U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 24022 / December 26, 2017
SEC v. Gaughran, et al., No. 17 Civ. 10026 (S.D.N.Y.)
SEC Charges Attorney and Accountant with Aiding and Abetting Adviser’s $9 Million Theft from Charity Client, Adviser Settles Related Fraud Claims
The U.S. Securities and Exchange Commission today charged New York-based investment advisor Train Babcock Advisors LLC (“TBA”), a New Jersey-based attorney, and a New York-based accountant, in connection with a fraudulent scheme led by TBA’s former principal, John Rogicki, who stole more than $9 million from his advisory client, a charitable foundation established by an elderly widow to donate her estate to health and education causes.
TBA, which is in the process of winding down its operations, has agreed to settle the SEC’s charges by paying more than $1.7 million in disgorgement, interest, and penalties for these and other violations. TBA has also agreed to be censured and to withdraw its registration with the SEC as an investment advisor.
Separately, the SEC filed a complaint in federal court in Manhattan against one of the foundation’s trustees, attorney Robert Gaughran, and its accountant, Kevin Clune, alleging that they aided and abetted the fraud perpetrated by TBA and Rogicki, the foundation’s investment adviser, President, and a trustee.
According to the SEC’s filings, between 2004 and 2016, Rogicki took advantage of his roles as investment adviser and trustee to the foundation by liquidating securities positions in the foundation’s advisory account with TBA and misappropriating a total of more than $9 million from the foundation for his own personal benefit. The SEC’s complaint alleges that Gaughran and Clune aided and abetted TBA’s and Rogicki’s fraudulent scheme. While serving as a trustee of the foundation, Gaughran allegedly accepted outsized fees and ignored glaring signs of Rogicki’s theft that were apparent from the foundation’s brokerage statements and other documents that he regularly reviewed. Gaughran also drafted the trust and estate papers that put Rogicki in charge of the charitable foundation and knew the size of the estate that should have flowed to the charitable foundation, but for Rogicki’s misappropriation of $9 million of its assets. According to the SEC’s complaint, Clune, an accountant who performed tax work for both the estate that created the charitable foundation and the charitable foundation itself, ignored multiple and repeated red flags revealing Rogicki’s and TBA’s fraudulent scheme. In addition, both Gaughran and Clune were actively involved in concealing the theft by providing false information to an outside audit firm during a surprise examination of the charitable foundation that was conducted in 2014.
On October 19, 2017, the SEC filed a civil injunctive action in federal district court against Rogicki. In a parallel criminal action, Rogicki pleaded guilty to criminal charges brought against him by the Manhattan District Attorney on October 19, 2017. On December 14, 2017, Rogicki was sentenced to serve 30 to 90 months in prison and ordered to pay $6,728,391.77 to the foundation, of which he forfeited $2.5 million, in connection with his criminal plea. The SEC also previously instituted administrative proceedings against former TBA CEO Brian J. Keenan on September 26, 2017, in connection with his misappropriation of assets from a separate client account. The administrative proceedings against Keenan were settled on October 23, 2017.
The SEC’s complaint, filed in the United States District Court for the Southern District of New York, charges Gaughran and Clune with aiding and abetting TBA’s and Rogicki’s violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC’s complaint seeks a permanent injunction, disgorgement and prejudgment interest, and penalties against Gaughran and Clune.
The SEC’s order instituting settled administrative proceedings against TBA finds that the adviser failed to detect and prevent two separate misappropriations by its former principals from client accounts for which TBA’s former principals acted as trustee and over which TBA had custody. TBA also failed to comply with the requirements of Rule 206(4)-2 under the Advisers Act by neglecting to obtain surprise examinations for several years for certain client accounts for which it had custody. The SEC’s order also finds that TBA filed numerous Forms ADV containing false information. Without admitting or denying the SEC’s findings, TBA consented to entry of a cease-and-desist order, a censure, and to pay disgorgement, interest, and a penalty of over $1.7 million. TBA also agreed to file a Form ADV/W withdrawing its registration with the Commission at the completion of its wind-down.
The SEC’s investigation was conducted by Katherine Bromberg, Jon Daniels, Neil Hendelman, Dugan Bliss, and Valerie A. Szczepanik of the New York Regional Office. The case is being supervised by Lara S. Mehraban. The SEC’s litigation will be led by Mr. Bliss, Ms. Bromberg, and Mr. Daniels. An SEC examination that led to the investigation was conducted by investment adviser examiners in the New York Regional Office. The SEC appreciates the assistance of the Manhattan District Attorney’s Office.