Three Principals of Adviser Settle SEC Charges Over Undisclosed Conflicts

The Commission filed another settled action based on undisclosed conflicts involving an investment adviser. In this proceeding Respondents, principals of the adviser, failed to disclose a fee splitting arrangement with an executing broker. In the Matter of Gavornki, Adm. Proc. File No. 3-16286.

The proceeding centers around the relationship between registered investment adviser Concord Equity Group Advisers, LLC, Executing Broker and Tore Services, LLC, another broker-dealer. The owner of Concord is Concord Capital which is majority owned indirectly by the three Respondents, Lee Argush, Alan Gavornik and Nicholas Mariniello. Tore, formed in 2008, is also owned by Concord Capital. Mr. Argush was the CEO and CFO of Concord and Tore. Mr. Gavornik served as Concord’s executive managing director and CCO while Mr. Mariniello was Concord’s and Tore’s executive managing director and president.

In 1999 Respondents initiated the Concord Platform. It was intended to guide Concord’s clients through customized portfolio research, design and selection. It also permitted the clients’ portfolio managers to monitor and rebalance investment portfolios. Those clients were largely small and medium sized banks and trusts. In addition, Concord offered access to sub-advisers that were incorporated into the Platform.

Tore was formed to execute trades for clients and sub-advisers on the Platform. In 2008 Executing Broker contacted Concord regarding execution services. By October of that year an agreement was reached under which those who used the Platform would be referred to Executing Broker who would charge a commission of $0.04 to $0.06 per share. Of that amount $0.01 per share would remain with Executing Broker while the balance would be paid to Tore as a referral fee. An agreement captioned Commission Sharing Agreement for Referrals was executed.

Under the Referral Agreement most of the client paid commissions went to Tore. Indeed, from the time the arrangement was entered into until 2011 when Concord was acquired, Tore obtained $1,005,000 in revenues from the arrangement – about 90% of the commissions collected by Executing Brokers.

The terms of the Referral Agreement were never fully disclosed in the filings made by Concord with the SEC. For the first 12 months the arrangement was in place the firm’s ADV Part II contained no discussion of the arrangement. In an ADV Part II filed in November 2009 and again in March 2010 there was a reference to a referral fee arrangement involving Tore but the details regarding the agreement were not included. Likewise, and August 2010 filing, made after an examination by the staff, referenced the arrangement and noted that Tore “may” receive referral fees but again failed to detail the nature of the arrangement. Mr. Gavornik was primarily responsible for the filings. The Order alleges willful violations of Advisers Act Sections 204(a), 206(2) and 207.

Respondents resolved the proceeding, with each consenting to the entry of a cease and desist order based on Advisers Act Section 206(2). The order as to Mr. Gavornik is also based on the other Sections cited in the Order. In addition, he agreed to the entry of an order barring him from serving in any capacity with an investment adviser or registered investment company for a period of twelve months and suspending him from participating in any penny stock offering for the same period. Respondents were also ordered to pay disgorgement of $41,005,000 and prejudgment interest on a joint and several basis and each was directed to pay a penalty of $150,000.