On August 15, 2017, the Securities and Exchange Commission settled a pair of related enforcement actions in a case that had been ongoing since March 2015, involving two now-defunct affiliated investment advisers’ Form ADV misstatements and failures to keep separate books and records. The SEC held the registrants’ in-house chief operating officer and outsourced chief compliance officer responsible for the violations, and their cases remind hedge fund managers that the Office of Compliance Inspections and Examination’s Outsourced CCO Initiative is still ongoing. Specifically, if a firm’s CCO is outsourced, the SEC will evaluate—and perhaps with more depth—the pervasiveness of its culture of compliance, the openness of communication between management and the CCO, and whether the CCO is empowered to effectuate policies and procedures in accordance with the goals of the Advisers Act.
This article summarizes the SEC’s allegations against the affiliated investment advisers’ COO and outsourced CCO.
The Relationships Among Aegis Capital, Circle One and SC Consulting
Aegis Capital is a North Carolina-registered LLC with its principal place of business in South Carolina. Aegis withdrew registration as an investment adviser with the Commission on March 27, 2012, and from that date until June 24, 2015, Aegis was registered as an investment adviser with the state of North Carolina. Aegis Capital is not currently registered as an investment adviser with the Commission or any state.
Circle One Wealth Management is a Florida-based LLC that partially withdrew registration as an investment adviser with the Commission on March 27, 2012, and filed a full FORM ADV-W on May 7, 2012. Circle One is currently listed as “Inactive” by Florida’s Division of Corporations.
Dianne Lamm served as the COO for Aegis Capital, Circle One and Capital L Group, LLC, their parent holding company, beginning in October 2009. Lamm was designated as the firm’s COO in the last filing it made on its Form ADV in April 2012.
SC Strategic Consulting Advisors was an Illinois-based LLC with its principal place of business in Naperville that offered consulting services to investment management firms, registered and unregistered firms, and private equity firms on a range of business and regulatory compliance matters, and also offered outsourced CCO services to Commission-registered entities. SC Consulting is now defunct.
David Osunkwo was a principal of SC Consulting and was designated, and served as, Aegis Capital’s and Circle One’s CCO during 2010 and 2011.
The SEC’s Allegations Against Osunkwo and Lamm
Form ADV Misstatements
According to the SEC, between January 2010 and December 2011, SC Advisors was contractually obligated to provide compliance services, including preparing, reviewing and filing Forms ADV. Under the contract, SC Consulting was required to make a principal of the firm available to serve as CCO to Aegis and Circle One, and SC Consulting appointed Osunkwo. During the same time period, Lamm was Capital L Group’s and the investment advisers’ CCO. She was also Osunkwo’s direct supervisor.
On March 31, 2010, Osunkwo filed Aegis Capital’s Form ADV for the December 31, 2009 year end based on information he received from Lamm. In that Form ADV, Aegis Capital reported that it had approximately $165 million in AUM and 1,540 advisory accounts. Although Lamm signed the 2009 Form ADV, certifying that the information it contained was “true and correct,” according to the SEC, both the AUM and the number of client accounts were materially overstated—though the Commission did not specify by how much.
In the spring of 2011, Capital L Group’s management renewed the contract with SC Consulting and Osunkwo and agreed to support and work with them in carrying out their functions, including for the purposes of preparing and filing a consolidated Form ADV for Aegis Capital and Circle One for the year ended December 31, 2010. The consolidated Form ADV was intended to be in place of separate Forms ADV for Aegis and Circle One.
On April 4, 2011, Osunkwo filed an annual amendment to Circle One’s Form ADV for the year ended December 31, 2010. According to the SEC, Aegis, Circle One and Capital L Group’s management intended the amendment to reflect the merger between Aegis and Circle One, and therefore encompass both of the affiliated investment advisers’ assets under management and advisory clients. Circle One reported that it had a combined $182 million in AUM and 1,289 advisory accounts.
According to the SEC, in preparing Circle One’s annual amendment to Form ADV for the December 31, 2010 year end, Osunkwo reviewed Aegis and Circle One’s 2009 ADV and also relied on estimates provided to him by Capital L Group’s chief investment officer via email. The CIO said he “believe[d]” AUM “[t]otal is in the $182.89m range…” and that there were 1,179 accounts. Osunkwo and SC Consulting adopted these estimates, said the SEC, “without taking sufficient steps to ascertain their accuracy.” In fact, the combined AUM of Aegis Capital and Circle One as of December 31, 2010 was just $62,862,270.28, an overstatement of more than $119 million. Total client accounts were overstated by at least 1,000. Osunkwo also listed the CIO as signatory certifying the ADV without confirming with the CIO.
The SEC said no Form ADV annual update or amendment was filed for Aegis Capital until its March 27, 2012 Form ADV-W filing.
Failure to Maintain Books and Records
The SEC also alleged that between 2009 and 2011, Aegis Capital and Circle One failed to keep books and records separate and apart from those of Capital L Group and its affiliated entities. Specifically, said the SEC, “Aegis Capital [and Circle One] failed to make and keep advisory-specific trial balances, financial statements, and internal working papers, journals, including cash receipts and disbursements, and any other records of original entry forming the basis of entries into ledgers; general ledgers reflecting assets, liability reserve, capital, income and expense accounts; checkbooks, bank statements, cancelled checks and cash reconciliations; and bills or statements, paid or unpaid.”
The commingling of books and records was so extensive that when the Commission requested them in August 2011, Aegis and Circle One were unable to produce balance sheets, trial balances, income statements and cash flow statements as of the end of their most recent fiscal year and the most current year to date; cash receipts and disbursements journals; general ledgers and charts of accounts; or any loans from clients to the investment advisers or sales of the investment advisers’ stock to clients. The SEC determined that as COO, Lamm was responsible for Capital L’s operations department, which included accounting and keeping books and records for Aegis and Circle One.
The SEC charged Osunkwo with violating Section 207 of the Advisers Act and causing Aegis Capital’s violations of Section 204 and Rule 204-1(a)(1) thereunder. The SEC noted that Osunkwo has no prior disciplinary history, and he was suspended from the industry for one year and ordered to a $30,000 civil money penalty.
The SEC charged Lamm with violating Section 207 of the Advisers Act, and aiding and abetting and causing violations of Section 204(a) and Rule 204-2(a) thereunder. The SEC noted that on February 5, 2016, Lamm pled guilty to two counts of securities fraud in a parallel criminal proceeding in federal district court. For her civil violations, she was barred from the industry.