Securities Cases: Massachusetts Accuses Scottrade of Running Sales Contests and Targeting Retirees, Wife of Investment Adviser Must Pay $500K in Fraud Case, and Hedge Fund Manager and His Firms Are Ordered to Pay Almost $30M for Diverting Investor Money

Scottrade is Accused of Improper Sales Practices Involving Retirement Accounts

Massachusetts Secretary of the Commonwealth William Galvin has filed a complaint against Scottrade accusing the brokerage firm of engaging in improper sales practices that it knew violated the US Department of Labor’s fiduciary rule regarding impartial conduct standards. Under the rule, advisors and their firms are obligated to act in a fiduciary capacity when making investment recommendations, as well as act in their clients’ best interests.

In his complaint, Galvin is contending that Scottrade employed a culture that includes “aggressive sales patterns,” and that the firm and its agents failed to abide by its duty to Massachusetts retirees between 12/2015 and 6/2016 when it ran a number of national call nights that included the incentive of raffle tickets for those who cold called customers. Scottrade also conducted quarterly sales contests offering at least $490K in prizes. This included the “Q3 Win and Retain Sales Contest “that offered $285K and paid out $2500/agent to the top 25 branches according to percentage increase in new net assets brought in.

A number of representatives in Massachusetts were awarded prizes. A few months later, Scottrade conducted another sales contest and 26 agents in the state took part. Galvin’s office said that the purpose of the sales contests was to increase Scottrade’s assets leading up to its merger with TD America Trade (AMTD).

Galvin’s office is now charging Scottrade with not supervising its investment advisor representatives, agents, and others to make sure that they complied with the DOL’s fiduciary rule. It also accused the firm of violating its own policies.

Relief Defendant in Investment Adviser Fraud Case Must Pay Over $500K

In the U.S. District Court for the District of Massachusetts, a final judgment was issued in an Securities and Exchange Commission fraud case ordering Shawnet Thibeault, the wife of investment adviser Daniel Thibeault, to disgorge over $500K. Shawnet is a relief defendant in the SEC’s case against her husband.

Daniel and his companies are accused of misappropriating $15M from the GL Beyond Income Fund, which is an investment fund that he operated. The Massachusetts investment adviser had told investors that their funds would be pooled to buy or issue consumer loans. They would then receive returns after interest and principal payments on the loans were made.

The SEC accused Thibeault and other defendants of fabricating the loans to steal the fund money and claiming that the fake loans were the Fund’s assets.

The regulator found that some of the investors’ misappropriated funds were given to Shawnett, which is why she must now pay $468M of disgorgement and nearly $50K of prejudgment interest.

Hedge Fund Manager and His Southridge Investment Advisory Firms Must Pay Almost $13M of Disgorgement

The SEC is ordering Stephen Hicks and his Southridge Advisors LLC and Southridge Capital Management to pay almost $13M in disgorgement and penalties for illegally diverting investor money to hedge funds that needed cash infusions. The regulator claims that investors were the victims of fraud because they were not notified that the hedge fund assets would be moved.

Investors were told that most of their money would go into “unrestricted free trading shares, near cash, or cash. While Hicks reportedly notified investors that administrative and legal costs were improperly allocated among funds, he didn’t pay back the money. Instead, he allegedly moved illiquid securities to the funds. Hicks also is accused of misstating the biggest investment in one fund so as to artificially inflate the management fees that investors were charged.

Hicks and his two firms have settled the SEC case, which includes paying over $7.8M in disgorgement and prejudgment interest and a $5M penalty. They did not, however admit to or deny the allegations.

<a href=”https://www.sec.state.ma.us/sct/current/sctscottrade/MSD-Scottrade-Administrative-Complaint-E-2017-0045.pdf” rel=”noopener” target=”_blank”Galvin’s Complaint Against Scottrade (PDF)

<a href=”https://www.sec.gov/litigation/litreleases/2018/lr24052.htm” rel=”noopener” target=”_blank”Relief Defendant in Fraud Case Against Massachusetts Investment Adviser is Ordered to Pay Over $500,000, SEC, February 16, 2018

Court Orders Connecticut Hedge Fund Manager and Firms to Pay Nearly $13 Million in SEC Case, SEC, February 15, 2018