A Philadelphia-based SEC registered investment adviser, along with its principal owner, affiliate, and parent companies were charged by the SEC with misappropriating an estimated $8.7 million from advisory clients through material misrepresentations and omissions.
The registered investment adviser, Benchmark Asset Managers, through its principal, Sam Otto Folin, sold securities over an eight-year period ending in 2010 in Benchmark and Safe Haven Portfolios, a privately offered hedge fund. Benchmark told prospective investors that the fund would invest in securities of “socially responsible” issuers. According to the SEC's complaint, the funds were used partially instead, to pay previous investors and to pay certain of Benchmark's expenses, including Mr. Folin's salary. In addition, Benchmark and its parent company issued notes to investors (which included Mr. Folin's family members) accompanied with the statement that the note holders would receive a guaranteed above-market interest rate. According to the complaint, the defendants failed to disclose the true use of the proceeds and, on a continuous basis through quarterly statements to investors, the true value of the notes.
The fund was formed in 2004 to invest in several different portfolios. Benchmark caused its investment advisory clients to invest in the fund. During the period of 2006 through 2008, Benchmark and Mr. Folin used fund assets to pay Benchmark's affiliate and parent more than $1.7 million to cover so-called “development costs.” According to the SEC's complaint, those development costs were not expenses attributed to the organization of, or offering of securities by, the fund. Instead, according to the complaint, the payments were used by the defendants to pay previous investors and Benchmark's non-related expenses.
In addition, the SEC alleges that loans made by Benchmark and its parent with the proceeds from their note offerings were used to fund loans between affiliated entities contrary to disclosure provided to note investors. Finally, the SEC alleges that Benchmark and Mr. Folin failed to disclose to the advisory clients the fact that Benchmark was under extreme financial distress.
Although the defendants did not either admit or deny the SEC's allegations, they agreed with the SEC to the entry of an injunction from future violations of the fraud provisions under the Securities Act of 1933, the Exchange Act of 1934, and the Investment Advisers Act of 1940. The defendants also agreed to pay disgorgement of $8,706,620 plus interest of $1,454,177, and a civil penalty of $150,000 by Mr. Folin and $750,000 each by the two entities. Mr. Folin also agreed to the issuance of an order by the SEC barring him from association with, among others, an investment adviser. Benchmark agreed to an order revoking its investment adviser registration.