Fake Documents, Brokerage Lies from Investment Adviser

Jack Humphrey, Regulatory journalist
September 29, 2011 /

The Securities and Exchange Commission has sued a San Francisco-area investment adviser for defrauding clients about how brokerage commission rebates were being used and producing fake documents to cover up the fraud during an SEC examination.

Kurt Hovan allegedly misappropriated more than $178,000 in “soft dollars” that he falsely claimed to be payments for legitimate investment research on his clients’ behalf. In reality, Hovan was secretly funneling the money for such undisclosed uses as office rent, computer hardware, and his brother’s salary.

Soft dollars are credits or rebates from brokerage firms on commissions paid by clients for trades executed in the client accounts of an investment adviser. If appropriately disclosed, an investment adviser may retain the soft dollar credits to pay for a limited category of brokerage and research services that benefit clients.

When SEC examination staff asked Hovan to provide documentation to back up his claims, he created phony research reports. The SEC’s case was investigated by Karen Kreuzkamp and Robert Leach of the San Francisco Regional Office. The examination of HCM was conducted by Karah To, Tracey Bonner, and Ada Chee of the San Francisco Regional Office’s investment adviser/investment company examination program.

The SEC also charged his wife Lisa Hovan and his brother Edward Hovan for their roles in the fraudulent scheme at Hovan Capital Management (HCM). Meanwhile, the U.S. Attorney’s Office for the Northern District of California today filed criminal charges against Kurt Hovan.

According to the SEC’s complaint filed in federal court in San Francisco, Kurt and Lisa Hovan falsely disclosed to clients that HCM would use soft dollars only for certain research services.

Instead, they used $166,667 in soft dollars to pay Edward Hovan’s salary over a 10-month period in 2008 and 2009. To cover up these payments, the three Hovans created a shell company – “Bolton Research” – secretly controlled by Edward Hovan.

Through this company, the Hovans invoiced HCM’s brokerage firms for research services that had never been rendered. Once Edward Hovan received the payments, he kicked back approximately 40 percent ($65,000) to Kurt and Lisa Hovan to pay the office rent.

The SEC further claimed that Kurt and Lisa Hovan instructed a research provider paid with soft dollars to pad its invoices by $12,000 and kick back this amount to help HCM pay for a new computer server.

During a January 2010 examination of HCM, the SEC staff asked HCM to provide copies of the research reports prepared by Bolton Research in exchange for the soft dollar payments. In response, Kurt Hovan quickly drafted numerous research reports and doctored materials to make them appear as if they had been prepared by Bolton. Hovan provided these phony documents to SEC examiners.

The SEC’s complaint charges Kurt Hovan, Lisa Hovan, Edward Hovan, and HCM with violating the antifraud provisions of the federal securities laws, and asserts additional recordkeeping violations against Kurt Hovan and HCM. The complaint seeks injunctive relief, disgorgement with prejudgment interest, and financial penalties.

 

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