Disputes Over Axys Performance Numbers No Excuse For Fudging Client Reports, SEC Says

Monday, January 09, 2012 08:03
Disputes Over Axys Performance Numbers No Excuse For Fudging Client Reports, SEC Says

Tags: client communications | RIA compliance

A Connecticut advisor has been barred from the industry and fined $60,000 for what the SEC says amounts to doctoring his clients' performance reports.

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Michael Pelosi, formerly of Halsey Associates in New Haven, claims that glitches in the firm's Axys accounting system caused discrepancies when it came to reconciling his clients' portfolios with data from Schwab.


He says the errors forced him to "manually calculate returns for legitimate purposes," if, for example, the system returned an N/A or zero on some assets.


Unfortunately for him, the firm's assistants noticed that his client letters didn't match what Axys was telling them were the numbers of record, so they eventually confronted management.


Pelosi was fired, taking many of his clients with him. They seemed happy enough, but the SEC points out that roughly 84% of them thought he was earning them significantly higher results than they were actually getting.


The judge didn't find his justifications convincing -- if anything, the multiple explanations seemed insincere. As a result, he's been banned from the business and fined $60,000.


There's a great lesson in compliance here. Even if the numbers look wrong, keep detailed notes on the apparent errors -- but trust the system until someone takes a look.  







Comments (4)

The Administrative Law Judge's ruling explains the reason why Pelosi, an MBA and CFA with 15 years as a private wealth advisor, was barred saying:

"Pelosi acted deceitfully and disregarded the law intentionally or, at least, recklessly. This factor is particularly important given the repeated nature of Pelosi’s deceitful conduct. Also, the need to deter Pelosi is strong, given his continued employment in the financial sector and his failure to acknowledge the wrongfulness of his conduct."

The discrepancies between the Axys reports and reports recalculated manually by Pelosi were judged by the ALJ to be material. This part of the case against Pelosi is worth reading for RIAs because it helps establish a threshold of how inaccurate data performance given to clients can be before it becomes materially misleading.

Securities lawyers might want to comment to elucidate.
agluck , January 09, 2012
Thanks, Andy. The ruling is unusually detailed -- definitely worth reading on several fronts.
ScottMartin , January 09, 2012
A couple of things seem weird about this.

One, apparently the Axys reports sent to clients (Appraisals)with Pelosi's letters did not contain any performance calculations. Who does this? (It's not clear whether just Pelosi did this or whether this was a firm wide practice.)

Second, I was a little shocked that the ALJ mentioned the actual names of the clients in his decision. Unless this was published by mistake.

stvnrsmth , January 10, 2012
Good points. I just wrote a follow up at https://advisors4advisors.com/c...employees- and will follow up there on exactly what was sent to clients in letters versus reports.

Regarding client names, I doubt it's a mistake. ALJ hearings are open to the public.
agluck , January 10, 2012

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