July 24 (Reuters) - Ignoring a key adviser’s questionable behavior can be a comfortable path for supervisors at securities firms, especially in a small, chummy office. Just expect it to end badly.
In fact, looking away can leave indelible blotches on your resume and even become a career-ending mistake, as a former investment advisory compliance officer and principal are learning.
On Friday, the U.S. Securities and Exchange Commission barred Charles Rizzo, the principal, and Gina Hornbogen, the compliance officer, from working as supervisors in the securities industry. From 2002 to 2009, according to an SEC settlement, the two ignored numerous clues about a key adviser, creating an environment that allowed adviser Steven Salutric to misappropriate about $7 million from customers at the Illinois-based firm, Results One Financial.
Salutric pleaded not guilty to criminal fraud charges in January. Rizzo and Hornbogen, now employed by an independent broker dealer, neither admitted nor denied the SEC’s civil allegations. Lawyers for all the involved parties could not immediately be reached for comment.
The case highlights the potential difficulties of policing suspicious conduct at small investment advisory firms. There are roughly 4,770 small investment advisers in the United States, typically managing up to about $100 million in assets, according to a 2011 industry report based on 2010 data.
Limited financial resources often mean that compliance officers juggle multiple roles. Also, disciplining a longtime colleague may be awkward for principals given that small advisers typically have between six and 10 nonclerical employees, say compliance professionals.
“You need to have a very strong backbone,” said Korrine Kohm, vice president at Ascendant Compliance Management, a consultancy in Salisbury, Connecticut. “I could see where it gets harder to speak up in those situations but it’s so much more beneficial” to do so, she said.
Alarms about Salutric began sounding around 2003, when daily emails that Rizzo and Hornbogen received from the firm’s operations department showed certain large withdrawals and deposits in accounts for Salutric’s clients. In one instance, $900,000 was wired into four accounts and wired out a few days later.
Rizzo and Hornbogen never asked Salutric’s clients about the withdrawals. Instead, they “routinely accepted” his explanations, said the SEC.
The situation worsened as Salutric began forging clients’ signatures on wire transfer forms. The transactions caught the attention of a Charles Schwab Corp unit where the clients kept their funds. Salutric later described some of the suspicious transfers as “loans between clients” that were “none of Schwab’s business,” according to the SEC.
But Schwab became so concerned that it no longer wanted Salutric to manage client accounts held at Schwab. Rizzo and Hornbogen, however, later allowed Salutric to give instructions for his clients’ accounts through the firm’s operations departments, the SEC said.
The misdeeds continued until Salutric, whose alleged victims included a 96-year-old client with dementia, was caught and barred from the industry in 2010.
Schwab ended its relationship with Results One in 2010, when the firm withdrew its SEC registration. A Schwab spokeswoman said the company fully cooperated with the SEC. Schwab is not accused of any wrongdoing.
While the SEC’s order does not explain a rationale for the inaction by Rizzo and Hornbogen, the problem is not unheard of at smaller advisers where the lines between professionals and friends are often hazy, say compliance professionals. That does not mean that every case leads to massive investor fraud, but the pattern, even in less-serious situations, can land supervisors and compliance officers in trouble, they say.
Want to avoid raising the SEC’s hackles? For starters, “You can’t have friends” at the office, said Stephen Sussman, chief executive of Regulatory Compliance LLC in Boston.
That is especially true for the compliance officer, who is charged with enforcing the rules. It is best for them to keep their distance and simply do their job.
At a small firm, the person who shoulders the compliance responsibility may also be keeping books and even managing accounts, Sussman said. Compliance officers who wear multiple hats should be even more aware of the need to take a step back from personal relationships and be prepared to enforce the rules.
Other problems crop up when the person causing trouble is in charge or a major force behind the firm’s revenue.
“You need to be able to stand up to the senior partner and say ‘this violates the rules,’” said Les Abromovitz, a consultant with National Compliance Services Inc in Delray Beach, Florida.
Compliance officers and other managers may have to take another big leap if they have concrete proof that their firm is violating the rules: resign.
Otherwise, they “put their whole livelihood on the line,” Abromovitz said. “They may never be able to work in the industry again.”
That outcome should make it easier to put a chill on some cozy work relationships.