Two investment advisers must pay more than $6.3 million in fines and restitution for misleading clients whose money was invested in hedge funds linked to Bernie Madoff, a Securities and Exchange Commission administrative law judge has ruled.
Larry Grossman, a certified financial planner and founder of Sovereign International Asset Management, recommended clients invest mostly in two hedge funds he described as “moderately conservative,” the SEC administrative complaint said.
Mr. Grossman, who never discovered that the underlying funds were linked to Mr. Madoff, violated his fiduciary obligations to clients by failing to perform due diligence on these investments, which were managed by Nickolai Battoo, according to the complaint.
In October, a federal judge in Chicago
ordered Mr. Battoo to pay more than $358 million for hiding losses from investments in the Ponzi scheme run by Mr. Madoff.
Mr. Grossman also failed to tell clients about $3.4 million in referral and consulting fees his company received from the funds he recommended, the SEC said.
The other adviser in this case, Gregory Adams, agreed to buy Sovereign from Mr. Grossman for $3.8 million in October 2008, when the firm had 500 to 700 clients with $85 million in assets under management, the SEC complaint said. Three-quarters of the assets of Sovereign clients, most of whom were retired and many of whom were novice investors, were invested in the Battoo funds, according to the complaint.
Even after the sale, Mr. Grossman continued to have multiple roles with the firm and never explicitly told clients about the sale, the SEC complaint said.
Administrative law judge Brenda Murray ordered Mr. Grossman to pay about $4.5 million in penalties and disgorgement and Mr. Adams to pay a total of $1.8 million. Both men also will owe interest, she said
in her ruling last Tuesday.
Mr. Grossman acted with “extreme recklessness” and did not change his behavior even after SEC examination staff told him in 2005 that he was violating securities laws, Ms. Murray wrote.
Sovereign filed for bankruptcy in 2012; Mr. Adams followed suit in May 2013, the complaint said.
Mr. Grossman's lawyer, Zachary Messa of Johnson Pope Bokor Ruppel & Burns, did not immediately return a call for comment. Mr. Adams' lawyers, Mark David Hunter and Jenny Johnson-Sardella of Hunter Taubman Weiss, did not return calls.
About
$10 billion has been recovered for victims of Mr. Madoff's fraud. That represents about 60% of the principal that vanished after his arrest in December 2008.
