Moving beyond hacker headlines, the Securities and Exchange Commission (SEC) continues to push forward with its mission to uncover investment advisor, bad actors acting badly. Just this week, the SEC charged a Westchester, New York-based investment adviser with fraud stemming from lies to retail investors about the value of their investments in a Ponzi-like scheme.

According to the SEC, Michael Scronic started hitting up (42) friends and acquaintances, many of whom were his suburban neighbors, to invest in a risky options trading strategy in 2010. By way of credentials, he touted his long and impressive track record of proven returns and misled prospective investors about the liquidity of their potential investments. Scronic also identified himself as an investment adviser to a fictitious hedge fund in which he purported to sell interests, or “shares.”

“What’s cool about my fund,” he told one potential investor, “is that I’m [sic] only in publicly traded options and cash so any redemptions are met within two business days so if you do need to withdraw for your business needs it will be quick and painless.”

In reality, Scronic was hemorrhaging investor money through massive trading losses. While alleging investor total assets of at least $21,837,475 for the period ending June 30, 2017, Scronic actually had just under $27,500 in his brokerage account.

If it’s too good to be true…It’s too good to be…

With little cash on hand, Scronic fed investors attempting to cash out, a steady stream of implausible excuses about why he could not pay them back. He also sought to secure additional funds from new and existing investors to meet other investors’ redemption requests.

“Scronic’s alleged scheme is just another example of a so-called investment professional acting as fiduciary, but failing to deal honestly with his investors for his own financial benefit,” said Lara S. Mehraban, Associate Regional Director of the SEC’s New York Regional Office. “Investors should be wary anytime they are promised high or consistently positive returns in a complex, hard to understand investment strategy.” Ya think?

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Scronic. The SEC’s complaint charges Scronic with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, as well as Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC seeks a permanent injunction, disgorgement, and penalties against Scronic.

Detection still matters

With all the media attention focused on hack-based, cybersecurity exposures, are bread-and-butter compliance misdeeds being swept under the rug? Nope. The regulators are still regulating and the fines are still a flying.

While Scronic was being scrutinized, the Financial Industry Regulatory Authority sanctioned Morgan Stanley $13 million in fines and restitution for failing to supervise sales of UITs, and the US Commodity Futures Trading Commission got a more than $2 million hit in the US District Court for the Northern District of Illinois against Grace Elizabeth Reisinger of Grand Island, Nebraska and her company ROF Consulting, LLC for operating a fraudulent commodity pool scheme — and that’s only the first bit of the regulatory alphabet.

So pay attention. You still need appropriate processes and procedures

While cyber exposures and hackathons dog at the heels of any organization with a computer and access to the internet, neither minimize the challenges compliance professionals face in keeping their organizations on the “straight and narrow.” At its most elemental, one must have appropriate processes and procedures in place and then develop a culture of compliance that follows them.

So…what are you doing? Are you prepared? Or…perhaps we should talk (212-233-1155) about instituting appropriate support systems like Patrina’s cost-effective and comprehensive, 8-module compliance solution, and/or compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s chat.