The SEC charged two Tampa-area investment advisers with committing fraud by failing to truthfully inform clients about compensation received from offshore funds they were recommending as safe investments despite substantial risks and red flags. The advisers were also charged with contributing to violations of Rule 206(4)-2 under the Advisers Act, the "custody rule."
The SEC alleges that Gregory J. Adams and Larry C. Grossman solicited and directed clients of their investment firm Sovereign International Asset Management to invest almost exclusively in funds controlled by an asset manager named Nikolai Battoo, who the SEC charged in a separate enforcement action last year. Grossman and Adams failed to inform clients about the conflict of interest in recommending these investments as Battoo was paying them millions of dollars in compensation for steering investors to his funds.
According to the SEC, Grossman was paid approximately $3.3 million and Adams received $1 million in the undisclosed compensation arrangements. Grossman and Adams promoted the investments as safe, diversified, independently administered and audited, and suitable for the investment objectives and risk profiles of their clients who were often retirees. However, Battoo's funds were, according to the SEC, lacked diversification, and lacked independent administrators and auditors. Grossman and Adams also failed to investigate – and in some cases wholly disregarded – numerous red flags surrounding Battoo and his funds.
The SEC further alleged that Grossman and Adams aided and abetted Sovereign's violations of the custody rule when they instructed clients to transfer their investment funds to a bank account controlled by a related entity. Grossman and Adams pooled clients' money in this bank account before investing it in Battoo's offshore funds. Sovereign, according to the SEC, failed to comply with the custody rule, which requires an investment adviser to comply with surprise examinations or certain other procedures to verify and safeguard client assets.
Please click here to access the administrative order.