a material net loss, its operations were being funded by Racing and that it had minimal assets. Nevertheless, in late 2012 and early 2013 Mr. Schalk prepared and distributed to investors in Farm statements showing a per share value of $3.34. In fact those shares had little or no value, according to the Order. From 2007 through 2011 Mr. Schalk also diverted about $220,000 from Raintree Racing and Raintree Farm accounts to his personal bank account.

Mr. Labadia sold unregistered shares in a second venture, Atlanta Rehab, raising over $1.1 million. Atlanta Rehab investors were furnished with statements showing that the enterprise had an investment in Raintree Racing, valuing it at the offering price. At the time, a substantial portion of Atlanta Rehab funds were invested in Raintree Racing.

The Order in each proceeding alleges willful violations of Securities Act Sections 5(a), 5(c) and 17(a) and of Exchange Act Section 10(b). The Order as to Mr. Labadia alleges violations of Advisers Act Sections 206(1) and 206(2). Each Respondent settled, consenting to the entry of a cease and desist order based on the Sections cited in the Order in their action. Mr. Sahalk also agreed to pay disgorgement of $1,472,959, prejudgment interest and a third tier civil penalty of $1.6 million. An Administrative Law Judge will determine his ability to pay. Mr. Labadia is also barred from the securities business and from serving as an officer or director of a public company. He was ordered to pay disgorgement of $48,337 and prejudgment interest. Payment is suspended based on a sworn statement of an inability to pay.

Tagged with: ,