Investing

SEC Charges Accounting Firm With Conducting Deficient Surprise Exams

Chris Lange

Published: May 2, 2016 11:40 am

Last Updated: January 13, 2020 9:59 am

The U.S. Securities and Exchange Commission (SEC) recently announced that an accounting firm and one of its partners who conducted surprise examinations of client assets at an investment adviser have agreed to settle charges that they performed inadequately as the adviser’s president secretly stole money from accounts belonging to professional athletes.

The agency found that Santos, Postal & Co. and Joseph A. Scolaro conducted deficient surprise custody examinations of SFX Financial Advisory Management Enterprises and did not adequately consider fraud risk factors.

They twice filed paperwork with the SEC that contained untrue statements. In one instance they stated that they had complied with certain procedures to verify client assets when in fact they never did. In the second instance they stated that client assets were held with a qualified custodian when in fact they were not.

Anthony S. Kelly, chief of the SEC Enforcement Division’s Asset Management Unit, commented:

Surprise custody exams of investment advisers serve a critical role in protecting against the misuse of client assets and uncovering such misuse when it occurs. Santos, Postal & Co. failed to confirm with SFX’s clients the contributions made to and from their accounts and then made untrue statements about its custody exams.

Previously, the SEC announced charges against SFX’s president Brian J. Ourand, who was later found by an administrative law judge to have misappropriated funds from client accounts. In the initial decision issued last month, Ourand was ordered to pay disgorgement of $671,367 plus prejudgment interest and a $300,000 penalty, and he was barred from the securities industry. SFX and its chief compliance officer separately agreed to settlements.

The SEC’s order permits Santos, Postal to apply for reinstatement after one year and Scolaro after five years.

Santos, Postal also agreed to disgorgement of $25,800 in profits that the firm obtained for performing the exams plus interest of $3,276.76 and a penalty of $15,000.  Scolaro agreed to pay a $15,000 penalty.