Enforcement cases against a Chief Compliance Officer always catch my attention. The latest to catch my eye is against A.G. Morgan Financial Advisors, LLC (“AGM”) of Massapequa, New York, AGM’s owner Vincent J. Camarda, and AGM’s former Chief Compliance Officer James McArthur.
The SEC Commissioners and senior Division of Examination 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”
AGM, Mr. Camarda and Mr. McArthur got involved with an unregistered securities offering with a lending company called Complete Business Solutions Group, that was doing business as Par Funding. The company was making short term loans to small businesses that were supposed to be secured by receivables. Par Funding was raising capital by selling unregistered securities in the form of promissory notes. Nothing illegal as long as the firm and its agents are following the the private placement rules.
According to the SEC compliant, Mr. McArthur was actively involved in the selling of the Par Funding securities to the AGM clients. This would put the nature of the SEC CCO action into the exception 1: affirmatively involved in the misconduct. (And still its CCO.)
In this case I’m not sure why Mr. McArthur is identified in the complaint as “its former Chief Compliance Officer”. There is no mention of him acting in a compliance role in the complaint. According to the firm’s website and the firm’s Form ADV filing, Mr. McArthur is also the firm’s president.
As for the alleged wrongdoing, AGM was also a client of Par Funding. The firm owed par as much as $750,000 at times and some which was personally guaranteed by Mr. Camarda. The Securities and Exchange Commission accuses AGM of telling investors that it was a safe investment, while failing to disclose that his company AGM was in debt to Par Funding and that Mr. Camarda was a guarantor on that debt to Par Funding. The SEC claims that existence of the debt was a material conflict that should have been disclosed to the AGM investors and failing to disclose the existence of the debt was a breach of fiduciary duty under the Investment Advisers Act. AGM was apparently paying down its debt to Par Funding by selling the promissory notes.
The SEC also claims that the sale of promissory notes did not fit any exemption from registration. It’s a little light on that claim. It at least three instances, the complaint notes that the respective investor had completed an “Accredited Investor Questionnaire.” It does reference a television commercial for the investment, so that could be a general advertisement in violation of the private placement rules.
Of course, the main problem was that the Par Funding investments were duds. Par Funding ended up in receivership. It’s under investigation for illegally selling securities. From news reports, Par Funding engaged in some shading lending practices, poor underwriting and had some shady characters under its employ. Investors lost money.
Sources:
- SEC Charges New York-Based Investment Adviser and Its CEO and Former Chief Compliance Officer with Securities Violations
- SEC Complaint
- SEC Charges Long Island Firm With Fraud In Connection With $500M Securities Offering
- Par Funding founder says he expects to face criminal charges — and soon
- Par Funding defendants settle with SEC, will repay money in $500 million investment fraud