Securities Litigation

Last week, SEC Administrative Law Judge Grimes dismissed administrative charges against an investment adviser and its principals for allegedly failing to disclose material conflicts of interest in its Form ADV and willfully filing false ADVs. The SEC instituted administrative proceedings against an investment advisor and several of its personnel, asserting that the firm's form ADV Part 2 did not adequately disclosure material conflicts of interest arising from Fidelity's revenue-sharing program in connection with some among the many funds on its platform, and also for willfully filing materially false forms with the Commission. After a full "trial" on the merits, the SEC's ALJ dismissed the case, holding that the Enforcement Staff failed to carry its burden. Particularly, the case involved only 150 legacy clients among the firm's base who had not received revised disclosures and:

• The principals did not even know which funds were part of the revenue-sharing agreement or not, testifying it made no difference to their recommendations because it simply was too hard to keep up with which ones were in or out over time;
• The firm relied on facially-valid compliance advice from Fidelity (and its compliance staff) and two separate independent compliance consultants regarding the issue;
• The firm was engaged in a constant and continuing effort to maintain good ADV disclosures on the subject, revising them each time suggested by any of the firm's consultants or counterparties;
• SEC Examinations over the period at issue did not note any deficiencies over the ADV disclosures; and,
• There were no client complaints or losses connected with the program or its disclosures.

The Commission's ALJ held the Staff failed to carry its burden of scienter, or gross recklessness, or even negligence. And as to the virtually per se violation of willful filing under Adviser Act § 207, the ALJ held no violation, with a footnote saying even in the event of a violation (arguendo - apparently girding for full Commission review), he would not have imposed any sanctions. The result of the decision is unremarkable given the dearth of the Commission's evidence and the strength of the Respondents' case as reflected in the decision. The bigger question is why the Staff ever brought the action in the first instance, or continued with it after Wells submissions, and what redress might there be for the poor advisory firm that had to go from investigation all the way through trial before vindication. The decision exudes a whiff of the bureaucratic "gathered momentum" that too frequently prevents more considered prosecutorial discretion to abandon an unjust case. The decision in The Robare Group, Ltd., AP File No. 3-16047 (SEC Admin. Initial Dec'n, June 4, 2015) is here. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Resident in the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2015 by Thomas K. Potter, III (all rights reserved).