January 23, 2015 at 4:10 p.m.
Feds accuse ex-investment adviser of fraud
Feds accuse ex-investment adviser of fraud
The U.S. Securities and Exchange Commission took action against the adviser, James Sarkauskas, and his company, Sarkauskas and Associates, more than a year ago. But the case remains ongoing, and the SEC is in the process of determining how to disburse more than $331,000 in restitution to victimized clients.
In September 2013, the SEC made findings and imposed remedial sanctions based upon settlement offers submitted by Sarkauskas and his company, which the SEC agreed to accept. The SEC found that between August 2009 and August 2012, Sarkauskas purchased unit investment trusts for clients that contained transactional sales charges and failed to tell those clients they could get the same products without the added charges. That conduct, the SEC concluded, violated federal law because it created a conflict of interest.
A unit investment trust, or UIT, is an investment product containing a fixed portfolio of securities. It is similar to a mutual fund.
Sarkauskas and his company could have purchased the same unit investment trusts without transactional sales charges. Instead, the SEC order says "they chose to purchase units that carried transactional sales charges, thereby substantially increasing their compensation at the expense of their clients."
According to the SEC's findings:
In September 2008, examiners in the commission's Chicago office conducted a review of Sarkauskas and his company. By the following year, the SEC notified him that he might have violated federal law.
"On Aug. 7, 2009, the exam staff sent the Adviser a deficiency letter which advised that the Adviser may have violated the antifraud provisions of the Advisers Act by purchasing the UIT units that bore transactional sales charges and by failing to disclose the conflict of interest that arose when the Adviser purchased UIT units which bore transactional sales charges on behalf of its clients," the SEC order reads.
(The "Adviser," as stated in the order, refers to the company Sarkauskas and Associates.)
But after receiving the letter, Sarkauskas failed to change his practices or the information he disclosed, and he continued to purchase unit investment trusts with the transactional sales charges, the order says.
That conduct is key, according to Adam Pritchard, a professor at the University of Michigan Law School who is an expert in securities law. Pritchard, a former SEC attorney, said Sarkauskas had a fiduciary duty to his clients to disclose relevant information to them, including how fees were structured.
"It's not that he's received the sales charge in addition to his advisory fee that's creating the problem," Pritchard said. "It's that he failed to disclose that to his customers and he's got a fiduciary duty to those customers. So he has to volunteer relevant information to them to explain to them what it is, how the charges are structured."
Pritchard is not involved in the Sarkauskas case, but was contacted by The Lakeland Times to offer independent analysis.
The SEC found Sarkauskas "willfully violated" the federal Investment Advisers Act of 1940, which prohibits fraudulent conduct by an investment adviser.
Sarkauskas and his company did not admit or deny wrongdoing in their offers, but they did consent to the commission's order as part of the settlement. Under the terms of that settlement, the company agreed to cease operations and Sarkauskas has been barred from working in the financial services industry.
The settlement also requires Sarkauskas or his former company to pay the federal government nearly $331,434 in disgorgement, representing the total amount of sales charges collected for products that could have been purchased without the added charges, as well as $18,403 in interest. Sarkauskas must also personally pay a $100,000 penalty. All told, the SEC order requires payment of about $450,000. That money will help compensate injured clients, though they are not likely to receive restitution anytime soon, according to an SEC spokesperson. The commission's enforcement division has until April to formally propose how to distribute the money.
Pritchard, the law professor, said the settlement is typical of the way the SEC handles such cases. He called Sarkauskas' conduct "a pretty elementary no-no."
"Anyone who understands their compliance responsibilities should understand that they should not be doing this," Pritchard said.
The Wisconsin Department of Financial Institutions became aware of the SEC action against Sarkauskas in September 2013, according to department spokesperson George Althoff. Because Sarkauskas had agreed to cease operations, DFI opted not to get involved, Althoff said.
At the time the SEC took enforcement action, in September 2013, Sarkauskas was 68 years old and had been a representative of various investment broker-dealers since the 1970s. He founded Sarkauskas and Associates in 1993, and the company registered with the SEC in 1995. In 2009, Sarkauskas and Associates withdrew its registration because the amount of assets it managed fell below $25 million, the minimum amount required for registration at that time.
By February 2012, Sarkauskas managed approximately $18 million for about 140 clients, according to the SEC.
The company later switched hands and got a new name. Sarkauskas and Associates effectively became Sark Investments, and with that change came different shareholders, directors and employees, according to Tony Liddle, who co-owns Sark Investments with his wife.
Documents organizing Sark Investments were filed with the state in the fall of 2012.
Liddle's online business profile shows he worked at Sarkauskas and Associates between June 2011 and December 2012. However, he told The Lakeland Times that neither he nor Sark Investments had any involvement in the SEC's action against Sarkauskas.
The address for Sark Investments, 14 E. Davenport St., in downtown Rhinelander, is the same address that belonged to Sarkauskas and Associates. According to public records, a company called Sarkauskas Enterprises owns the property. Bradley Sarkauskas, whose father is James Sarkauskas, is the registered agent of Sarkauskas Enterprises. Bradley Sarkauskas was a vice president of Sarkauskas and Associates, but he told the newspaper he is not an employee, officer, director, shareholder or board member of Sark Investments.
Bradley Sarkauskas declined to comment on the SEC case. In a written statement to the newspaper, he said: "As part of an agreement with the Securities and Exchange Commission, I am unable to make any public statement on this matter."
The Lakeland Times was unsuccessful at directly contacting James Sarkauskas. He did not provide comment before press time.
Investigation records withheld
Much of the information in this report derives from federal and state public records, including the SEC order imposing remedial sanctions against Sarkauskas and his former company. The Lakeland Times sought additional documents from the SEC, but the commission withheld them from release.
Under the federal Freedom of Information Act, The Times filed a request last year with the SEC for investigation records related to Sarkauskas. The SEC initially denied release, but that decision was overturned on appeal.
The SEC later concluded it would likely take two or more years to process the FOIA request, so the newspaper narrowed its request for just the deficiency letter the SEC sent to Sarkauskas in 2009.
That request was also denied. The SEC claimed the letter contains confidential financial information and that disclosure would cause substantial competitive harm to Sarkauskas. The commission further argued the letter is exempt from disclosure because it relates to examination, operating or condition reports prepared by the SEC in the course of regulating financial institutions.
The newspaper again filed an appeal, but the commission's Office of General Counsel upheld the denial.
Jonathan Anderson may be reached at [email protected].
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