A Connecticut investment adviser has been barred from the industry by the Securities and Exchange Commission and will pay $577,297 in penalties for concealing a referral fee from a client and then trying to undermine the agency's investigation.
John W. Rafal, the former president and chief executive of Essex Financial Services Inc. in Essex, Conn., obtained a new client with accounts in excess of $100 million from Peter D. Hershman, a Connecticut attorney, according to the SEC order.
Mr. Rafal agreed to pay Mr. Hershman $50,000 annually from the advisory fees paid to Essex by the client, an elderly widow,
according to the SEC order.
As part of the arrangement, Mr. Hershman was to become a registered investment adviser. But Mr. Hershman never took the test required to become an RIA, making him ineligible to receive the referral payments.
Instead, from early 2011 to April 2013, Mr. Rafal and Mr. Hershman disguised the referral payments as fake invoices for legal services to the Essex client and did not disclose them to the client.
When Essex halted the arrangement, Mr. Rafal paid Mr. Hershman using other accounts, according to the SEC.
Mr. Rafal, 66, also tried to hide the SEC investigation from his other clients, falsely claiming in emails to them from May 2013 through March 2014 that the SEC had wrapped up its probe and cleared him and Mr. Hershman.
In the SEC settlement, Mr. Rafal admitted guilt and agreed to pay a fine of $275,000, disgorgement of $275,000 and prejudgment interest of $27,297.72. He also was barred from the industry.
The SEC also said Mr. Rafal misled the agency about additional payments he made to Mr. Hershman after Essex had ended their arrangement.
The SEC's Office of the Inspector General conducted an investigation of the alleged obstruction along with the U.S. Attorney's Office for the District of Massachusetts, which separately filed criminal charges against Mr. Rafal on Monday.
Mr. Hershman agreed to pay the SEC a settlement of $90,000 and was barred from the industry. He did not admit nor deny the charges.
Essex Financial Services paid the SEC more than $180,000 in disgorgement and interest while neither admitting nor denying the charges.
“Rafal misled one client by hiding referral fees, misled other clients by falsely stating the SEC's investigation was over and then attempted to mislead those investigating him. He will now be paying the price for that deceit,” Stephanie Avakian, acting director of the SEC Enforcement Division, said in a statement.
A lawyer for Mr. Rafal said he would bounce back from the incident.
"Mr. Rafal is grateful to put this matter, which has been pending for several years, behind him," said John Sylvia, a lawyer at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. "No client lost any money as a result of Mr. Rafal's actions, and Mr. Rafal is looking forward to opening a new chapter in his professional life."
Essex said it conducted an independent review, cooperated with the SEC and had implemented remedial measures.
"We take any compliance matter very seriously, and our responsive measures show that we are committed to the highest standards of business conduct," Doug Paul, chairman of Essex Financial Services, said in a statement. "We are happy to have this matter behind us now and we look forward to continued growth and success."
A lawyer for Mr. Hershman declined to comment.
Mr. Rafal, once a highly ranked adviser, was
fired by Essex in December 2015, following a Connecticut Department of Banking investigation of the referral payment.
