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Texas Advisory Firms Charged With Failure to Disclose Principal Transactions

December 24, 2013 — In 2010, the U.S. Congress made provision for a financial fraud whistleblower program as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Tipsters who notify the Securities and Exchange Commission (SEC) about an advisor’s failure to disclose principal transactions, or other securities law violations, may be eligible for handsome rewards. Rewards for informants may be as high as thirty percent of the government’s total recovery, so long as it tops $1 million.

A principal transaction occurs when an investment adviser acts through its own account or through an affiliated broker-dealer to sell a security to a client or purchase a security from a client. A conflict of interest may arise between the adviser’s and the client’s interests, since the advisor stands to make a profit on the transaction, separate from its ordinary fee. Advisers are therefore required to disclose the conflict to clients in writing, outlining their financial interest, and to obtain the client’s consent. Clients deserve to know when their investment advisors are in a position to make a big profit by running a transaction through an advisory firm’s affiliated account.

Houston Advisors and Executives Profit Big in Undisclosed Principal Transactions

Two Houston investment advisory firms have been charged with arranging thousands of principal transactions via the firms’ affiliated brokerage firm without disclosing the conflict to their clients. Those charged include Texas investment advisers Tri-Star Advisors and Parallax Investments LLC. Three individuals — Tri-Star Advisors president Jon C. Vaughan and CEO William T. Payne and Parallax’s owner John P. Bott II — collectively were paid over $2 million in connection with the trades.

Between 2009 and 2011, Bott allegedly executed 2,000 undisclosed principal transactions without obtaining consent from Parallax clients. Tri-Star Financial, Parallax’s affiliated brokerage firm, bought mortgage-backed bonds for Parallax clients and then transferred the bonds to the accounts of Parallax’s clients. Of the $1.9 million in sales credits that Tri-Star Financial collected on the transactions, Bott took nearly half.

During the same time period, the SEC charges, Vaughan and Payne also executed over 2,000 similar undisclosed principal transactions without gaining approval from Tri-Star Advisor clients. The two men split almost half of the $1.9 million in gross sales credits that the affiliated Tri-Star Financial brokerage firm collected on the deals.

Whistleblowers Collaborate With Government to Ensure Disclosure of and Consent for Principal Transactions

Insiders with knowledge of securities law violations should learn how the Dodd-Frank whistleblower program works before they notify the SEC. Waters & Kraus is a nationally known whistleblower law firm with qui tam lawyers in California, Texas and the Washington, D.C. area. Our SEC fraud lawyers have the experience needed to protect informants’ rights. Contact us or call our whistleblower attorneys at 855.784.0268 to discuss how we can work together to do the right thing.

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