CCO Sanctioned for Incorrect Form ADV Filings

According to the Securities and Exchange Commission, David I. Osunkwo failed as a CCO for incorrectly stating the amount of AUM and the number of clients for two affiliated investment advisers. Mr. Osunkwo relied on estimates provided to him by the Chief Investment Officer. For that, he was fined $30,000 and suspended for a year from certain jobs related the investment adviser and securities industry. Unfortunately, this is another instance of the SEC publishing a case that increases the potential liability for CCOs.

Osunkwo served in 2010 and 2011 as the chief compliance officer at Aegis Capital LLC and Circle One Wealth Management LLC. The firms had outsourced CCO duties to a third-party provider called Strategic Consulting Advisors LLC, where Osunkwo was a principal. As part of the outsourcing, Osunkwo was designated CCO of both firms. Osunkwo was tasked with preparing a consolidated 2010 year-end Form ADV for Circle One that would reflect its merger with Aegis under the same parent company, Capital L Group LLC.

According to the SEC, Osunkwo reviewed information of Aegis Capital’s and Circle One’s investment management business and client accounts including 2009 year’s ADV. For 2010 AUM and account information, Osunkwo relied on estimates provided to him by the CIO.

The SEC said the CIO sent Osunkwo an email that stated:

David – . . . I believe AUM was as follows on 12/31 Funds: $36,800,000 Schwab/Fidelity: $96,092,701 (1,179 accounts) (not sure how many customers) Circle One: probably higher than $50m, but hopefully [another employee] told you a number today Total is in the $182.89m range . . . .

I assume that Osunkwo could not show that he relied on anything other than this email.

The problem is that the actual combined AUM of Aegis Capital and Circle One was only $62,862,270.28. The Form ADV overstated the AUM by 190%  The Form ADV also overstated the total client accounts by at least 1,000 accounts, which was off by 340%.

The SEC does not lay out any facts in the order that shows Osunkwo knew the statements were incorrect. On its face, the SEC is imposing liability on a CCO solely related to the compliance operations of a CCO, with no evidence of fraud.

The SEC did not point out that any investors were harmed. This is in contrast to the Diamond CCO liability case where her firm was involved in fraud and her actions effectively covered up that fraud.

The parallel case against Aegis Capital and Circle One Wealth is all about recordkeeping and filing violations. There is no indication of harm to the clients.

At one point the SEC had expressed an unwillingness to prosecute CCOs except in three extreme circumstances:

  1. Participating in the wrongdoing
  2. Hindering the SEC examination or investigation
  3. Wholesale failure

In the case against Mr. Osunkwo, I don’t see any of these three circumstances. Nor does the SEC state or imply that any of these circumstances had occurred. Nor is there any allegation of fraud or harm to clients.

On the face of the order, Mr. Osunkwo relied on the CIO for information included on the Form ADV and as a result he was sanctioned. That leaves all CCOs having to wonder how far they must go to verify information on Form ADV filings. This case tells me that I can’t rely on information from senior firm employees when preparing a Form ADV. Add in the Diamond case, I have to be concerned about what information the SEC thinks I should have known when filling out the Form ADV.