Aug 7 A Securities and Exchange Commission judge has ordered a San Diego-based investment firm to pay a $15 million penalty and barred its two advisers from the securities industry for a scheme that defrauded clients out of $10.9 million.
Chief Administrative Law Judge Brenda P. Murray ruled that J.S. Oliver Capital Management LP and the two advisers, who included the firm's founder, breached their responsibilities to act in their clients' best interests and committed other securities law violations.
Murray ruled that the firm and advisers had engaged in "cherry-picking," or awarding more profitable trades to favored clients. They had also misused "soft dollars," or credits from brokerage firms on commissions that investment advisers' clients pay for trades, according to a 64-page opinion dated Tuesday.
J.S. Oliver Capital Management must also pay $1.4 million in disgorgement, a type of penalty that effectively forces those who have engaged in wrongdoing to give up profits they obtained through their misconduct. The firm's founder, Ian O. Mausner, must also pay a $3 million penalty, in addition to being barred from the securities industry.
The firm's portfolio manager, Douglas F. Drennan, was also barred from the securities industry and fined $410,000.
A phone number for J.S. Oliver Capital Management was not in working order on Thursday. Mausner, who defended himself and the company, did not immediately respond to a message sent to him through LinkedIn. Other efforts to reach him were unsuccessful. Drennan and his lawyer did not immediately return calls requesting comment.
The SEC filed its action against J.S. Oliver Capital Management in August, 2013, alleging that Mausner awarded more profitable trades to hedge funds in which Mausner and his family had invested. The SEC said less profitable trades were given to other clients, including a widow and a charitable foundation. The cherry-picking scheme occurred between 2008 and 2009, it said.
The firm managed about $142 million in 2008, according to the decision.
The decision said J.S. Oliver Capital Management and Mausner also misused $1.1 million in soft dollars for expenses that did not benefit clients, such as a $215,000 payment to Mausner's ex-wife related to their divorce and $40,000 for Masuner's luxury timeshare expenses.
Investment advisory firms may use soft dollars to pay for certain limited expenses that benefit clients as long as they properly disclose that information. The firm and Mausner had argued that they informed their clients of the soft dollar uses in regulatory forms but the SEC found the disclosures inadequate and, in at least one instance, false.
Drennan, the portfolio manager, "aided and abetted" some of the soft dollar misuses, Murray ruled.
The firm, Mausner and Drennan "betrayed their fiduciary responsibilities in a blatant, self-serving manner" and were not credible witnesses, Murray wrote. (Reporting by Suzanne Barlyn; Editing by David Gregorio)