05 Feb Brokerage Firm, Instinet, Approved Improper Commission Rebate Payments To Investment Adviser
According to a recent Cease and Desist Proceeding filed by the Securities and Exchange Commission, to which Instinet, LLC (“Instinet”) has submitted an Offer of Settlement, from January 2009 through July 2010, Instinet approved approximately $430,000 in commission rebates to investment advisor J.S. Oliver Capital Management (“J.S. Oliver”) which were not appropriately disclosed to its clients. J.S. Oliver’s President, Ian Mausner, used the inappropriate funds to pay $329,000 to his ex-wife, $65,000 for 13 months of rent payments at Mr. Mausner’s home office and more than $40,000 for Mr. Mausner’s New York City timeshare – all “red flags,” according to the SEC, that Instinet should have noticed to conclude that J.S. Oliver was misusing the commission rebates and violating the Investment Advisors Act of 1940.
Commission rebate payments, or “soft dollars” are a way to pay for services through commissions earned on clients’ accounts, as opposed to simply paying through direct payments, i.e., hard dollars. Soft dollar payments are perfectly legal so long as they are fully disclosed to a brokerage firm’s clients and not misused. In this case, Instinet failed to appropriately disclose the arrangement to clients and failed to ensure J.S. Oliver’s compliance with the Advisors Act.
The “soft dollar” agreement between Instinet and J.S. Oliver called for J.S. Oliver to receive a soft credit of $.0025 for every $.03 of brokerage commissions generated per share by J.S. Oliver clients’ equity trades. J.S. Oliver submitted invoices to Instinet and used the funds generated from the credits for expenses that fell within and outside the Safe Harbor of Section 28(e) of the Exchange Act.
Instinet’s Commission Management Service was in charge of administering and approving all soft dollar payments. Unfortunately, despite knowledge of the red-flags that existed regarding the payments to Mr. Mausner’s ex-wife, his residence and his New York City timeshare, an Instinet employee approved the payments. In so doing, Instinet failed to live up to its supervisory function and wilfully aided and abetted and caused J.S. Oliver’s violations of the Advisors Act. As a result, Instinet has agreed to retain an independent consultant to issue a report reviewing Instinet’s policies and procedures and make recommendations to prevent future violations. Instinet will also cease and desist such violations and pay over $800,000 in disgorgement, prejudgment and civil penalties to the SEC.
The Peiffer Rosca securities attorneys often represent investors who lose money as a result of Ponzi schemes, investment fraud, and/or broker misrepresentations. They have experience dealing with cases relating to negligent supervision and abusive commission practices like those described above. The Peiffer Rosca attorneys take most cases on a contingency fee basis, advance the costs and only get paid out of the money they recover for their clients. Investors who believe they lost money as a result of investment fraud or misconduct may contact the securities lawyers at Peiffer Rosca, Alan Rosca or Joe Peiffer, for a free, no obligation evaluation of their recovery options, at 585-310-5140.