U.S. Securities and Exchange Commission
Litigation Release No. 22107 / September 28, 2011
Securities and Exchange Commission v. Kurt S. Hovan, Lisa B. Hovan, Edward J. Hovan, Jr., and Hovan Capital Management, LLC, Civil Action No. CV11-4795
SEC CHARGES BAY AREA INVESTMENT ADVISER FOR DEFRAUDING CLIENTS AND FALSIFYING DOCUMENTS DURING SEC EXAM
Washington, D.C., Sept. 28, 2011 – The Securities and Exchange Commission today charged a San Francisco-area investment adviser with fraud for lying to clients about how brokerage commission rebates were being used and producing phony documents to cover up the fraud during an SEC examination.
The SEC alleges that Kurt Hovan misappropriated more than $178,000 in “soft dollars” that he falsely claimed to be using to pay for legitimate investment research on his clients’ behalf. In reality, Hovan was secretly funneling the money for such undisclosed uses as office rent, computer hardware, and his brother’s salary. When SEC examination staff asked Hovan to provide documentation to back up his claims, he created phony research reports.
The SEC also charged his wife Lisa Hovan and his brother Edward Hovan for their roles in the fraudulent scheme at Hovan Capital Management (HCM).
Soft dollars are credits or rebates from brokerage firms on commissions paid by clients for trades executed in the client accounts of an investment adviser. If appropriately disclosed, an investment adviser may retain the soft dollar credits to pay for a limited category of brokerage and research services that benefit clients.
According to the SEC’s complaint filed in federal court in San Francisco, Kurt and Lisa Hovan falsely disclosed to clients that HCM would use soft dollars only for certain research services. Instead, they used $166,667 in soft dollars to pay Edward Hovan’s salary over a 10-month period in 2008 and 2009. To cover up these payments, the three Hovans created a shell company – “Bolton Research” – secretly controlled by Edward Hovan. Through this company, the Hovans invoiced HCM’s brokerage firms for research services that had never been rendered. Once Edward Hovan received the payments, he kicked back approximately 40 percent ($65,000) to Kurt and Lisa Hovan to pay the office rent. The SEC further alleges that Kurt and Lisa Hovan instructed a research provider paid with soft dollars to pad its invoices by $12,000 and kick back this amount to help HCM pay for a new computer server.
During a January 2010 examination of HCM, the SEC staff asked HCM to provide copies of the research reports prepared by Bolton Research in exchange for the soft dollar payments. In response, Kurt Hovan quickly drafted numerous research reports and doctored materials to make them appear as if they had been prepared by Bolton. Hovan provided these phony documents to SEC examiners.
The SEC’s complaint charges Kurt Hovan with violating Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5, Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940 (“Advisers Act”), Section 17(e)(1) of the Investment Company Act of 1940 (“Investment Company Act”), and aiding and abetting violations of Section 204(a) of the Advisers Act and Rule 204-2(a)(7). The SEC’s complaint charges Lisa Hovan with violating Section 10(b) of the Exchange Act and Rule 10b-5, Section 207 of the Advisers Act, and aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 and 206(1) and 206(2) of the Advisers Act. The SEC’s complaint charges Edward Hovan with violating Section 10(b) of the Exchange Act and Rule 10b-5 and Section 17(e)(1) of the Investment Company Act, and aiding and abetting violations of Sections 206(1) and 206(2) of the Advisers Act. The SEC’s complaint charges HCM with violating Section 10(b) of the Exchange Act and Rule 10b-5, Sections 204(a), 206(1), 206(2), and 207 of the Advisers Act, and Section 17(e)(1) of the Investment Company Act. The complaint seeks injunctive relief, disgorgement with prejudgment interest, and financial penalties.
The SEC’s case was investigated by Karen Kreuzkamp and Robert S. Leach of the San Francisco Regional Office. The examination of HCM was conducted by Karah To, Tracey A. Bonner, and Ada C. Chee of the San Francisco Regional Office’s investment adviser/investment company examination program.
The U.S. Attorney’s Office for the Northern District of California today filed criminal charges against Kurt Hovan. The Commission would like to thank the U.S. Attorney’s Office for the Northern District of California and the Federal Bureau of Investigation for their assistance in this matter.