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Monday, August 18 2014

Trust – How would you handle a net capital issue?

Trust, an essential element in the relationship between financial Representatives , the public and the regulators is delicate and must be nurtured over time . . . and it can be lost in an instant.

That’s what Charles “Chuck” Moore and Crucible Capital Group learned on August 8, 2014 when the SEC announced charges against the New York brokerage firm and its founder for allegedly violating the net capital requirements and subsequently falsifying books and records to conceal the deficiencies. The uniform net capital rule was created by the U.S. Securities and Exchange Commission (“SEC”) in 1975 to regulate directly the ability of broker-dealers to meet their financial obligations to customers and other creditors.

The rule requires those firms to value their securities at market prices and to apply to those values a haircut (i.e., a discount) based on each security’s risk characteristics. The haircut values of securities are used to compute the liquidation value of a broker-dealer’s assets to determine whether the broker-dealer holds enough liquid assets to pay all its non-subordinated liabilities and to still retain a “cushion” of required liquid assets (i.e., the “net capital” requirement) to ensure payment of all obligations owed to customers if there is a delay in liquidating the assets.

“The net capital rule is a principal tool by which the SEC monitors the financial health of brokerage firms,” said Amelia A. Cottrell, an associate director in the SEC’s New York Regional Office. “It is therefore crucial that SEC examiners have prompt access to accurate and complete information about a firm’s financial condition.” It would be fair to say that most companies face financial challenges at some point. How firms deal with these challenges can either build or destroy trust. The charges allege that Charles “Chuck” Moore and Crucible Capital Group attempted to disguise the firm’s extensive and repeated net capital insufficiencies by improperly off-loading its liabilities onto the books of an affiliated firm and improperly treating non-marketable stock as an allowable asset.

Apparently Crucible entered into an expense-sharing agreement with another firm owned by Moore called Angelic Holdings. Angelic contracted to pay Crucible’s expenses. The vendors of Crucible were to bill Angelic for services they performed for Crucible. Moore provided SEC examiners with copies of invoices that had been doctored to eliminate significant past due amounts. The SEC examiners and investigators noted the falsifications. They also found that Angelic did not have the resources to pay the debts of vendors making the expense sharing agreement illegitimate. The case has been referred to criminal authorities for prosecution. Click here to read the SEC Press Release.

If you would prefer to focus your attention on your clients and the day-to-day operation of your firm, Red Oak Compliance Solutions is here to help with any or all of your compliance requirements.