Washington, D.C., Jan. 13, 2011 — The Securities and Exchange Commission today charged a Long Island-based money manager and his two firms with engaging in a fraudulent investment program that generated more than $8 million in illicit commissions and fees.
The SEC alleges that Warren D. Nadel, through his investment advisory firm Registered Investment Advisers (RIA) and his broker-dealer Warren D. Nadel & Co., induced clients to invest in a purportedly liquid, cash management strategy that engaged in market transactions. However, in numerous communications with clients and prospective clients, they deliberately overstated the value and liquidity of client holdings by concealing critical information about the way they were supposedly executing the strategy. Nadel inflated the value of clients' transactions and holdings on monthly statements he provided to them.
"Nadel and his firms abused their clients' trust by investing their assets in a strategy that they misrepresented in nearly every way," said George S. Canellos, Director of the SEC's New York Regional Office. "Nadel created the illusion of a liquid market for their holdings at inflated values, depriving his clients the opportunity to make meaningful investment decisions with their money."
According to the SEC's complaint filed in U.S. District Court for the Eastern District of New York, Nadel claimed he was investing client assets in preferred utility securities that they held for short periods of time in order to generate capital appreciation or dividends depending on their goals. However, Nadel and his firms knew by 2007 or earlier that the market was not sufficiently liquid to permit frequent, substantial purchases of these securities at attractive prices. Nadel fraudulently concealed these market conditions from clients.
The SEC alleges that Nadel simply exchanged these securities between clients, often at inflated prices he set. For example, Nadel and his firms informed clients repeatedly (orally and in writing) that they were executing open-market transactions on the clients' behalf. The vast majority of transactions, however, were not executed on the open market. In order to make it appear that he was engaging in market transactions, Nadel ensured that clients received confirmations that reflected market transactions, and also failed to disclose to clients that the counterparties to these transactions were other RIA clients or to obtain client consent for the trades he executed between clients before the completion of each transaction.
According to the SEC's complaint, Nadel also misrepresented RIA's assets under management, claiming that the firm managed more than twice its actual assets.
The SEC's complaint seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains plus prejudgment interest.
The SEC's case was investigated by Alison T. Conn and Maureen P. King of the SEC's New York Regional Office with the assistance of Michael Fioribello and Debbie Chan after a joint examination conducted by Linda Lettieri, Jeffrey Berfond and Margaret Lett of the SEC's broker-dealer examination staff and Joseph P. DiMaria, James E. Anastasia, Steven P. Gilchrist and Julianne M. Lieberman of the investment adviser examination staff. The SEC's litigation effort will be led by Richard G. Primoff and Maureen P. King.