Investment Adviser in Trouble with SEC After Failing to Disclose Solicitation Agreement

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Earlier this month, John Rafal, former president and CEO of Essex Financial Services, Inc., admitted wrongdoing and agreed to pay more than $575,000 in settlement charges.  According to the SEC, the Connecticut-based investment adviser defrauded a client, attempted to mislead the SEC’s enforcement investigators and lied to his other clients about the status of the SEC’s investigation.

Beginning in early 2011, John Rafal and Peter Hershman, a Connecticut attorney with whom Rafal was acquainted, ignored the SEC’s rule regarding payments by investment advisers to third parties for client solicitations.  Rafal paid Hershman to refer one of his large client accounts to Essex Financial Services, Rafal’s dually registered investment adviser and broker-dealer firm.  However, instead of disclosing the solicitation agreement and subsequent conflict of interest to the client, as required by law, Rafal and Hershman disguised the payments as fake legal invoices from Hershman, claiming they were for legal services provided to joint clients of Essex and Hershman.

In May 2013, in response to the rumors circulating that he was being investigated for a securities law violation, Rafal sent emails to clients and others stating that the SEC had completed its investigation and found no securities law violations. He also claimed that the Commission had issued a “no-action letter” completely exonerating Rafal and Essex of any misconduct.

Lastly, during his May 2015 testimony, when asked about the Referral Fee Arrangement, Rafal stated that Hershman had returned the fees to Essex per firm’s request.  However, Rafal refrained from telling the Commission staff that he had arranged to make two Referral Fee Arrangement payments totaling $49,760 to Hershman from accounts owned by entities Rafal controlled.

“Rafal misled one client by hiding referral fees, misled other clients by falsely stating the SEC’s investigation was over, and then attempted to mislead those investigating him.  He will now be paying the price for his deceit,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “We will not tolerate attempts to mislead and we will continue to refer possible obstruction cases to the SEC’s Office of Inspector General.”

As retribution for their securities law violations, Rafal agreed to pay more than $180,000 in disgorgement and interest and Peter Hershman agreed to pay more than $90,000 for aiding and abetting Rafal’s illegal activities. In addition to the monetary settlement, both agreed to be barred from the securities industry, as well as from serving as an officer or director of a publicly-traded company. They are also permanently suspended from appearing and practicing before the SEC as attorneys. Essex Financial Services agreed to pay more than $180,000 in disgorgement and interest to settle charges related to Rafal’s securities law violations.

It is of paramount importance to maintain truthfulness at all times — with your clients and regulatory investors.  If you find yourself in an investigation, it is important to secure experienced securities counsel, who can provide guidance on regulatory responses and client messaging.

If you have questions or would like to discuss JLG’s regulatory counsel services, please contact us at 619.298.2880 or info@jackolg.com.

 

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