A broker paid more than $800,000 to settle Securities and Exchange Commission charges that it gave commission rebates to an investment advisory firm, whose president then used them to make improper payments to his ex-wife and to pay for a personal residence.
The SEC found that the broker, Instinet, approved about $430,000 in so-called soft-dollar payments to J.S. Oliver Capital Management, from January 2009 through July 2010 that the firm did not properly disclose to its clients.
Soft dollars are credits that brokerages give to advisers for commissions charged to their clients for trades in their accounts. They can legally be used to pay for brokerage and research services, as long as they are fully disclosed.
The SEC said that Instinet ignored “red flags” that the adviser was misusing the soft dollars, including $329,000 for the ex-wife of J.S. Oliver's president, Ian Mausner; $65,000 for 13 months of inflated rent payments at Mr. Mausner's home office and more than $40,000 for two payments on Mr. Mausner's New York City timeshare.
Instinet settled without admitting or denying the charges. Instinet's attorney, Jonathan Pressman, a partner at WilmerHale, declined to comment. The SEC charged J.S. Oliver and Mr. Mausner separately in August.
“Instinet repeatedly approved soft dollar payments despite clear warning signs that J.S. Oliver and Mausner were improperly using client funds for their benefit,” Marshall S. Sprung, co-chief of the SEC Enforcement Division's Asset Management Unit, said in a statement. “Brokers perform a crucial gatekeeper function in approving soft dollar payments, and they cannot turn a blind eye to red flags that investment advisers may be breaching their fiduciary duty to clients.”
J.S. Oliver said that the soft dollars would be used for “evaluating potential investment opportunities” and for “overhead expenses,” according to the SEC claim.
But the agency said that Instinet should have known that the payments for Mr. Mausner's ex-wife were fishy because she was not being compensated as an employee “but rather…to satisfy Mausner's personal obligation.”