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A Special Opportunity: How an Investment Adviser Defrauded Clients

Friday, September 27, 2019

Due to the high level of trust clients place in Investment Advisers, the fiduciary duty of an Adviser can’t be overstated. That’s why when we hear about an Adviser purposefully abusing that trust, it’s frustrating and disheartening. Such is the case with E. Herbert Hafen. On September 4, 2019, the SEC charged Hafen with defrauding 11 clients out of over $1.6 Million, pocketing the money for personal expenses. 

Trust Me 

Between July 2011 and April 2018, Hafen convinced his clients that he has access to a special investment opportunity outside the financial institutions where he worked. According to Hafen, his lucrative investment opportunity would pay a six percent annual return with little to no risk. The catch? This opportunity was not available through his employer.  Clients were directed to take their money out of the financial institutions, deposit the money into their personal bank accounts, and then wire the money to Hafen’s personal bank account. 

In hindsight, the scheme sounds straight out of an episode of The Good Wife. But, let’s put this in the context of Hafen’s established relationship with his clients. He was an employee at two large financial institutions in New York as an investment adviser representative and as a registered representative of a broker-dealer. He was 64 years old, giving him an additional level of experience. Hafen wasn’t some guy behind an email scheme in Nigeria. He was an established Investment Adviser who clients could trust. 

Targeting the Vulnerable

Promising lucrative returns, he sold his scheme as something “safe, secure, and boring.” In the summer of 2011 he targeted his first client, who unfortunately fits the profile for scams that we see too often in the news – the elderly. 

Hafen began his scheme by approaching an octogenarian widow who inherited her IRA from her late husband. He informed her of this new “opportunity” and over the next seven years convinced her to wire him $325,000 from her IRA, which she expected to support her for the rest of her life. In 2018, Hafen falsely reported to the client that she had $300,000 in her IRA, but by this time it was actually down to $150,000. 

During the course of the scheme, Hafen went on to defraud 10 other clients in a similar manner. Of course, the investment opportunity was fictitious, Hafen simply pocketed the money and used it to pay off his mortgage, student loans and other personal expenses. 

The Seven Year Itch

Hafen operated for seven years undetected, when in the Summer of 2018 one of his employers, who is not named in the SEC complaint, learned of the scheme and terminated Hafen. Hafen now faces criminal and civil charges for his violation of Section 10(b) of the Exchange Act, Rule 10(b)-5 thereunder, Section 206 (1) of the Advisers Act, and Section 206(2) of the Advisers Act for his fraudulent actions.     

Of the $1.6 million, Hafen has returned $650,000. One thing that these families will never get back? Trust – potentially in any Investment Adviser. 

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.

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