Securities Fraud Litigation and Arbitration Attorney, Russell L. Forkey, Esq.
Securities and Exchange Commission v. Sam Otto Folin, Benchmark Asset Managers LLC, and Harvest Managers LLC, Civil Action No. 11-cv-4447 (E.D. Pa. July 12, 2011)
SEC Charges Philadelphia-Based Registered Investment Adviser With Fraud.
The Securities and Exchange Commission recently charged Sam Otto Folin (Folin), his Philadelphia-based registered investment adviser, Benchmark Asset Managers LLC (Benchmark) and its parent company, Harvest Managers LLC (Harvest) with misappropriating approximately $8.7 million from advisory clients, friends and family through material misrepresentations and omissions.
According to the SEC’s complaint filed in the U.S. District Court for the Eastern District of Pennsylvania, from approximately 2002 through October 2010, Folin, Benchmark and Harvest offered and sold securities in Harvest, Benchmark, and Safe Haven Portfolios LLC (Safe Haven), a pooled investment vehicle, promising investors that their funds would be invested in public and private companies with “socially responsible” goals and purposes. Instead, the complaint alleges that Folin, Benchmark and Harvest diverted a portion of the invested funds to pay previous investors as well as to sustain Benchmark’s and Harvest’s expenses which included paying Folin’s salary.
More specifically, the complaint alleges that Benchmark and Harvest issued various “notes” to advisory clients, friends and family promising guaranteed above-market interest rates. Folin, Benchmark and Harvest assured investors that such notes were conservative and safe. According to the complaint, Folin, Benchmark and Harvest failed to disclose the true uses of those funds and continually misrepresented the value of the notes on quarterly statements.
In addition, the complaint alleges that in August 2004 Folin and Benchmark formed Safe Haven which purported to offer investments in several different portfolios, including the Private Fixed Income Portfolio, the Hedged Equity Portfolio, the Green Real Estate Portfolio and the Sustainable Enhanced Cash Portfolio. The complaint also alleges that Folin and Benchmark caused Benchmark’s advisory clients to invest in Safe Haven and that Folin and Benchmark also acted as investment advisers to Safe Haven. From 2006 through 2009, the complaint alleges that Folin and Benchmark caused Safe Haven to pay over $1.7 million to Benchmark and Harvest under the guise of “development costs.” The complaint alleges that these “development costs” did not relate to any actual expenses incurred by Harvest or Benchmark in connection with the formation or offering of Safe Haven securities. Rather, the complaint alleges, the payments coincided with Harvest’s and Benchmark’s need for funds to pay previous investors, expenses and Folin’s salary. Moreover, the complaint alleges that Folin and Benchmark improperly amortized the development costs rather than expensing them as incurred in accordance with Generally Accepted Accounting Principles (GAAP) thereby causing the reported net asset values of the Safe Haven portfolio to be overstated on statements provided to advisory clients and investors.
The complaint also alleges that Folin and Benchmark caused Safe Haven to make loans to Harvest and Benchmark in excess of $3.9 million. The complaint further alleges that Folin and Benchmark did not disclose these loans. Moreover, the complaint alleges that these loans violated several provisions of Safe Haven’s investment criteria including, among other things, that: (1) they were not supported by adequate collateral, (2) they violated the 5% net exposure requirement, and (3) they caused the portfolios to violate the “no leverage” provision. In addition, the complaint alleges that the financial statements provided by Folin and Benchmark to investors did not comply with GAAP. More specifically, the complaint alleges that the financial statements improperly valued the Safe Haven loans to Harvest and Benchmark at face value, rather than fair value or net realizable value. Finally, the complaint alleges that Folin and Benchmark failed to disclose to their advisory clients Benchmark’s dire financial situation and inability to sustain itself but for the monies it received under the guise of “development costs” and the loans from Safe Haven.
Without admitting or denying the allegations in the SEC’s complaint, Folin and Benchmark have consented to the entry of a final judgment enjoining them from future violations of Sections 17 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Harvest has consented to the entry of a final judgment enjoining it from future violations of Sections 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Folin, Benchmark and Harvest have also consented to pay, jointly and severally, disgorgement of $8,706,620 plus prejudgment interest of $1,454,177. In addition, Folin has consented to pay a civil penalty of $150,000 and Harvest and Benchmark have consented to pay civil penalties of $750,000 each. The settlements are subject to court approval.
Without admitting or denying the Commission’s findings, Folin also consented to the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions which bars him from association with any broker, dealer, investment adviser, municipal securities dealer, transfer agent, municipal advisor, or nationally recognized statistical ratings organization based upon the entry of the final judgment. Similarly, without admitting or denying the Commission’s findings, Benchmark consented to the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 203(e) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions which revokes its investment adviser registration based upon the entry of the final judgment.
If the reader desires to review thecomplaint filed by the SEC, please follow the highlighted link.