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Sunday, June 11 2017

Conflicts of Interest and Antifraud Responsibilities

The SEC has fined a Kihei, Hawaii resident $50,000.00 and ordered the disgorgement of nearly $500,000.00 in connection with “multiple breaches” of his fiduciary duty and violations of antifraud provisions of the federal securities laws. On May 26, 2017, the SEC issued an order charging investment advisor Laurence I. Balter (Oracle Investment Research) with three separate violations.

According to the SEC, Balter:

  1. fraudulently allocated profitable trades to his own accounts to the detriment of several client accounts;
  2. falsely told his [separately managed account] clients who invested in the Fund that they would not pay both advisory fees and Fund management fees for the portions of their accounts invested in the Fund; and
  3. made trades for the Fund that deviated from two of its fundamental investment limitations.

Balter had invested a majority of his clients in Oracle Mutual Fund, a series of the Oracle Family of Funds which he personally managed. Balter’s Form ADV Part 2A stated that “‘client trades are placed prior to any advisor personal transactions’” and his Compliance Manual required him to make “‘an equitable allocation of the securities to the client’” before he “‘contemporaneously purchased the same securities as a client.’” Despite representing that he would fulfill his fiduciary duty to clients by equitably pre-allocating trades, Balter eventually adopted a day trading strategy that involved regularly executing trades for himself and clients in the same omnibus account without pre-allocating or making an equitable allocation of the trades. “In virtually all instances in which Balter made trades in the omnibus trading account, he did not allocate the trades until after they were executed,” the SEC said. “In other words, after he knew the profitability of the trade. Moreover, Balter disproportionately allocated profitable trades to his own accounts and unprofitable trades to his client accounts.”

In addition to allocating trades to enrich himself, Balter falsely represented to clients that he would apply a credit to their advisory fees if they invested certain assets in the Fund. Also, Balter’s ADV stipulated that “‘private clients who invest in any of the mutual funds that we directly manage are credited [a portion] the management fee.’” However, Balter did not apply any such credits to the fees he deducted from certain client accounts.

Balter also illegally deviated from Oracle Mutual Fund’s stated limitations and subsequently made material misstatements when selling interests in the fund. Though Balter’s Statement of Additional Information (the “SAI”) designated the Fund as “diversified” and prohibited the fund from investing more than 25% of its assets in any one industry, Balter made investments that caused the fund to become a non-diversified company and violate its 25% concentration policy. The Investment Company Act provides that a registered investment company cannot change its concentration policy or sub-classification as a “diversified company,” without first obtaining authorization the vote of a majority of outstanding voting securities. However, Balter unilaterally transformed the fund’s sub-classification and later began making material misstatements regarding the Fund’s sub-classification and concentration policy in the offer and sale of interests in the Fund.

According to the SEC, a majority of Balter’s advisory clients were unsophisticated investors, with little investment experience, and either retired or nearing retirement. Subject to laws and regulations governing the reapplication process, Balter is barred from any future employment or association with any broker, dealer, or investment adviser.

Please contact us if you have any questions regarding your fiduciary duty, your fund classifications and concentration policies, or any disclosures required to comply with the antifraud provisions of federal securities laws.