Adviser Charged with Improper Actions During an Examination

September 27, 2011

The SEC charged Kurt Hovan, a San Francisco-area investment adviser, with fraud for lying to clients about how brokerage commission rebates were being used and producing fictitious documents to cover up the fraud during an SEC examination.  The SEC also charged his wife Lisa Hovan and his brother Edward Hovan for their roles in the fraudulent scheme at Hovan Capital Management (HCM).

The SEC alleges that Kurt Hovan misappropriated more than $178,000 in “soft dollars” that he falsely claimed to be using to pay for legitimate investment research on his clients’ behalf. Soft dollars are credits or rebates from brokerage firms on commissions paid by clients for trades executed in the client accounts of an investment adviser. If appropriately disclosed, an investment adviser may retain the soft dollar credits to pay for a limited category of brokerage and research services that benefit clients.

According to the SEC, Hovan was secretly funneling the money for such undisclosed uses as office rent, computer hardware, and his brother’s salary. When the SEC’s examination staff asked Hovan to provide documentation to back up his claims, he created fictitious research reports.

The SEC found that Kurt and Lisa Hovan falsely disclosed to clients that HCM would use soft dollars only for certain research services.  Instead, they used $166,667 in soft dollars to pay Edward Hovan’s salary over a 10-month period in 2008 and 2009. To cover up these payments, the SEC alleges that Hovans created a shell company called “Bolton Research.”  Through this company, the Hovans invoiced HCM’s brokerage firms for research services that had never been rendered. Once Edward Hovan received the payments, he kicked back approximately 40% ($65,000) to Kurt and Lisa Hovan to pay the office rent. The SEC further alleges that Kurt and Lisa Hovan instructed a research provider paid with soft dollars to pad its invoices by $12,000 and kick back this amount to help HCM pay for a new computer server.

During a January 2010 examination of HCM, the SEC staff asked HCM to provide copies of the research reports prepared by Bolton Research in exchange for the soft dollar payments. In response, the SEC alleges that Kurt Hovan quickly drafted numerous research reports and doctored materials to make them appear as if they had been prepared by Bolton. Hovan provided these phony documents to SEC examiners.

The SEC charged Kurt Hovan, Lisa Hovan, Edward Hovan, and HCM with violating the antifraud provisions of the federal securities laws, and asserts additional recordkeeping violations against Kurt Hovan and HCM. The SEC is seeking injunctive relief, disgorgement with prejudgment interest, and financial penalties.

Please click here to access the SEC’s complaint.


Categories

Enforcement Actions, Investment Advisers, Investment Companies