CCO Charged with Failing to Supervise an Investment Adviser Representative

September 30, 2015

The SEC brought an enforcement action against James Goodland, a chief compliance officer of Securus Wealth Management, LLC, an investment adviser, and Securus itself for failing to adopt and implement an adequate system of internal controls with a view toward preventing and detecting violations of the Advisers Act. The SEC found that from January 2010 through July 2013, Securus failed reasonably to supervise Howard Richards, an investment adviser representative associated with Securus whom Goodland directly supervised.

The SEC stated that during this period, Richards engaged in a manipulative scheme to support the market price of the common stock of Gatekeeper USA, Inc. to help Gatekeeper obtain financing. Gatekeeper was a start-up company whose stock was thinly-traded on the over-the-counter grey market. Richards caused his clients to invest over $1 million in shares of Gatekeeper stock during this period. The SEC stated that this trading was unusual for Securus, whose primary business involved investing in mutual funds on behalf of its clients. In furtherance of his scheme, Richards sent numerous emails from his Securus email account to an insider at Gatekeeper in which he discussed his scheme. In addition, Richards failed to disclose significant conflicts of interest to his advisory clients arising from his personal ownership of Gatekeeper shares and his close involvement with the company.

During the relevant period, Goodland was responsible for reviewing, approving and implementing Securus’ compliance policies and procedures. As part of his supervisory responsibilities as Richards’ direct supervisor, Goodland held bi-weekly meetings with Richards and other adviser representatives who were part of an investment committee to discuss client investments and compliance issues.

Richards told Goodland during the bi-weekly meetings that he personally owned Gatekeeper shares and was “building positions” in Gatekeeper stock in client portfolios on a discretionary basis. Goodland knew that Gatekeeper was a grey market stock, and that Richards’ purchases of Gatekeeper stock were outside of Securus’ normal investment strategies for its clients.

Richards provided Goodland with updates on the status of the Gatekeeper financing efforts. Goodland was aware that Richards obtained this information from Gatekeeper’s vice president of finance.

The SEC found that Goodland, failed to adequately review Richards’ emails. Even though Securus’ written policies and procedures required monthly email monitoring and Securus provided Goodland with access to an email system and flagged emails for his review, Goodland did not review the flagged emails between 2010 and 2012. Instead, Goodland randomly selected and reviewed approximately 50 client emails about 7 or 8 times during the year, without focusing on any particular issues or documenting his review.

Even after Goodland received notifications in January and February 2013 that Securus had outstanding emails that had not been reviewed in the email system, the SEC stated that Goodland did not personally review the emails and instead, delegated the review to another employee who reported to Goodland and was not a supervisor.

The email system flagged some emails between Richards and Gatekeeper’s vice-president of finance about Gatekeeper’s financing efforts, though it did not flag emails in which Richards discussed his manipulative trading of Gatekeeper stock in client accounts. Had Goodland timely and properly reviewed the flagged Gatekeeper emails, he likely would have recognized Richards’ ongoing communications with a corporate officer about financing efforts as additional red flags and implemented additional oversight. If Goodland had conducted a heightened review of Richards’ other emails concerning Gatekeeper, he likely would have detected Richards’ manipulative tactics and prevented further violations.

The SEC noted that Securus failed reasonably to implement its e-mail review policies and procedures to address whether supervisors were conducting e-mail review.

The SEC stated that Securus’ written compliance policies acknowledged that it had a duty as an investment adviser to “eliminate conflicts of interest, whether actual or potential, or make full and fair disclosure of all material facts of any conflicts so a client, or prospective client, may make an informed decision in each particular instance.” Securus, however, had no policies or procedures requiring its representatives to disclose conflicts of interest to the firm or for the firm to perform any additional procedures to ensure that conflicts of interest were disclosed to clients. Rather, Securus relied upon Richards’ voluntary disclosure of his ownership of Gatekeeper shares and took no additional actions. Securus and Goodland were not aware of Richards’ other significant conflicts of interest and took no steps to determine whether Richards disclosed all material facts of his conflicts of interest to his clients before buying Gatekeeper shares for them.

After permitting Richards to continue trading Gatekeeper stock despite a known conflict of interest and the unusual nature of discretionary trading in a grey market stock for the firm’s clients, the SEC found that Goodland did not adequately monitor Richards’ repeated purchases of Gatekeeper stock in client accounts. Goodland did not implement any heightened procedures to monitor Richards’ trading of Gatekeeper. Goodland reviewed trading in client accounts periodically, but focused on Gatekeeper transactions only when they were highlighted for closer review by trading compliance software that flagged trades automatically based on client suitability and concentration criteria. Securus had no policies or procedures to detect and prevent manipulative trading such as the tactics employed by Richards. The only time Goodland conducted a review focusing on Gatekeeper trading was in July 2013, after Goodland learned that a client had complained about Richards’ purchases of Gatekeeper stock. Goodland then calculated the percentage of public float owned by all of Richards clients and instructed Richards to not buy any more Gatekeeper shares without his prior approval.

Section 203(e)(6) of the Advisers Act provides for the imposition of a sanction against an investment adviser who has failed reasonably to supervise, with a view to preventing violations of the securities laws, another person who commits such a violation, if such other person is subject to its supervision. Section 203(f) of the Advisers Act incorporates by reference Section 203(e)(6) and provides for the imposition of sanctions against persons associated with an investment adviser. As a result of the conduct described above, the SEC stated that Securus and Goodland failed reasonably to supervise Richards with a view to detecting and preventing his violations of securities laws. Furthermore, as a result of the conduct described above, Securus willfully violated and Goodland willfully aided and abetted and caused Securus’ violations of Section 206(4) and Rule 206(4)–7 of the Advisers Act, which require, among other things, that a registered investment adviser adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.

Click https://www.sec.gov/litigation/admin/2015/ia-4213.pdf to access the enforcement action.


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Investment Advisers, Investment Companies