Federal securities regulators on Tuesday announced charges against two Texas financial advisory firms and three of their executives for not disclosing transactions made through an affiliated broker to clients.
In a statement, the Securities and Exchange Commission said representatives of Houston-based Parallax Investments and Tri-Star Advisors engineered thousands of so-called principal transactions between client accounts and their affiliated brokerage firms from 2009 to 2011, without obtaining clients' consent or making required disclosures.
The case is the latest example of the SEC crackdown on financial advisers, which includes efforts to hire more examiners and perform more checks on industry professionals. Last week, the SEC brought fraud charges against two Florida advisers for allegedly selling "risky" investments while profiting from commissions on the transactions.
“By failing to disclose principal transactions and obtain consent, Parallax and Tri-Star Advisors deprived their clients of knowing in advance that their advisers stood to benefit substantially by running the trades through an affiliated account,” Marshall S. Sprung, co-chief of the SEC Enforcement Division's Asset Management Unit, said in the statement.
John P. Bott II, Parallax's owner, and two Tri-Star officials, William T. Payne and Jon C. Vaughan, used Tri-Star's corporate accounts to purchase mortgage-backed securities and then transferred the bonds to their clients' accounts, according to the SEC. They then collected the incentive fees, totaling more than $2 million, on the transactions.
Together the firms manage about $243 million for 683 accounts, according to regulatory filings.
Parallax and its chief compliance officer, F. Robert Falkenberg, were further charged with violations of the “custody rule” that sets standards for how advisory firms handle client assets. The SEC said they failed to retain an auditor or deliver financial statements on time in their role as an adviser to a private fund.
“They think it’s completely meritless and they plan to make a vigorous defense,” said Dona Szak, partner at the Houston-based firm representing Tri-Star Advisors.
Lawyers representing Parallax and individuals who were charged did not immediately respond to telephone messages seeking comment. The executives face possible civil penalties when the case is taken up in an SEC administrative proceeding.
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