SEC Files Settled Fraud Action Against Assistant to Adviser

by Dorsey & Whitney LLP
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An assistant to an unregistered investment adviser settled fraud charges based on billings tied to false profits. The charges stem from efforts by the adviser to conceal trading losses from firm clients. In the Matter of Ronald E. Huxtable II, Adm. Proc. File NO. 3-15748 (Feb. 12, 2014).

Ronald Huxable, a retiree, became associated with an unidentified investment adviser in early 2009. The two first met in late 2008. By April of 2009 Mr. Huxtable was a client and began trading options for his accounts. He also began recruiting clients for the Adviser. In 2009 he brought Clients A, B and C to the firm. The next year he was responsible for D, E, F and G becoming clients of the Advisory. Most of the clients understood that the Adviser had developed a trading strategy implemented in their accounts by Mr. Huxtable. Under the direction of the Adviser Mr. Huxtable also placed trades in other client accounts.

Mr. Huxtable and the Adviser agreed that the management fees generated from accounts in which he placed the trades would be split evenly. Typically, the Adviser and Mr. Huxtable invoiced the client for their half of the fee. For Client B, however, Mr. Huxtable sent an invoice for the full fee and then remitted 50% to the Adviser.

In February 2011 Clients B, C and H had net losses in their accounts. Mr. Huxtable had placed the trades. Mr. Huxtable also had loses in his accounts. Rather than reflect the losses in the accounts, the Adviser decided to spread them over a five month period. Accordingly, in February only one fifth of the loss was reflected in each of the accounts. It thus appeared that the three clients and Mr. Huxtable had net profits in their accounts. Under those circumstances management fees were due.

The Adviser sent statements to Clients C and H as well as Mr. Huxtable. Each invoice was paid. Mr. Huxtable also sent clients B, C and H invoices. Those were paid and Mr. Huxtible remitted the agreed upon portions to the Adviser. Mr. Huxtable did not invoice Clients B, C or H in subsequent months.

The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2).

To resolve the proceeding Mr. Huxtable consented to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to the entry of an order barring him from the securities business. In addition, Mr. Huxtable agreed to pay disgorgement of $12,132, prejudgment interest and a penalty of $50,000.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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