Risk & Compliance

Accounting Firm Fined Over Surprise Exams

The SEC says Santos, Postal & Co. failed to properly scrutinize an investment adviser who embezzled $670,000 from clients.
Matthew HellerApril 29, 2016

In more legal fallout from an investment adviser’s theft of $670,000 from clients, accounting firm Santos, Postal & Co. and one of its partners have been charged with improperly performing surprise custody exams of SFX Financial Advisory Management Enterprises.

The Securities and Exchange Commission said Friday that partner Joseph Scolaro failed to adequately consider the risk of fraud related to misappropriation of customer assets in his 2010 and 2011 examinations of SFX.

Risks he should have identified, the SEC said in an administrative order, included “at least two dominant individuals with significant influence” at SFX having full signatory power over client bank accounts relating to its bill-paying services, “thereby creating inherently significant risks of misappropriation from client accounts.”

“Surprise custody exams of investment advisers serve a critical role in protecting against the misuse of client assets and uncovering such misuse when it occurs,” Anthony S. Kelly, chief of the SEC Enforcement Division’s Asset Management Unit, said in a news release. “Santos, Postal & Co. failed to confirm with SFX’s clients the contributions made to and from their accounts and then made untrue statements about its custody exams.”

Santos Postal agreed to pay disgorgement of $25,800 in profits that the firm obtained for performing the exams plus interest of $3,276.76 and a penalty of $15,000 to settle the charges. Scolaro agreed to pay a $15,000 penalty.

An SEC administrative judge last month found former SFX President Brian Ourand guilty of embezzling $670,000 by writing checks and initiating wire transfers from client accounts for his own benefit. The alleged victims included former heavyweight boxing champion Mike Tyson, who in 2013 sued Ourand, SFX and its parent company Live Nation for $5 million.

According to the SEC, Scolaro “failed to identify Ourand as a person authorized to disburse funds from client accounts, thereby obstructing his ability to fully assess the risks associated with significant unusual related party transactions.”

Even after SFX told Santos Postal in October 2011 that it had fired Ourand, Scolaro “did not perform any further assessment of fraud risk factors in conducting the 2011 Examination,” the SEC said.