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SEC charges broker for assisting investment adviser’s fraud

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The Securities and Exchange Commission has filed a civil injunctive action against Stephen M Folan, a former registered representative in the Chicago office of FTN Financial Securities Corp (FTN), for assisting Sentinel Management Group, Inc (Sentinel), a bankrupt former investment adviser, in its fraud against its advisory clients.

The SEC’s complaint alleges that over year-end 2006 and the first few days of 2007, Sentinel and FTN engaged in a five-day reverse repurchase transaction (Repo Transaction) involving approximately USD35 million of collateralised debt obligations ("CDOs). Folan acted as the primary advocate for the Repo Transaction within FTN and served as the conduit between Sentinel, his best customer, and FTN’s management. The complaint further alleges that recorded telephone calls show that although Folan had information indicating that Sentinel would use the Repo Transaction for an improper purpose, he did not share this information with his superiors at FTN.

According to the SEC complaint, Sentinel used the Repo Transaction to mislead its clients by temporarily reducing the outstanding bank loan balance in its year-end 2006 financial statements by approximately 10% without disclosing that the source of the reduction was an atypical, non-recurring event and by understating its liabilities by failing to record any liability associated with its obligation to repurchase the CDOs when the Repo Transaction was unwound.

The complaint alleges that Folan aided and abetted Sentinel’s violations of 206(2) of the Investment Advisers Act of 1940 ("Advisers Act") and seeks a permanent injunction and civil penalties. Folan settled the charges against him without admitting or denying the allegations of the complaint. Folan consented to injunctive relief and a $50,000 civil penalty. The proposed settlement is subject to approval by the court. As part of the settlement, Folan also agreed to the entry of a Commission Order barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognised statistical rating organisation, or from participating in any offering of a penny stock, with the right to reapply after three years.

In a related case, on November 17, 2011, FTN consented, without admitting or denying the findings, to the entry of a Commission Order finding that FTN was a cause of Sentinel’s violation of Section 204(a) of the Advisers Act and Rule 204-2(a)(6) promulgated thereunder. The Order required FTN to cease and desist from committing or causing any violations and any future violations of these provisions and to pay disgorgement of USD1,495,878.00 and prejudgment interest of USD377,758.73. (Rel. IA-3316; File No. 3-14632)

 

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