In the Matter of Further Lane Asset Management, LLC, et al., Admin. Proc. No. 3-15590; In the Matter of GW & Wade, LLC, Admin. Proc. No. 3-15589; In the Matter of Knelman Asset Management Group, LLC et al., Admin. Proc. No. 3-15588. On October 28, 2013, the SEC announced it sanctioned three investment advisory firms for violating the “custody rule” which requires advisory firms to adhere to certain standards when they maintain custody of client money or securities.
The SEC issued orders instituting settled administrative proceedings against the three firms for deficiencies related to Rule 206(4)-2 under Section 206(4) of the Investment Advisers Act. According to the SEC’s Order against Further Lane Asset Management (“FLAM”) and its CEO Jose Miguel Araiz, Araiz and FLAM did not arrange an annual surprise examination to verify the funds’ assets which they were supposed to do because they maintained custody of the assets of hedge funds managed by FLAM and affiliated adviser Osprey Group Inc. (OGI). In addition, investors did not receive quarterly account statements from a qualified custodian of the funds as required by the custody rule. According to the SEC, FLAM and Araiz also engaged in fraud by causing the fund to acquire a promissory note from another entity that Araiz owned without telling investors the fund might acquire related party promissory notes or not follow its investment strategy. In consenting to a censure and cease-and-desist order, Araiz, FLAM and OGI agreed to pay disgorgement and prejudgment interest of $347,122. Araiz agreed to pay a $150,000 penalty and be suspended from the industry for one year. FLAM consented to comply with certain compliance-based undertakings.
According to the SEC’s order against GW & Wade, the firm did not have proper safeguards as a custodian of client funds, and failed to identify itself as a custodian to its independent auditors or in public disclosures. As a result, clients were exposed to harm and contributed to a third-party fraud in one client account in June 2012, when someone hacked into the client’s e-mail account and posed as the client and got GW & Wade to wire the client’s funds to a foreign bank. The scam was not uncovered until after $290,000 had been taken. In consenting to a censure and cease-and-desist order, GW & Wade agreed to pay a $250,000 penalty.
According to the SEC’s order against Knelman Asset Management Group (“KAMG”) and its CEO and chief compliance officer Irving P. Knelman, KAMG had custody of the assets of a fund of private equity funds named Rancho Partners I. KAMG did not perform the required annual surprise examinations and did not send quarterly account statements from a qualified custodian. Rancho’s financial statements were not audited or distributed to Rancho members. In consenting to a censure and cease-and-desist order, KAMG agreed to pay a $60,000 penalty. Knelman agreed to pay a $75,000 penalty and be barred from acting as a chief compliance officer for at least three years. KAMG and Knelman also consented to compliance training and other compliance-based undertakings.