The following are summaries of administrative actions and orders taken from July 1 through Sept. 30, 2016.
Charles Schwab: Co. Inc.: Fine, Reprimand
Charles Schwab & Co. Inc. was reprimanded and agreed to pay a $95,000 fine for failing to verify that certain individuals with powers of attorney in client accounts were required to be registered as investment advisers.
The reprimand and fine are part of a Consent Order entered by Securities Commissioner John Morgan on Sept. 22. Schwab will pay the fine to the General Fund of the State of Texas.
The order followed an investigation by the staff of the State Securities Board into Schwab’s procedures for monitoring the registration status of persons authorized by clients as a limited power of attorney or full power of attorney (POA). Staff investigated Schwab’s procedures from January 2010 to January 2016.
Schwab requires persons authorized as a limited or full POA to state whether they are receiving compensation for any investment advice rendered to clients. Receiving compensation for advisory services may require registration under state and federal law unless the person with a POA is covered by an exemption from registration.
According to the order, Schwab identified certain persons who had power of attorney authorizations in Texas and who appeared to be rendering investment advice for compensation, but were not registered and did not qualify for an exemption from registration.
In 2012 Schwab implemented new procedures to identify persons with POA authorizations who indicated they are either being compensated for investment advice or are registered investment advisers.
Schwab flagged these individuals for review and asked them to explain their registration status, but it did not consistently remove POA authorizations from the flagged individuals when they failed to provide a timely explanation of their registration status.
Schwab has instituted revised procedures designed to ensure that persons with POA authorizations are complying the registration requirements of securities laws.
As part of the order, Schwab will separately pay $30,000 to the Investor Protection Trust, a national nonprofit organization that supports investor education efforts in Texas and other states.
Stephen M. Scheurer: Reprimand, Fine
Austin investment adviser representative Stephen M. Scheurer was fined $3,000 and reprimanded for failing to disclose certain financial agreements with creditors.
The sanctions are part of a Disciplinary Order that Securities Commissioner John Morgan entered on Sept. 21. The order also grants Scheurer's applications for registration as an investment adviser representative and agent.
State Securities Board Rules require investment advisers and agents to update any information they have previously submitted in regulatory filings within 30 days.
Scheurer reached four separate agreements with creditors in 2010, but in 2011 he reported in a regulatory filing that he did not have any compromises with creditors. Scheurer did not report the compromises reached in 2010 until June 2016.
Rubicon Investment Management & Analytics LLC: Reprimand, Fine
Texas Securities Commissioner John Morgan entered a Disciplinary Order Sept. 20 that fined and reprimanded Rubicon Investment Management & Analytics LLC of San Antonio.
As part of the order, Rubicon and its president, Michael Yves Heridia, agreed that Heridia will not serve in any supervisory capacity on behalf of Rubicon for eight years.
The order found that Rubicon, solely owned by Heridia, did not maintain supervisory procedures to protect the interests of clients, including oversight of advisers to make sure they recommended investments suitable for a client’s age, financial situation, and willingness to take risk.
Under the terms of the order, Rubicon and Heridia will withdraw the registration of all investment adviser representatives of Rubicon, excluding Heridia.
Rubicon paid a $5,000 to the General Fund of the State of Texas.
According to the order, Rubicon did not maintain complete records for all clients on employment status, occupation, annual income, net worth, investment objectives, and risk tolerance. Rubicon is required to maintain those records.
Strata Medical Innovations Inc.: Agreed Cease and Desist
Securities Commissioner John Morgan on Sept. 19 entered an Agreed Cease and Desist Order that requires Strata Medical Innovations Inc. of Lubbock to stop offering its stock to the public until certain conditions are met.
The order also names Mark Aldana, the president of Strata, a medical device company.
Aldana and Strata sold shares of stock to investors in and from Texas. Aldana solicited prospective investors and the company advertised its shares on the internet.
Strata must stop selling its shares until the investment is registered with the Securities Commissioner or is qualified to be sold under an exemption from registration under the Texas Securities Act.
Richards, Merrill & Peterson Inc.: Fine, Reprimand
Texas Securities Commissioner John Morgan entered a Disciplinary Order Sept. 14 that fined and reprimanded Richards, Merrill & Peterson Inc. of Spokane, Wash., for doing business while not registered as a dealer in Texas.
Richards, Merrill paid a $30,000 fine to the State of Texas General Fund. The order reprimanded two executives of the firm for acting as unregistered agents: CEO and Chief Compliance Officer Steven Richard Larson and John Scott Larson, chief operating officer and co-chief compliance officer.
The order also granted the dealer registration application of Richards, Merrill & Peterson and the applications for agent registration of Steven Larson and John Larson. The three parties submitted applications for registration on May 2.
Since 1997, the firm and the Larsons executed dozens of securities transactions for Texas clients without being registered with the Securities Commissioner.
The Texas order is the third state sanction against the Richards firm for unregistered activity. Oregon and Nebraska securities regulators previously imposed sanctions, including fines, against the firm.
Texas First Financial LLC, Bobby Eugene Guess, Mechanical Motion Solutions LLC: Emergency Cease and Desist
Texas Securities Commissioner John Morgan entered an Emergency Cease and Desist Order on Aug. 15 that requires Bobby Eugene Guess, an unregistered investment promoter, to stop engaging in fraud in marketing promissory notes tied to a wide array of businesses.
The emergency order cites Guess’ failure to disclose to potential investors that Collin County State District Judge Mark J. Rusch issued a search warrant Aug. 4 authorizing the seizure of the business records of Texas First Financial LLC in Frisco.
Guess is the founder and CEO of Texas First Financial.
Judge Rusch found probable cause to issue the search warrant based on information in the affidavit for the warrant. The affidavit cites evidence that the principals of internet advertising company Stamedia Inc., whose promissory notes Guess offered for sale, used investor funds to perpetuate a Ponzi scheme and pay personal expenses from July 2015 through January 2016.
Stamedia principals spent an average of $423,000 a month over that period, according to an analysis by a financial examiner with the Texas State Securities Board that is in the affidavit for search warrant.
Guess and Texas First Financial also offered for sale promissory notes in North-Forty Development LLC, a real estate company in Frisco. The notes would purportedly pay an annualized return of 9%, backed by deeds of trust for the properties North-Forty developed.
According to the affidavit, as much as $1.4 million of investor funds placed with North-Forty and associated companies were spent to cover a federal tax lien for that amount. The tax lien, which was outstanding as of April 2016, was levied against a North-Forty principal.
Besides an internet company and a real estate developer, Guess and Texas First Financial offered for sale investments – none of them registered for sale in Texas – in Primary Urgent Care LLC, a health-care provider, and Mechanical Motion Solutions LLC, which purportedly sells a chiropractic tool.
According to the order, Guess also previously sold unregistered promissory notes and interests in life settlement contracts issued by Credit Nation Capital LLC of Georgia. Guess was an owner and vice president of sales and marketing for the company.
Guess intentionally failed to disclose that the Securities and Exchange Commission sued Credit Nation in 2015 and later placed the company in receivership. The SEC alleged that Credit Nation was operating a multi-million-dollar Ponzi scheme to continue to lure investors and cited Guess for concealing the dire financial situation of the company.
Lawrence Allen Deshetler D/B/A Partners Investment Advisors: Notice of Hearing to Revoke Registration
Lawrence Allen Deshetler, an investment adviser in The Woodlands, faces the revocation of his registration over Texas State Securities Board staff allegations that he misapplied funds from a client’s individual retirement account that was once worth $726,785.
The State Securities Board staff on Aug. 9 filed a Notice of Hearing asking the Texas Securities Commissioner to revoke Deshetler’s registration and order him to cease and desist from engaging in fraudulent conduct. Deshetler does business as Partners Investment Advisors.
In January, according to the State Securities Board staff, Deshetler advised a client to cash out her IRA and transfer the funds to Deshetler, who said he would invest the money in a new IRA.
Deshetler did not invest the money in an IRA, instead depositing the funds into a bank account over which he had sole authority. The client had no access or control over the money.
Deshetler wired money to the client each month to make it appear she was receiving regular IRA distributions, according to the hearing notice.
The staff alleges that Deshetler spent some of the client’s money on restaurant bills, country club bills, clothing, and pool cleaning services.
Deshetler breached his fiduciary duty to the client and engaged in fraudulent business practices, according to the hearing notice.
Valor Capital Asset Management: Reprimand, Fine
Valor Capital Asset Management LLC of Austin was reprimanded and will pay a $48,000 fine for failing to enforce its written supervisory procedures regarding block trades of stock placed by its president, Robert Mark Magee.
Texas Securities Commissioner John Morgan entered the Disciplinary Order against Valor Capital on Aug. 8. The fine will go into the General Fund of the State of Texas.
Block trading allows an investment adviser to place an aggregate order of stocks for multiple clients. The clients receive the stock at an average share price. Once the trade is filled the adviser allocates the shares ordered by the clients.
In 2014 and 2015 Magee entered block trades in which shares were purchased for his personal account alongside clients. Valor Capital has disclosed in regulatory filings that it or Magee may participate in block trades.
To address the potential conflict of interest in participating in block trades with clients, however, Valor Capital’s supervisory procedures require pre-allocation of shares purchased in block trades and retention of allocation records.
Magee didn’t always pre-allocate block trades and never retained a record of how any block trades in which he participated were allocated ahead of the trade.
The Investment Center Inc.: Fine, Reprimand
The Investment Center Inc., a New Jersey securities dealer registered with the Texas State Securities Board, was reprimanded and will pay a $50,000 fine for failing to supervise an agent who overloaded certain clients’ accounts with stocks from one industry.
The fine will go into the General Fund of the State of Texas.
The Consent Order, which Securities Commissioner John Morgan entered Aug. 2, followed a complaint from a Texas resident regarding The Investment Center and a former agent for the firm.
Between January 2010 and March 2014, the agent recommended that certain clients invest in publicly traded, low-priced securities of energy companies. A review of certain clients’ accounts revealed that a majority of those clients held more than 95% of their total assets in equities, with shares of energy companies comprising 100% of their equity holdings. In most of the accounts reviewed, clients’ entire equities holdings were shares in a single company.
The agent recommended clients buy low-priced shares of energy companies even when the clients indicated they had a low tolerance for risk.
The Investment Center failed to adequately address internal alert reports generated by the agent’s activities. The alerts were based on the concentrated equity positions in client accounts, the decline in value of certain accounts, and the agent’s pattern of amending some clients’ customer information to include “speculation” as an acceptable level of risk.
During the State Securities Board’s investigation, The Investment Center paid the complainant $98,000 to resolve the issues raised in the complaint.
Michael Jason Gamez: Suspension
Texas Securities Commissioner John Morgan on July 27 entered a Disciplinary Order suspending the securities registrations of Michael Jason Gamez for 100 days starting Aug. 8.
Gamez is currently registered as an agent of Maplewood Investment Advisors Inc. and an investment adviser representative of MIAI Inc.
The Order cited Gamez for making unauthorized trades at a previous employer, Edward Jones.
In 2013 and 2014 Gamez regularly placed trades in certain clients’ brokerage accounts without discussing the trades with the clients on the dates of the trades. Gamez was not authorized to engage in discretionary trading in client accounts.
As a result, Edward Jones terminated the agent and investment adviser representative registration of Gamez and repaid the clients the amount of the commissions they previously paid.
Balanced Energy and Kirk Johnson: Modified Emergency Cease and Desist Order
Texas Securities Commissioner John Morgan entered a Modified Emergency Cease and Desist Order on July 14 that requires Balanced Energy LLC and its president, Kirk Johnson, to stop offering for sale securities until they are registered or offered under an exemption from the Texas Securities Act.
The order modifies an Emergency Cease and Order entered against Balanced Energy and Johnson in 2014.
Balanced Energy is a Southlake-based oil and gas exploration firm that offered for sale working interests in oil and gas wells in Runnels County. The working interests were not registered with the Securities Commissioner, nor were they offered pursuant to an exemption from registration.
In 2006, the State Securities Board entered an Agreed Cease and Desist Order requiring Johnson, at the time the vice president of Sundance Resources In., to stop selling unregistered securities.