The Securities and Exchange Commission (SEC) has filed charges against two Florida-based investment advisers, accusing them of fraud and failure to inform clients about compensation they received for recommending certain offshore funds. According to the SEC, the investments were much riskier then consumers were led to believe. However, Gregory Adams and Larry Grossman continued to recommend the funds to obtain substantial rewards for themselves.

Adams and Grossman recommended that clients use Sovereign International Asset Management and invest exclusively in funds controlled by a manager named Nikolai Battoo. Battoo–who has been charged in a separate SEC enforcement action– paid Adams and Grossman millions to drive the investment traffic to him.

Not only was this conflict of interest hidden from clients—many of whom were retirees– they were led to believe that investments were stable and diversified. The SEC says that the funds were in fact “risky,” lacking in diversification and independent audit.  Battoo has previously been charged in conjunction with the Bernie Madoff Ponzi scheme, but Adams and Grossman ignored those red flags and continued to recommend his funds.

Grossman is said to have collected around $3.3 million in compensation and arrangements in the scheme, while Adams collected approximately $1 million. In addition to the major charge, the parties involved are also accused of not following SEC “custody laws” which require advisers to establish procedures that safeguard client accounts.

“Investment advisers have a fiduciary duty to act in utmost good faith when recommending investments, and they must fully disclose all of the relevant facts to their clients,” said Eric I. Bustillo, director of the SEC's Miami Regional Office said in a press release.  “Adams and Grossman breached this duty when they misstated their compensation and failed to disclose serious conflicts of interest.”

 

For more on recent SEC action, check out these news items:

SEC sees an increase in whistleblower activity

Demystifying the U.S. Foreign Corrupt Practices Act (Part I)

Dodd-Frank derivatives regulations face delays