Cases against Chief Compliance Officers catch my attention. Jack Cook is the Chief Compliance Officer of Princeton Alternative Funding. He is in the crosshairs of the Securities and Exchange Commission.
The SEC Commissioners and senior OCIE staff have usually stated three circumstances that lead to CCO liability:
- when the CCO is affirmatively involved in misconduct;
- when the CCO engages in efforts to obstruct or mislead the Commission; or
- when the CCO exhibits “a wholesale failure to carry out his or her responsibilities
Mr. Cook served initially as Princeton’s chief operating officer and chief compliance officer. He eventually became CEO. Even though Mr. Cook had no experience in Princeton’s alternative lending space.
The SEC accuses Mr. Cook, of creating and disseminating materially false statements to investors and potential investors that misrepresented the management of the Princeton. Mr. Cook also concealed the significant role that a principal, Mr. Burgess, who had recently been convicted of tax fraud, played in managing Princeton and its investment.
The case seems to fall squarely in circumstance 1. Mr. Cook was clearly involved in the wrongdoing. The liability is not coming from his role in compliance. The SEC is accusing Mr. Cook of being the person creating the misstatements, approving the misstatements and conveying the misstatements to investors and in marketing to potential investors.
Of course there were smoking gun emails about the involvement of Mr. Burgess in the management of Princeton.
Burgess instructed them to “[b]e careful with too much transparency as it will bite you in the ass.” He later added, “I am also NOT suggesting you lie, but don’t volunteer unless you are ask[ed] the direct question.” He then noted his apparent belief that “[y]ou cannot trust anyone, period, and good deeds do not go unpunished. He [the investor] will jerk you around on future investments, just to continue to get info out of you.” To underscore his concern, Burgess added, “I will bet you my left nut (and I like my nuts) that this [investor] comes after us and uses your words to get us. Don’t let that happen.”
Less than a minute after sending this email, Burgess replied to all with a single sentence stating, “Also, delete these emails please.”
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