SEC, USAO Charge IA Who Covered-up Referral Fee

The cover-up is virtually always worse than the underlying conduct. History is replete with instances where improper or even wrongful conduct was severely aggravated by an effort to conceal the conduct. That is precisely the case of former investment adviser – broker-dealer CEO who sought to conceal referral fees paid to attorney Peter Hershman. In the Matter of John W. Rafal, Adm. Proc. File No. 3-17760 (January 9, 2017); In the Matter of Peter Hershman, Esq., Adm. Proc. File No. 3-17761 (January 9, 2017).

Mr. Rafal was the CEO of dual registered Essex Financial Services, Inc. which held majority ownership of Essex Savings Bank. Mr. Rafal had a partial ownership interest in Essex Financial. Mr. Hershman was a Connecticut attorney who specialized in business, estate planning and tax law.

In 2010 Mr. Hershman began discussing the referral of a wealthy widow, one of his legal clients, to Mr. Rafal and Essex Financial. The client had combined assets of over $100 million. By the next year the two men reached an agreement under which attorney Hershman would be paid an annual fee of $50,000 quarterly from the advisory fees for referring the client. Mr. Hershman was to become a registered investment adviser.

The client subsequently retained Essex Financial to manage a portion of her funds. While Mr. Hershman failed to become an investment adviser he did stay in touch with the client and Mr. Rafal. He also continued to try and refer clients to the firm.

In mid-July 2012 the two men agreed that Mr. Hershman would bill Essex using statements representing that the payments were for legal fees. Eventually the fees were paid. Internal complaints at Essex concerning the undisclosed solicitation payments, however, resulted in a demand by the firm that they be repaid the next year. Although part of the fees was repaid to the firm Mr. Rafal made other arrangements to pay the fees. The fee arrangement was never disclosed to the clients.

In 2013 Mr. Rafal believed that rumors were circulating concerning him and the payment of illegal fees. He t sent a number of emails to firm clients and others falsely stating that the SEC had investigated the matter and issued a “no action” letter. When senior firm officials discovered the emails they ordered them retracted. Mr. Rafal complied.

Subsequently, Mr. Rafal testified in an investigation conducted by the Commission staff. During his testimony he stated that the fees had been repaid. He concealed from the staff the fact that he had made arrangements to pay the fees from accounts he controlled.

The Order as to Mr. Rafal alleges violations of Advisers Act Sections 206(1), 206(2) and 206(4). To resolve the case Mr. Rafal admitted to the facts in the Order and consented to the entry of a cease and desist order based on the Sections cited in the Order. He is also denied the privilege of appearing or practicing before the Commission as an attorney and barred from the securities business and from participating in any penny stock offering. Mr. Rafal will pay disgorgement of $275,000, prejudgment interest and a penalty of $275,000. The U.S. Attorney for the district of Massachusetts announced criminal charges against Mr. Rafal for obstructing the proceeding of a federal agency.

The Order as to Mr. Hershman alleges violations of Advisers Act Section 206(1) and 206(4). Respondent Hershman resolved the action by consenting to the entry of a cease and desist order, without admitting or denying the facts, based on the Sections cited in the Order. He is also barred from the securities business and from participating in any penny stock offering. In addition, Mr. Hershman will pay disgorgement of $49,760, prejudgment interest and a penalty of $37,500. See also In the Matter of Essex Financial Services, Inc., Adm. Proc. File No. 3-17762 (proceeding against the firm alleging violations of Advisers Act Section 206(4); resolved with a consent to a cease and desist order and the payment of $170,000 in disgorgement and prejudgment interest).