The SEC recently affirmed its ALJ’s ruling barring Alan Stanford’s former CCO from the industry and ordering monetary penalties of $260,000 together with $591,992 in disgorgement. The Commission held the CCO approved false and/or misleading marketing and training materials in the face of red flags and without adequate due diligence or verification, instead relying upon superficial explanations of other company insiders.

“But the evidence shows that Young approved material misrepresentations without verifying them or establishing any reasonable or independent basis for relying on verification by others. Then, despite his awareness of ever-increasing red flags, he approved additional misleading statements to placate concerns, prevent redemptions, and encourage further sales.”

The SEC rejected the CCO’s argument that he was entitled to rely upon the assertions of management:

“That Young was at least negligent is established by, among other things, his unjustifiable acceptance of SIB’s lack of transparency. The fact that SFG officials repeatedly and consistently told him that he was “never going to see the portfolio” that purportedly produced remarkable returns is precisely the kind of unusual circumstance that requires thorough and independent investigation because the “darkness and ignorance of commercial secrecy are the conditions upon which predatory practices best thrive.” Rather than investigating, Young relied on vague references to unspecified Antiguan laws. But “[w]hen the facts known to a person place him on notice of a risk” of fraud “he cannot ignore the facts and plead ignorance of the risk.” Even if Young believed that the lack of transparency was a consequence of Antiguan law, he acted unreasonably when he approved unqualified assurances about the portfolio and the supposed willingness of Bank officials to answer investor questions.”

In re Bernerd E. Young, AP File No. 3-15003 (SEC March 24, 2016) is here.