Agency brokerage Instinet, part of Nomura, has had to pay US$800,000 to the US Securities and Exchange Commission (SEC) for ignoring red flags and paying soft dollars for improper expenses from a client.
Instinet approved more than US$400,000 in soft dollar payments to investment adviser J.S. Oliver Capital Management despite signs the payments were improper.
Soft dollar payments are allowed if properly disclosed to enable investment advisers to pay for expenses such as brokerage and research. However, a SEC investigation found that J.S. Oliver and its president, Ian Mausner, were improperly using client funds for their own benefit.
The company was found to have misappropriated US$1.1 million in soft dollar payments for undisclosed purposes that did not benefit clients, including costs of Mausner’s divorce.
The SEC said Instinet had clear warning signs that the funds were being used inappropriately but did not act on them.
Marshall S Sprung, co-chair of the SEC Enforcement Division’s Asset Management Unit, said: “Brokers perform a crucial gatekeeper function in approving soft dollar payments, and they cannot turn a blind eye to red flags that investment advisers may be breaching their fiduciary duty to clients.”
The soft dollar payments, which took place between January 2009 and July 2010, included a payment of US$329,000 to Mausner’s ex-wife under the guise of employee compensation. Instinet was provided with inconsistent reasons for the payment but approved it.
Mausner also claimed for a 50% increase in office rent costs, despite the firm’s offices being based in his home. Instinet knew that Mausner owned the company which the firm rented its office from and should have concluded he stood to personally benefit from the increased rental payments, yet it approved US$65,000 in soft dollar payments.
Instinet’s total costs include a US$375,000 penalty, disgorgement of US$378,673.76 and prejudgement interest of US$59,607.66. It must also get an independent compliance consultant to review its policies, procedures and practices relating to soft dollar payments.
JS Oliver and Mausner have been charged with willfully violating anti-fraud provision in federal securities laws. An investigation into the accused wrongdoing is ongoing.
It did not admit or deny the SEC’s charges of willfully aiding and abetting J.S. Oliver’s violations of the Investment Advisers Act but consented to a censure and a cease-and-desist order.
In a statement, Instinet said: “Instinet is pleased that today’s action closes the door on events that occurred long ago and involved a small number of payments that were processed on behalf of a single former client, who was an SEC-registered investment advisor.
“The firm also is pleased that, following a lengthy and thorough investigation, the SEC did not find that Instinet engaged in any intentional misconduct.”