The SEC’s complaint against Temenos Advisory, Inc. and George L. Taylor paints a very bad picture for the firm and its Chief Compliance Officer. In this case, the CCO is also the CEO, founder and majority owner of Temenos.
- Participating in the wrongdoing
- Hindering the SEC examination or investigation
- Wholesale failure
The Temenos case falls clearly in category 1. The CCO participated in the alleged wrongdoing. I’m not going to lose any sleep over this case.
And the picture painted by the SEC is one of blatant wrongdoing. Taylor concealed from clients that he and the firm were pocketing high commissions from the sales of the investment recommendations. Taylor is also accused of misleading clients about the risks and prospects of the investments. To top things off, the SEC alleges that Temenos grossly overbilled some of their advisory clients using an inflated value for the investment.
It’s not wrong for advisers to take commissions from the sale of products. But it needs to be disclosed to clients. In the complaint, the SEC once again expresses its displeasure of an adviser saying it “may” receive a commission from the sale of a product. The SEC claims that Temenos should have told its clients that it was routinely receiving fees for investments in the private placement offerings and that the fees were many times larger than the advisory fees the clients were paying for advice.
I thought this “may” versus “will” was killed with the Robare case. The ruling stayed away from the distinction between “may” and “will” by pointing out that the disclosure was inadequate to explain the fee sharing arrangement and how it could influence Robare to recommend one fund over another.
According to the complaint, Temenos did disclose the commission scheme in some instances, but not others, and in some cases understated the commission.
Of course, if you are going to get paid a commission, you need to be registered as a broker-dealer. Temenos was not. According to the complaint, Temenos was not conducting the basic level of diligence required by broker-dealers when selling private investment products.
Temenos also had a valuation problem. The firm carried the private placement interests at the cost of the original investment and never adjusted the value up or down. Of course, a firm can do that if it’s disclosed to investors and it’s part of its policies and procedures. The SEC states that the Temenos policy was to value a hard-to-price or illiquid securities at $0.
According to SEC complaint Temenos went ever further down the fraud curve and used values based on overstated cost. In one instance, the statement said the client had made a $200,000 investment when she had only made a $100,000 investment.
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