Cases imposing liability against compliance offices catch my attention. An Illinois court just imposed a fine on the former chief compliance officer of The Nutmeg Group, a registered investment adviser and fund manager. David Goulding had previously agreed to be barred from association with any investment adviser.
David Goulding must have thought things would go differently when his father promoted him at his financial advisory firm from a part-time administrative capacity to the full-time role as the chief compliance officer. The Nutmeg Group had $32 million in assets under management. Mr. Goulding was going to make money…
It’s not clear whether he knew that his father had been convicted of conspiracy to defraud the United States, mail fraud, and illegal transportation of currency in connection with a tax evasion and money laundering scheme that lead to him serving six months in prison and suspension from the practice of law for four years.
As you might expect, things were bad at Nutmeg. Nutmeg did not have complete records of investments, lacked books and records required by law, and had no internal controls to prevent violation of the Investment Advisers Act. Fund assets were commingled with firm assets. Of course, this lead to improper valuations and inaccurate reporting to investors. Assets were improperly transferred.
As the new CCO, Mr. Goulding could fix this?… No.
The following are Mr. Goulding’s failing qualifications:
- No training, experience, or knowledge of the securities industry
- Never worked for a broker/dealer, investment company, or investment fund
- No experience communicating with investors
- No experience performing or assisting in the valuation of an investment fund
- No experience with the compliance responsibilities of an investment adviser
- Education consists of an undergraduate degree in philosophy with a minor in political science.
- Worked as a personal trainer and in marketing for a health club and Border Books prior to joining the firm.
The court thought “[t]o be blunt, the evidence suggests David literally had no idea what he was doing or what he was getting himself into when he decided to go work for Nutmeg.” (p.16 of Memorandum Opinion and Order)
In the process of some attempt to fix things, he helped perpetuate the wrongdoing at Nutmeg. He sent misleading statements to investors that served to further Nutmeg’s improper activities.
Just his luck after becoming CCO, the firm was subject to examination three months later. That exam quickly uncovered the serious problems at Nutmeg.
Mr. Goulding’s defense was that he did not receive financial benefit from the fraud. That benefit went to his father who agreed to disgorge his profits, plus pay a penalty. David ended up disgorging half his salary as CCO.
Under the SEC’s three prong approach, Mr. Goulding hit the first prong by participating in the fraud. You could argue that he may not even have fully understood what he was doing was wrong. The court found that Mr. Goulding had aided and abetted Nutmeg’s primary violations of the Investment Advisers Act. (p.16 of Memorandum Opinion and Order)
Was this a matter of bad timing? If Mr. Goulding had more time as CCO could he have fixed the problem? Did his father put someone unqualified in the position to help with the fraud? My guess: yes, no, yes.
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