SEC fines, censures Ohio RIA for failure to supervise rogue remote-work rep

The Securities and Exchange Commission has imposed sanctions against a Cincinnati-based firm and its CEO for reportedly failing to adequately supervise an investment adviser representative who misappropriated hundreds of thousands of dollars from clients.

The SEC’s order, revealed Tuesday, found that Horter Investment and Drew Horter failed to properly oversee investment advisor representative Kimm Hannan, who misled clients with false solicitations over a two-year period.

One section of the SEC order detailed how Hannan was brought on at Horter Investment in December 2014 after splitting with his previous employer in the wake of an internal review. Citing the Form U5 associated with that breakup, the SEC noted Hannan's “use of marketing materials not approved by the firm and that checks were made payable to his DBA, rather than his RIA as required."

In the first of multiple red flags overlooked, the regulator described how Horter Investment came into possession of a FINRA inquiry regarding Hannan’s previous employment, which surfaced days after he joined the firm in late 2014. Despite recommendations from the firm’s compliance officer to terminate Hannan, Horter allowed him to continue as an IAR without additional supervision.

According to the SEC, Hannan, now 73 and no longer with the industry, solicited and misappropriated $728,001 from clients between 2015 and 2017 under the guise of investing in his outside business activities. Instead, he used the money to pay off personal expenses, including gambling debts, alimony, and personal credit card bills, and repay other investors.

The SEC's findings revealed that the firm processed 17 requests from Hannan’s clients to transfer their money to Hannan Properties, one of his OBAs. Despite these transfers clearly showing client funds were being redirected to Hannan’s personal ventures, Horter Investment failed to investigate.

Hannan's actions were enabled by what the SEC described as a lack of adequate supervision and overly lax compliance protocols at Horter Investment. The firm had a business model that allowed most of its IARs, including Hannan, to operate from remote locations with minimal oversight.

"Despite the requirement in Horter Investment’s OBA policy that IARs get prior approval for outside business activities and signoff from the CCO, Horter Investment and Horter allowed Hannan to operate HR Resources as outside businesses without either," the SEC order said, referring to one of Hannan's OBAs.

The SEC also found that the firm did not implement necessary supervisory procedures for remote workers and failed to conduct field visits or branch audits of its IARs, despite warnings from compliance consultants.

“Higher-risk IARs ... require a program of closer supervision particularly during their first years with Horter [Investment],” noted one consultant in 2015, according to the SEC. "Currently, no procedures call for such a review." 

Even before that in December 2014, the SEC said its staff sent a deficiency letter to Horter Investment datailing how "it failed to conduct supervisory inspections of its IARs’ branch offices."

The SEC said the firm took no action to address these concerns until 2017, shortly before it terminated Hannan. He was convicted in January 2019 for violating Ohio state laws and sentenced to a 20-year prison term.

Ultimately, the SEC’s order censured Horter Investment and imposed a $100,000 civil penalty on the firm. Horter, who oversaw the firm’s compliance program, was personally fined $50,000 and suspended from supervisory roles for six months.

The SEC emphasized that Horter Investment’s failure to adopt and implement adequate supervisory policies allowed Hannan’s fraud to persist unchecked for over a year. “Horter Investment’s growth has obviously outpaced its supervisory, compliance, and operational capabilities,” noted a compliance consultant in a 2015 review.