While the SEC Chair is battling Congress to secure a budget which approaches $2 billion the number of cases being brought by the enforcement program is dwindling. Regardless of what budget Congress actually gives the agency, a critical question will be how the resources are used and by what standard success will be measured. The number of cases filed during any given period, or even the amount of money obtained in resolved cases, is not the critical test of effective enforcement although those metrics may stimulate headlines.
Rather, the focus should be on the kind of cases being brought, the statement they make in the market place and the effectiveness of the remedies obtained. Stated differently, does the case halt wrong doers, inform the market place about Commission priorities and protect investors in the future by preventing a reoccurrence of the wrongful conduct? This will ultimately be the test by which the new administration being put in place at the SEC will be measured.
While the new administration will need time to install its program, a glimpse of what the Commission and its enforcement program is doing now was available on Friday when two new actions were filed. One is a civil injunctive case filed as an emergency action that involved three investors while the other is an administrative proceeding focused on an investment adviser to small to be eligible for Commission registration.
The first is SEC v. Fowler, Civil Action No. 1:13-cv-1656 (N.D. Ga. Filed May 16, 2013. This action was filed against Robert Fowler and his controlled entity, US Capital Funding II Series Trust 1, Inc. It centers on a prime bank fraud.
Beginning last August Mr. Fowler used US Capital Funding to raise $350,000 from three investors. He did this by targeting aspiring entrepreneurs and small business owners with a pitch of easy profits. Specifically, investors were told that through US Capital’s relation with a prime bank, millions of dollars in loans would be obtained. Mr. Fowler could then invest at least a portion of the money and later the profits would be split. To get started all that was necessary was an up front fee from the investors.
To reassure investors, Mr. Fowler claimed the program had a triple A credit rating from S&P and the blessing of the SEC. Of course the loans and investment program were fictitious. The ratings were misrepresentation. The only profit was the fees Mr. Fowler collected from investors and took for his own purposes. The complaint alleges violations each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 26. The case is in litigation. See also Lit. Rel. No. 22702 (May 17, 2013).
The Second is In the Matter of Noonan Capital Management, LLC, Adm. Proc. File No. 3-14955 (May 17, 2013). Registered investment adviser Noonan Capital and its sole owner Timothy Noonan are the Respondents. The Order which alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2), 203A(a)(1)(A), 204(a) and 207. The alleged violations center on two primary claims. First, the firm overcharged investors for its fees. From April 2009 through January 2011 the firm charged investors fees totaling $183,908 when in fact the fees should have been $92,212 using the formula in its Form ADV. Thus the firm overcharged — or “misappropriated” in the words of the Order – by about $91,696.
Second, the firm misrepresented the amount of assets under management. In its Form ADV filed in February 2009 the firm claimed to have $25 million under management. That representation was carried forward in an amended version of the filing. Subsequently, in a March 2009 filing the firm claimed it remained eligible for registration with the Commission because it had $39.4 million under management. In fact the Order stated that Noonan Capital never had more than $9 million under management.
To resolve the case the Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm’s registration was revoked and Mr. Nonan is prohibited from serving in any capacity with an investment adviser or investment company. The firm filed an affidavit demonstrating its inability to pay disgorgement or a civil penalty.
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To be sure Fowler and Noonan Capital are only two cases, making it difficult to ascribe to them any statement about the enforcement program. The new administration at the Commission is just beginning and the budget has yet to be set. The critical point going forward, however, will be how the agency allocates its always scarce resources to establish a credible and effective over-all program and message. A key element of that will be the work of the enforcement division, the kind of cases it selects and prosecutes, its presence in the market place and the remedies obtained.