I was quite bothered by the Osunkwo CCO liability case that, on its face, sanctioned a CCO for misstating a firm’s assets under management. A few years ago, the SEC had expressed an unwillingness to prosecute CCOs, except in three extreme circumstances:
- Participating in the wrongdoing
- Hindering the SEC examination or investigation
- Wholesale failure
None of those were indicated in the administrative order against Mr. Osunkwo.
I had gone through the SEC filings to see if I could find something that more devious that make me feel less uneasy about this sanction against a CCO for errors on the Form ADV.
In the Diamond CCO liability case earlier this year, that CCO was also sanctioned for mistakes on a Form ADV filing. Ms. Diamond had stated that the private fund was subject to annual GAAP audits by a third party auditor to comply with the custody rule. In fact, the fund was not and was a fraud. Investors lost money because the CCO did not do her job.
I thought the SEC did a poor job in the administrative order by not lining up the pieces to state that there was a wholesale failure and investors lost money because of that failure. But at least the fraud was mentioned in that order.
There was no indication of fraud in the Osunkwo administrative order. There is a mention that Aegis Capital and Circle One are no longer registered as investment advisers.
indicted for stealing investor money that was supposed to be used to fund the acquisition and consolidation of small to mid-sized RIAs. Those principals, John Lakian and Diane Lamm are accused of diverting some of that money for personal uses.
I have not had time to pull together all of charges, but it looks like the SEC is placing liability on Osunkwo for indirect losses. I have not found any documents that accuse anyone of pilfering money from the investment adviser clients at the firms that Osunkwo was CCO. Instead, it’s the losses from the investors in the RIA holding company that lead to the CCO liability.
I assume that the holding company was valuing an acquired RIA at $X per AUM. By overstating the AUM in the RIA, Osunkwo was allowing the holding company to overstate the value of its holdings. Investors and and lenders to the holding company sustained losses indirectly because of the Form ADV overstatement of AUM.
I don’t like this expansion of CCO duties and expansion of CCO liability. It’s stretching the obligations of the CCO to not only protect the clients of an investment adviser, but the investors in the owner of the investment adviser.
Sources:
- CCO Sanctioned for Incorrect Form ADV Filings
- SEC suspends outsourced CCO in a case that’s more than it seemed at first blush
- Indictment Against John R. Lakin and Diane M. Lamm
- In the Matter of David I. Osunkwo administrative order
- CCO Liability for False Statements on Form ADV
- The State of CCO Enforcement Actions