SEC Charges Two Advisers With Fraud Tied to Retail Investors

The Commission filed another action centered on retail investors. In this case two employees of a well known Financial Institution took advantage of firm clients over a period of three years, defrauding them of thousands of dollars. SEC v. Polese, Civil Action No. 1:18-cv-10186 (D. Mass. Filed Jan. 31, 2018).

Defendants James Polese and Cornelius Peterson were both investment adviser representatives and broker-dealer representatives, employed in the Boston, Massachusetts office of the Financial Institution. In 2012 Mr. Peterson began serving as an advisor to Client A who had moved his account to the Boston office. Client A gave Mr. Peterson full discretionary authority. Client B had been with Mr. Polese for a period of eight years. Client B was retired, planned to donate his assets to charity and relied on the Defendants to recommend investments and update him on the status of his portfolio.

In 2014 Mr. Peterson became a director of a private fund that was raising money for a wind-farm. The fund was not affiliated with the Financial Institution. The Financial Institution consented to Mr. Peterson serving as a director of the fund – a firm requirement. To secure approval Mr. Peterson represented he would not solicit Financial Institution clients to invest in the private fund. At the time he made that representation, Mr. Peterson had already caused Client A to invest $100,000 in the private fund. In addition to being an unauthorized investment, the private fund investment was contrary to the client’s stated investment objectives and risk tolerances.

Subsequently, the private fund required collateral for a loan. The fund partners – including Defendants Peterson and Polese – made the necessary arrangements. The Defendants obtained a letter of credit from the Financial Institution to guarantee a portion of the loan. The two men pledged Client B’s account as collateral without his knowledge. This put Client B’s funds at risk. The next year Mr. Polese continued to take advantage of Client B, convincing him to extend an oral, interest free loan of $50,000, supposedly for college tuition. The loan was not disclosed on the Financial Institution’s annual compliance questionnaire for 2016 as required.

Defendants continued to misappropriate Client B’s funds in a March 2016. Each Defendant took $50,000 from the client’s account to fund real estate investments. Mr. Peterson, however, had $350,000 wired from the account to the real estate fund in which the two men invested. When the fund inquired about the extra $250,000 Mr. Peterson had the funds diverted to his account. Subsequently, each Defendant made a separate false statement to Client B’s bookkeeper and the Financial Institution to conceal the transaction.

Finally, between March 2 and May 2, 2017 Mr. Polese misappropriated over $923,000 from Client B in a number of transactions. Subsequently, the Financial Institution discovered the unauthorized transactions. In early May 2017 Mr. Polese was placed on administrative leave. A few days later Mr. Peterson was also put on administrative leave. The complaint alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 204, 206(1) and 206(2). The case is pending.

The U.S. Attorney’s Office for the district of Massachusetts filed a parallel criminal action. See Lit. Rel. No. 24037 (Jan. 31, 2018).