SEC Charges Investment Adviser With Misappropriating Funds to Pay for Previous SEC Settlement
In a striking example of the ineffectiveness that can plague securities regulation, investment adviser Robert Pinkas allegedly misappropriated $800,000 from a client to pay for disgorgement and costs resulting from a previous case brought against him by the Securities and Exchange Commission (SEC).
On Feb. 15, the SEC issued an order to start administrative and cease-and-desist proceedings against Pinkas for the misappropriation of funds he used to pay what he owed pursuant to a settlement in the case SEC v. Brantley Capital Management LLC. This prior case involved the overvaluation of portfolio investments and misrepresentations and omissions to an advisory client, among other things. A hearing was to be held regarding the new charges between 30 and 60 days from the date of the order.
Robert Pinkas Ordered to Pay
Pinkas, 58, is an Ohio-based investment adviser to a series of private equity funds. He agreed to settle the Brantley Capital case in September 2010, and the final judgment issue by the federal court ordered him to pay a civil penalty of $325,000 plus $632,729 in disgorgement and prejudgment interest.
Robert Pinkas Barredy
In addition, Pinkas was barred from associating with any investment adviser with a right to reapply after one year. He was also barred from serving as an officer or director of any publicly-traded company for five years. Pinkas promptly ignored his ban from investment advising, continuing to work with and profit from a series of Brantley private equity fund entities that he controlled.
The SEC Order
The SEC order alleges that Pinkas willfully violated section 203(f) of the Investment Advisers Act of 1940, which prohibits anyone barred from association with an investment adviser to become associated again without the consent of the SEC.
Pinkas also willfully violated — or caused to be violated – various sections of the Investment Advisers Act that prohibit investment advisers from using the mails or any instrumentality of interstate commerce to defraud clients or engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative the SEC order says.
Investment advisors in pooled investment vehicles like the Brantley funds are also prohibited from making any untrue statement of a material fact, or omission of a material fact, by SEC Rule 206(4)-8, and from engaging in any act, practice, or course of business that is fraudulent, deceptive, or manipulative.
Though it has a faint whiff of the fruitless, Pinkas could once again be subject to disgorgement and civil penalties pursuant to Section 203 of the Investment Advisers Act.
The SEC alleges in its Feb. 15 order that Pinkas misappropriated $173,000 from a client to pay his attorney’s fees in the Brantley case, telling investors in the funds that their indemnification provisions had been review by several law firms, and the firms had concluded it was appropriate for him to use one particular fund’s assets to cover the fees, the fund known as Brantley IV. Pinkas also misappropriated $632,000 from the same client to cover the court ordered disgorgement.
The Brantley Capital Civil Action
The Brantley Capital case was a civil action against Pinkas for actions he took as the CEO of Brantley Capital Corp., a business development company. Pinkas was also the CEO of the investment advisory firm that managed Brantley Capital’s investments. The complaint in that case charged violations of the antifraud provisions of various securities law governing reporting, books and records, internal controls, and the provision of information to auditors. Pinkas allegedly filed reports materially overstating the value of the investments of two companies that represented more than half of Brantley Capital’s portfolio as well as misrepresented the value of these investments to the company’s board of directors.
During the SEC investigation, Pinkas was acting as investment adviser to several private equity funds, including Brantley IV, one of the two private companies whose valuations had been allegedly misrepresented. This fund’s limited partnership agreement allowed Pinkas to be indemnified for “expenses incurred in connection with actions that ‘arise out of or in any way relate’ to Brantley IV,” the SEC order says. The problem was, that in March 2009, the SEC had told Pinkas’ lawyers that the Brantley Capital investigation was focused solely on Pinkas’ role as CEO and investment adviser for Brantley Capital. Later submissions in the case showed that Pinkas understood this.
Nonetheless, Pinkas used Brantley IV assets to cover his legal costs and did not disclose this until the Brantley Capital action was filed in August 2009. Moreover, the Brantley IV agreement said that a person could be indemnified upon the receipt of a written undertaking to repay the partnership if it was determined they were not entitled to indemnification. Pinkas put no such thing in writing.
On August 27, 2009, Pinkas revealed to an investor that he had been using Brantley IV assets cover his legal fees. The investor objected and informed the limited partners in Brantley IV, who also objected. Pinkas told them at this point that multiple law firms had reviewed the indemnification provisions of the Brantley IV agreement and said it allowed Pinkas to use its assets to pay for the his legal costs.
Given what the SEC had already told him, Pinkas knew “or was extremely reckless in not knowing” that he was not entitled to indemnification, the order says. Pinkas has admitted that he never checked with counsel as to whether he could use Brantley IV assets to pay his defense costs.
Pinkas also misappropriated Brantley IV assets to pay the disgorgement and prejudgment interest in the Brantley Capital settlement. On August 10, 2010, he transferred $632,000 from Brantley IV’s checking account to an account he controlled. He agreed to settle the Brantley Capital case a few days later, and has admitted to using the transferred money to pay the disgorgement and prejudgment interest.
The Brantley IV agreement did not allow Pinkas to use fund assets in this way. His disgorgement payment represented his ill-gotten gains from fraudulent conduct at Brantley Capital, and did not in any way relate to Brantley IV.
Pinkas Violates the Ban
Finally, Pinkas appears to have completely ignored his ban from acting in an investment advisory capacity as a term of his settlement in the Brantley Capital matter. He remained associated with Brantley Management V LLC, the investment adviser to Brantley Equity Partners LP, another private equity fund. Pinkas continued to manage this fund’s investments and retained sole authority to direct its finances, among other violations of the ban.
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