New York Securities Lawyer Blog
On April 29, 2016, the Securities and Exchange Commission (“SEC”) filed an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 4C of The Securities Exchange Act of 1934, Section 203(k) of The Investment Advisers Act of 1940, and Rule 102(e) of The Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and A Cease-and-Desist Order (the “Order”) against Santos, Postal & Company, P.C. (“Santos, Postal & Co.”), an accounting firm, and Joseph A. Scolaro, CPA (“Scolaro”), a Santos, Postal & Co. partner since 2004 (collectively the “Respondents”). The Order involves improper examinations by Santos, Postal & Co. of its clients’ funds, of which it had custody. Further, Santos, Postal & Co. and Scolaro filed two (2) Forms ADV-E with materially false statements relating to the examinations. Santos, Postal & Co. has been registered with the SEC’s Public Company Accounting Oversight Board since 2010, and Scolaro regularly conducted public accounting services before the SEC.
The Respondents’ improper examinations relate to the misappropriation of client funds by SFX Financial Advisory Management Enterprises, Inc.’s (“SFX”) Vice President, Brian J. Ourand (“Ourand”). SFX first engaged Santos, Postal & Co. to perform its examinations in 2004 and continued to engage them until 2012 when SFX withdrew its registration with the SEC.
Santos, Postal & Co. is a certified public accounting and management consulting firm based in Rockville, Maryland, that provides accounting, tax, and auditing services. Scolaro was one of five partners and owned 25% of Santos, Postal & Co. He was the only engagement partner for services for SFX.
According to the Order, “[f]rom 2006 through 2011, Ourand misappropriated funds from client accounts. During this time, Ourand wrote unauthorized checks from client bank accounts payable to ‘cash’ or himself, and wired unauthorized amounts to himself for his own personal use. He also wired client money using client credit cards for unauthorized amounts to others for their personal use.” It wasn’t until October 2011 that SFX informed Scolaro that Ourand had been terminated for the misappropriations and that the targeted clients had been reimbursed.
The Order finds that in connection with the 2010 examination of SFX, Santos, Postal & Co. filed an initial Form ADV-E and an amended version (the “2010 Report”), and in connection with the 2011 examination, they filed another Form ADV-E (the “2011 Report”). The 2010 Report and 2011 Report state that Santos, Postal & Co. had “examined … management’s assertion … that SFX … complied with certain provisions of rules 204-2(b) and 206(4)-2 of the Investment Advisers Act…” Further, the 2010 Report and 2011 Report state that Santos, Postal & Co.’s “examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants…” These statements were materially false, as Santos, Postal & Co. and Scolaro knew of the misappropriations.
Per the Order and as a result of Santos, Postal & Co. and Scolaro’s conduct, “[Respondents] willfully violated Section 207 of the Advisers Act, which makes it ‘unlawful for any person willfully to make any untrue statement of a material fact in any registration application or report filed with the Commission … or willfully to omit to state in any such application or report any material fact which is required to be stated therein.’” Further, “[Santos, Postal & Co.] and Scolaro engaged in improper professional conduct as defined in Section 4C(b) of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice.”
The Chief of the SEC Enforcement Division’s Asset Management Unit, Anthony S. Kelly, stated that “[s]urprise custody exams of investment advisers serve a critical role in protecting against the misuse of client assets and uncovering such misuse when it occurs. Santos, Postal & Co. failed to confirm with SFX’s clients the contributions made to and from their accounts and then made untrue statements about its custody exams.”
As a result of Santos, Postal & Co. and Scolaro’s actions, the Order imposes sanctions that were agreed to in the Respondents’ Offers of Settlement, which the SEC has accepted. Further, Santos, Postal & Co. and Scolaro “shall cease and desist from committing or causing any violations and any future violations of Section 207 of the Advisers Act. Scholar is also “denied the privilege of appearing or practicing before the Commission as an accountant” for five years, after which he can request reinstatement. Santos, Postal & Co. is denied the same privilege for one year, after which it may also request reinstatement. Both Santos, Postal & Co. and Scolaro are ordered to pay civil fines of $15,000 each to the SEC and Santos, Postal & Co. is ordered to pay disgorgement of $25,800 and prejudgment interest of $3,276.76 to the SEC. In a separate action, Ourand was ordered to pay disgorgement of $671,367 plus prejudgment interest and a $300,000 penalty and was barred from the securities industry. In yet another separate action, SFX was found to have violated Sections 203(e)(6) and 206(2) of the Advisers Act, and Section 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. Further, SFX’s Chief Compliance Officer, Eugene S. Mason (“Mason”), was found to have caused SFX’s violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. Ultimately, SFX was ordered to pay $150,000 in civil money penalties to the SEC, and both SFX and Mason were censured.
The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses or been defrauded. If you are a victim of fraud, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.