SEC’s First Action Under Rule 38a-1(c) Re Deceiving COO of a Fund
The SEC brought its first proceeding under Rule 38a-1(c) of the Investment Company Act. That Rule prohibits an officer, director or employee of a fund or its investment adviser from taking any action to coerce, manipulate, mislead or fraudulently influence the CCO of the fund. Here, the Order alleges that Respondent mislead the Chief Compliance Officer of the funds in an effort to conceal his violation of rules and procedures requiring that he disclose his securities transactions. In the Matter of Carl D. Johns, Adm. Proc. File No. 3-15440 (Filed August 27, 2013).
Respondent Carl Johns was employed by Bolder Investment Advisers, LLC. He also performed services for its affiliate, Boulder Investment Advisers, LLC. The two advisers provided investment advisory services to four affiliated, closed-ended management investment companies registered with the Commission. Mr. Johns assisted in the management of the portfolios for, and served as an officer of, several registered investment companies.
During the course of his employment Mr. Johns engaged in active personal trading in securities, including those held by the funds. Rule 17j-1(d) of the Investment Company Act required that Mr. Johns submit quarterly reports of his personal transactions and annual reports of his holdings. The Code of Ethics of the advisers imposed additional restrictions regarding pre-clearance and trading. It also required an annual certification.
From 2006 through 2010 Mr. Johns failed to comply with Rule 17j-1(d) and the Code of Ethics. He failed to clear 640 trades, including 91 transactions in securities held, or to be acquired by, the funds. To conceal these violations Mr. Johns submitted false quarterly and annual reports and certifications. Specifically, he altered brokerage statements and trade confirmations; created documents claiming to show pre-clearance approval which were false; submitted altered confirmations in an effort to make it appear he had obtained pre-clearance; and deleted securities holding on his brokerage statements.
In late 2010 the CCO raised questions about the documents submitted by Mr. Johns. When questioned, Mr. Johns mislead the COO, falsely claiming that certain brokerage accounts were closed. He also accessed previously submitted documents regarding his trading and altered them in a manner designed to demonstrate compliance. The Order alleges violations of Section 17(j) of the Investment Company Act and Rules 17j-1 and 38a-1.
To resolve the proceeding Mr. Johns consented to the entry of a cease and desist order based on the Sections and Rules cited in the complaint. In addition, he agreed to the entry of an order barring him from the securities business with a right to apply for reentry after five years and agreed to pay disgorgement of $231,169 along with prejudgment interest and a civil money penalty of $100,000. Cf. SEC v. Gray, Civil Action No. 4:13-cv-2186 (S.D.Tx. Filed July 26, 2013)(CEO of IR firm settles action charging that he engaged in insider trading in stocks of firm clients).