Tag: Aegis Capital

Follow Up on the Osunkwo CCO Liability

I was quite bothered by the Osunkwo CCO liability case that, on its face, sanctioned a CCO for misstating a firm’s assets under management. A few years ago, 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

None of those were indicated in the administrative order against Mr. Osunkwo.

I had gone through the SEC filings to see if I could find something that more devious that make me feel less uneasy about this sanction against a CCO for errors on the Form ADV.

In the Diamond CCO liability case earlier this year, that CCO was also sanctioned for mistakes on a Form ADV filing. Ms. Diamond had stated that the private fund was subject to annual GAAP audits by a third party auditor to comply with the custody rule. In fact, the fund was not and was a fraud. Investors lost money because the CCO did not do her job.

I thought the SEC did a poor job in the administrative order by not lining up the pieces to state that there was a wholesale failure and investors lost money because of that failure. But at least the fraud was mentioned in that order.

There was no indication of fraud in the Osunkwo administrative order. There is a mention that Aegis Capital and Circle One are no longer registered as investment advisers.

indicted for stealing investor money that was supposed to be used to fund the acquisition and consolidation of small to mid-sized RIAs. Those principals, John Lakian and Diane Lamm are accused of diverting some of that money for personal uses.

I have not had time to pull together all of charges, but it looks like the SEC is placing liability on Osunkwo for indirect losses. I have not found any documents that accuse anyone of pilfering money from the investment adviser clients at the firms that Osunkwo was CCO. Instead, it’s the losses from the investors in the RIA holding company that lead to the CCO liability.

I assume that the holding company was valuing an acquired RIA at $X per AUM. By overstating the AUM in the RIA, Osunkwo was allowing the holding company to overstate the value of its holdings. Investors and and lenders to the holding company sustained losses indirectly because of the Form ADV overstatement of AUM.

I don’t like this expansion of CCO duties and expansion of CCO liability. It’s stretching the obligations of the CCO to not only protect the clients of an investment adviser, but the investors in the owner of the investment adviser.

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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.

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