One out of ten investment advisers disciplined


Throughout his career as a broker-dealer, Anthony Gerard Manaia has been fired twice. He’s been the subject of 18 complaints by disgruntled investors, most of whom accused him of putting their money in risky investments without their knowledge.  He’s currently under investigation for his role in a scandal around offerings by a medical financing company that a federal agency has accused of misappropriating investor funds.

In July 2010 Manaia gave up his broker-dealer registration. Five months later, in January 2011, he hung out his shingle as an investment adviser. His website targets “high net worth individuals” and says the firm will build a “professionally managed, diversified investment portfolio,” and that clients will be interviewed to determine their tolerance for risk.

This information about Manaia’s record is publicly available, as are the complaints, fees, enforcement actions and other disciplinary actions associated with 11,000-plus registered investment adviser firms and 5,100 broker dealer firms in this country. Anybody can look up the records—although you need to know where and how to look. See accompanying story.

An analysis of available data from the U.S. Securities and Exchange Commission (SEC) on investment advisers shows that more than one out of ten registered investment adviser firms have reported that they have been the subject of some sort of disciplinary action, including 39 with employees who have been convicted of a felony; 722 that have been involved in a violation of investment-related regulations or statutes; and 614 that have been subject to an order by a regulatory federal, state, or foreign regulatory agency.

These disciplinary actions can range from slaps on the wrist for failure to file paperwork on time to multi-million dollar judgments related to major financial scandals, such as the Enron fiasco. There are advisers who have been convicted on child pornography charges and shoplifting and many others, like Manaia, whose record shows no official criminal offense but still might give pause to an investor. And there is a vast difference between the way these advisers—who are trying to encourage trust and have a certain wealth conjuring mystique—present themselves to the world through their websites and brochures they are required to give to customers as opposed to the information that is buried in SEC and Financial Industry Regulatory Authority (FINRA) files.

While there is much overlap between investment advisers and broker-dealers—an individual can be registered as both–they are overseen by different entities. Investment advisers are professionals who manage money for their clients, whether they are individuals with a small retirement account or major metropolises managing public pension funds. Legally they are supposed to serve in the best interest of their clients, a concept known as “fiduciary duty,” and the larger ones are overseen by the SEC. Broker dealers, on the other hand, are generally not subject to fiduciary duty and are largely overseen by FINRA, a “self regulatory organization,” or SRO.

Furthermore, just like the story about the drunk looking for his keys under the street lamp because that’s where the light is best, information about disciplinary actions takes the investor only so far. Bernie Madoff is a case in point: registered both as an investment adviser and a broker dealer, before his massive Ponzi scheme was exposed his public record revealed little that would give a potential customer particular cause for worry.

A study mandated by the law The Dodd-Frank law studied the regulatory regime for investment advisers and broker-dealers to determine, among other things, whether ordinary people understand the difference. One of the study’s conclusions was that broker-dealers should be subject to the same “fiduciary standard” as investment advisers.

Meanwhile, the last several years, the number of investment advisers have increased rapidly, even as the SEC has had fewer resources to dedicate to examinations. According to a report mandated by the Dodd-Frank financial overhaul law, from 2004 to 2010, the number of investment firms grew from 8,581 to 11,888, and the amount of money they managed grew from $24.1 trillion to $38.3 trillion. At the same time, the number of examinations decreased nearly 30 percent, from 1,543 in 2004 to 1,083 in 2010. The report recommends Congress consider charging investment advisers user fees to cover examination costs or giving more authority to FINRA to oversee investment advisers.

But none of these speak to a case like that of Manaia, who appears to be staying in business by floating between the two regulatory realms. In the mid-1990s, after the Los Angeles Times published a series of stories about scandals in the way big broker-dealer firms operated, the SEC noted that individuals with serious histories of consumer complaints nevertheless were moving from firm to firm. The SEC and FINRA would not comment on his individual case, and Manaia did not return calls for comment.


Who: Manaia Capital Management Inc.
What the website says: “Manaia Capital Management helps individuals and companies build professionally managed, diversified investment portfolio, [sic] customized to meet their specific objectives.”
What the record says:
Manaia is currently under investigation by FINRA for allegations of violations related to MedCap holdings. In July 2009, the SEC obtained a preliminary injunction to stop MedCap, a California-based medical receivables financing company, from making any more sales offerings. The SEC alleged that the company had misappropriated $18.5 million in investor funds. In April, FINRA announced that it had sanctioned two firms and seven individuals for their selling private offerings of MedCap without “conducting a reasonable investigation,” and that it was continuing to investigate other broker dealers.
Manaia has been fired twice from jobs as a broker-dealer, once more nearly 20 years ago from a job at Merrill Lynch and more recently, in July 2010, from Intervest International Equities Corporation, for “multiple violation of firm's policies and procedures”. Both times he states he quit before he was fired.
He has been the subject of 18 customer disputes and has paid out nearly $1.8 million to settle 16 of them. Most allege that the put customers’ money in risky investments without their agreement. Manaia contends that the clients in question had an appetite for risk.
    Manaia did not return calls for comment.

Who: Sandell Asset Management Corporation
What the website says: “We are committed to integrity, unwavering ethics, forthrightness and fair dealing in all that we do. We understand this, above all else, is the lifeblood of our success.”
What the record says: "By mismarking certain trades and falsely claiming that firm personnel had located stock to borrow, Sandell Asset Management gained an unfair trading advantage over other market participants.”
Penalties: Firm paid more than $8 million to settle the charges; top executives made civil payments totaling $190,000.
What happened: According to the SEC order, In August 2005, in the wake of Hurricane Katrina, the hedge fund’s executives were worried that they would lose money on their bet on the Hibernia, a New Orleans-based financial holding company. Hibernia was in the process of being acquired by Capital One Financial Corporation. Thomas E. Sandell and his colleagues were concerned that Capital One would lower its offering price for the company. Sandell had already leveraged its interest in Hibernia through swaps, so it didn’t actually own any of the company’s stocks, although it bore financial risk if the price fell. Sandell and another executive instructed an employee to make “short” sales—where a seller borrows the stock in question—but label them as “long” sales, thereby sidestepping SEC rules then in effect that would have disallowed these transactions. After receiving legal advice that what they were doing was against the rules, Sandell continued to encourage his staff to make short sales of Hibernia, even though they had told him they were having trouble locating enough stock to cover the sales. The firm did not return request for comment.

Who: Aletheia Research and Management, Inc.
What the website says: “Aletheia is the classical Greek word for “truth and disclosure,” of bringing facts into the open. Aletheia is an independent, registered investment advisor dedicated to uncovering investment truth.”
What the record says: “From 2006 to 2008, Aletheia disseminated proposals to client [sic.] and potential clients that failed to disclose requested information regarding prior Commission examinations…”
Penalties: The firm and two executives were censured and required to pay total of $400,000 in civil fines
What happened: As of late 2009, Alethia managed more than $7.1 billion in assets for 5,400 clients, which included retail accounts, institutions, and two private hedge funds. When prospective clients sent questionnaires asking whether the SEC had ever found any problems in its examinations of the firm, the firm dissembled, either saying there were no such findings or sending misleading information. In fact, the SEC had conducted an exam in 2005 in which it had found six deficiencies, which the firm should have reported. The firm was also late to make quarterly statements to its limited partners, as required by law. AND firm failed to keep records showing that it had provided employees with its code of ethics even after it was warned it must do so.
What Alethia says: “Alethia is gratified with the way the SEC settlement worked out,” says a spokesman for the firm, Robert Siegfried.  “It views the settlement and order as making very clear how the issues were directly related to the oversight of [Roger] Peikin, a former employee.” In  late 2010, Peikin, a co-founder of the firm, sued the company for wrongful termination. In the lawsuit, he alleged that he clashed with Peter J. Eichler Jr, the firm’s other co-founder, over “trading practices, general disregard for regulatory controls, wanton expenditure of corporate assets for Eichler’s personal benefit, and overall neglect of the business side of Aletheia’s operations.”

Who: Scarborough Capital Management
What the website says: “Some would call us a boutique wealth management firm, but our desire is to help every client achieve their own definition of financial well-being.”
What the record says: “From 1998 through early 2000, [Mike] Scarborough…sold brokerage customers Class B mutual fund shares in amounts that would have entitled them to “breakpoint” discounts had they purchased Class A shares of the same funds…Scarborough…did not tell them that Class A shares generally produce higher returns than Class B shares of the same mutual fund when purchased in amounts of $100,000 or more.”
Penalties: Royal Alliance was censured and fined $150,000; Scarborough was suspended from supervising any broker or dealer for nine months. In addition, Scarborough was required to pay “disgorgement” of $2.11 million and a monetary penalty of $50,000. Royal Alliance loaned Scarborough $2 million to help pay the fines. Scarborough later got his repayment amount reduced but still owes Royal Alliance $215,000, which must be repaid by January 2012.
What happened: Mike Scarborough is quoted widely in the media as an expert on 401(k) plans, has written a book for investors on maximizing investments, and is registered both as an investment adviser and a broker dealer. He formerly worked for a firm called Royal Alliance. The SEC charged that Scarborough directed employees there to sell Class B mutual fund shares to clients even though some investers—those with $100,000 or more—would benefit more from Class A mutual fund shares. This practice brought in more commissions for the firm. They were aggressive in marketing the Class B shares, for example giving customers a brochure that said that purchasing them “alleviates upfront commissions normally charged to you. Instead, our compensation comes to us directly from the mutual fund companies for the ongoing management of your assets. Such an arrangement works well for clients with a long-term investment horizon and a need to balance both growth and income.”
What Scarborough says: “If any governmental agency decides they want to go after somebody they have much deeper pockets than you do and they can do what they want to you,” says Scarborough, who contends he was treated unfairly by the SEC. Scarborough says agency staff told his lawyer they were making an example of him on the issue of Class B shares, and that they wouldn’t go after larger firms over the same type of practice because they had more resources to fight it. He also says that he lost only “one out of 4,000 clients” over the issue and has no problem explaining his history to current clients.

Disciplinary Actions Reported by Invester Adviser Firms

Hover the cursor over the bars for more information.

SEC = U.S. Securities and Exchange Commission
CFTC = U.S. Commodity Futures Trading Commission
SRO = Self Regulating Organization (i.e. Financial Industry Regulatory Authority)

Source: U.S. Securities and Exchange Commission,, June 2011 download

Editor's note: An earlier version of this story stated that more than one out of ten registered investment adviser firms have reported that they have been the subject of some sort of disciplinary action over the past decade. However, some of these violations occurred over a longer time period.