SEC Sanctions Colorado-Based Portfolio Manager for Forging Documents and Misleading Chief Compliance Officer
The Securities and Exchange Commission today sanctioned a former portfolio manager at a Boulder, Colo.-based investment adviser for forging documents and misleading the firm’s chief compliance officer to conceal his failure to report personal trades.
An SEC investigation found that Carl Johns of Louisville, Colo., failed to pre-clear or report several hundred securities trades in his personal accounts as required under the federal securities laws and the code of ethics at Boulder Investment Advisers (BIA). Johns concealed the trades in quarterly and annual trading reports that he submitted to BIA by altering brokerage statements and other documents that he attached to those reports. Johns later tried to conceal his misconduct by creating false documents that purported to be pre-trade approvals, and misled the firm’s chief compliance officer in her investigation into his improper trading.
To settle the SEC’s charges – which are the agency’s first under Rule 38a-1(c) of the Investment Company Act for misleading and obstructing a chief compliance officer (CCO) – Johns agreed to pay more than $350,000 and be barred from the securities industry for at least five years.
“Securities industry professionals have an obligation to adhere to compliance policies, and they certainly must not interfere with the chief compliance officers who enforce those policies,” said Julie Lutz, Acting Co-Director of the SEC’s Denver Regional Office. “Johns set out to cover up his compliance failures by creating false documents and misleading his firm’s CCO.”
According to the SEC’s order instituting settled administrative proceedings against Johns, the Investment Company Act required him to submit quarterly reports of his personal securities transactions and annual reports of his securities holdings. His firm’s code of ethics contained further restrictions on when and how Johns could trade in securities, and required his transactions to be pre-cleared by the firm’s chief compliance officer. From 2006 to 2010, Johns failed to comply with these obligations and did not pre-clear or report approximately 640 trades. These included at least 91 trades involving securities held or acquired by the funds managed by the firm. The code of ethics restricted trading in securities that the funds were buying or selling.
According to the SEC’s order, Johns submitted inaccurate quarterly and annual reports and falsely certified his annual compliance with the code of ethics. Johns physically altered brokerage statements, trade confirmations, and pre-clearance approvals before submitting them to the firm along with these reports. For example, he manually deleted securities holdings listed on his brokerage statements before submitting them in order to avoid disclosing securities purchases that were not pre-cleared.
The SEC’s order further finds that Johns created several documents that purported to be pre-clearance requests approved by the firm’s CCO, who had never actually reviewed or approved such trades. Johns created these false pre-clearance approvals to cover up instances in his annual report when securities transactions were not pre-cleared. Johns also altered the trade confirmations that he submitted to BIA by backdating the dates of the transactions, and he backdated trade confirmations to make it falsely appear as though pre-clearances were granted in advance of the transactions.
According to the SEC’s order, the firm’s CCO in late 2010 identified irregularities in the documents that Johns submitted to BIA detailing his personal securities transactions. The irregularities prompted the CCO to make inquiries about his compliance with the firm’s code of ethics, and Johns misled the CCO in response. Johns falsely told the CCO that he had closed certain brokerage accounts when in fact they remained open and were involved in trading that was not pre-cleared as required. Johns also accessed the hard copy file of his previously submitted brokerage statements and physically altered them to create the false impression that his trading was in compliance.
In settling the SEC’s charges, Johns has agreed to pay disgorgement of $231,169, prejudgment interest of $23,889, and a penalty of $100,000. Without admitting or denying the SEC’s findings, Johns consented to a five-year bar and a cease-and-desist order.
The SEC’s investigation was conducted by Michael Cates and Ian Karpel of the Denver Regional Office following an examination conducted by Craig Ellis, Bruce Ketter, and Thomas Piccone of the Denver office’s investment adviser/investment company examination program.