Credit Suisse and Star Broker Katz to Pay $7.9 Million for Fund Violations
(Adds details of Katz’s alleged violations throughout. Corrects second and third paragraphs to indicate that he was paid about $1.1 million of the $2.5 million that Credit Suisse collected in avoidable 12b-1 fees related to his clients’ accounts.)
The Securities and Exchange Commission on Tuesday reached a $7.93 million settlement with Credit Suisse Securities (USA) and broker Sanford “Sandy” Katz over allegations that they sold “more expensive ‘Class A’ shares of mutual funds rather than less expensive ‘institutional’ shares” to clients of the Swiss bank’s former U.S. broker-dealer.
Credit Suisse collected approximately $3.2 million in 12b-1 fees from January 2009 to January 2014 from clients in the bank’s Discretionary Managed Portfolio program, including about $2.5 million related to accounts Katz controlled, the SEC said, and failed to implement policies and procedures to prevent fiduciary breaches.
Katz pocketed about $1.1 million of the “avoidable” fees that leached from his clients’ investments, the regulator alleged, and actively petitioned his managers to permit him to sell the more expensive fund shares.
Katz, who in 2006 won a $2 million arbitration award from Goldman Sachs over deferred compensation claims, did not respond to e-mailed and telephone requests for comment. The 54-year-old advisor moved to Wells Fargo Advisors in early 2016 after Credit Suisse shuttered its U.S. retail brokerage business.
Without admitting or denying the SEC’s findings, Credit Suisse and Katz agreed to pay $3.22 million in disgorgement to affected clients, prejudgment interest of $577,678 and $4.125 million in penalties. Katz is responsible for $1.12 million of the disgorgement, $197,587 of the interest and $850,000 of the penalty.
The SEC is setting up a “fair fund” to distribute the settlement payments.
Credit Suisse spokeswoman Nicole Sharp declined to comment on the settlement.
A spokeswoman at Wells Fargo Advisors declined comment, noting the bank-owned broker-dealer was not a party to the settlement. “We are highly selective in our recruiting processes and hold our advisors to rigorous standards,” she said when asked about Katz.
The SEC has identified mutual fund share-class selection as a retail investor examination priority in 2017. It plans to “identify and assess conflicts that certain investment advisory personnel may have, such as those who also are registered representatives of a broker-dealer, which may influence recommendations in favor of share classes that have higher loads or distribution fees,” according to its Office of Compliance Inspections and Examinations.
Rogge Dunn, a Dallas-based employment lawyer who represents brokers in cases with former employers, said the settlement is a “wake-up call” for financial advisors.
“Katz did what hundreds, if not thousands of FAs, have been doing [by] using class A shares in advisory accounts,” Dunn said. “The takeaway is that the SEC rules have changed, and they’re much more aggressive in enforcement.”
Credit Suisse hired Katz in 2008 as a relationship manager in its San Francisco branch office, permitting him to oversee its Discretionary Managed Portfolio fee-based accounts “in accordance with his own strategy, which utilized investments in mutual funds to a greater degree than other Credit Suisse RMs servicing DMP clients,” the SEC said.
Katz and his team learned soon after joining Credit Suisse that it had instructed its clearing firm to block 12b-1 fees from advisory accounts and return them to the fund companies that paid them.
“Katz questioned Credit Suisse management about the block, asserting that he had received credit for such revenue at his prior employer and that his DMP accounts generated $300,000 to $500,000 in annual revenue” to the bank, the SEC said in its settlement order with the broker.
As a result, Credit Suisse lifted the block for Katz and other relationship managers in non-retirement discretionary managed accounts, according to the settlement.
When an administrative manager in Katz’s San Francisco branch questioned the strategy of buying A shares when prospectuses suggested using less expensive institutional shares, the broker “escalated” the issue to his branch manager.
“In response to the branch manager’s approval, Katz wrote that it was not easy for him to determine eligibility for institutional share classes and that ‘for new orders over $1mm our team will try to remember and look for institutional shares when it seems they are available,'” the SEC settlement said.
It also alleged that he violated Credit Suisse policy by failing to discuss fund share-class distinctions with discretionary account clients. When they would ask directly about institutional-class shares of a particular mutual fund, he bought the less expensive shares without acknowledging or addressing conflicts of interest but would continue buying A shares of other mutual funds for those same clients, the order said.
Katz began his brokerage career at Goldman in 1986, and worked for almost six years at UBS Financial Services before joining Credit Suisse, which marketed its brokerage services in the U.S. under the name Credit Suisse Private Bank.
UBS hired about one-third of its Swiss rival’s U.S. brokers, despite Credit Suisse’s having encouraged them to accept offers from Wells Fargo in return for a placement fee, according to brokers and headhunters.
Credit Suisse subsequently brought a raiding suit against UBS, while many former CS brokers are pressing arbitration claims for deferred pay and bonuses that they say their former employer has withheld.