Wednesday, June 8, 2011

SEC investigative tests that compliance personnel should employ —the George Motz case

On May 11, 2011, a sad chapter closed in the life of one George M Motz, once a highly-compensated investment executive but currently a resident of the Federal Correctional Institution in Otisville, NY. On that day, the US Securities and Exchange Commission (SEC) issued a notice announcing that it had accepted an offer of settlement from Motz which would heap administrative punishments on top of the eight-year prison term that had relegated him to tenancy at Otisville.

Motz's sentencing in 2010 rated a blurb in the online edition of a business magazine, but the coda regarding his latest SEC penalties has not seemed to merit a mention in the press.

The matter of George Motz and his sometime firm, Melhado, Flynn & Associates, Inc., once a registered brokerdealer and investment adviser, is an object lesson for investment adviser compliance professionals and the firms they shepherd. The saga has much to tell us about the importance of good compliance controls over a firm's portfolio management processes and, in particular, about the wisdom of an impartial and unimpeachable trade allocation policy.


Motz drew the ire of the SEC for the practice of "cherry-picking"; that is, saving the choicest trades for proprietary or otherwise-favored accounts, while foisting the clunkers off on the accounts of the less fortunate. The SEC notice averred that "Motz accomplished this cherry-picking by purchasing securities toward the beginning of the trading day but waiting until later in the day – after he saw whether the securities appreciated in value – to allocate the securities."

Accounts differ slightly on when Motz became a fraud. The SEC says that the cherry-picking was underway by "at least" 2001, while the Department of Justice mentions November 2000. In the fall of 2003, Melhado, Flynn was examined by the Commission. Motz and an accomplice were apparently able to postpone his inevitable collision with justice through some chicanery. They "altered certain order tickets relating to the cherry-picked trades in order to try to conceal his fraudulent practices from" the authorities (prosecutors and regulators would later add violations of the books and records requirement of the Investment Advisers Act of 1940 to the litany of Motz's offenses). Motz was issued an "Order Instituting Proceedings" on February 26, 2007.

The above is Page 1 of 4 of an article titledSEC investigative tests that compliance personnel should employ — the George Motz case

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The author is:
Philip Thomas
- the managing director, Asia, of CompliGlobe Limited, the regulatory advisory provider to a range of financial services firms and foreign private issuers. He is based in Hong Kong. At CompliGlobe, Philip focuses on the creation and maintenance of compliance programs and systems at market participants in Europe, Asia and the US. He also assists overseas companies in addressing their
US filing requirements, and in negotiating ISDA agreements and managing the risk associated with OTC derivatives. Philip is a securities and regulatory attorney with both in house and law firm experience. He has also served as the chief compliance officer to several money management concerns.

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