Following an eight-day hearing held in Washington, D.C., a Securities and Exchange Commission (SEC) administrative law judge dismissed the administrative proceedings against Equity Trust Company (Equity Trust), and found that Equity Trust did not cause the alleged violation of federal securities laws committed by two unrelated parties. Howard Groedel, a Cleveland-based partner in Ulmer & Berne’s Financial Services Regulatory practice group, represented Equity Trust in this proceeding alongside co-counsel Stephen J. Crimmins of Murphy & McGonigle.
The SEC filed an administrative complaint against Equity Trust in June 2015 alleging that Equity Trust, an integrated financial services company and custodian of self-directed individual retirement accounts (SDIRA), was a cause of the investment frauds committed by Ephren Taylor and Randy Poulson, two unrelated investment promoters. The SEC complaint asserted that Equity Trust ignored various red flags for accounts with investments that turned out to be fraudulent, and that the firm should have acted to prevent the ongoing fraud. The SEC’s administrative proceedings against Equity Trust marked the SEC’s first enforcement action brought against a financial services firm acting solely in its capacity as an IRA custodian.
In her order dismissing the case against Equity Trust, SEC Administrative Law Judge Carol Fox Foelak held that Equity Trust was not a cause of the violations committed by those investment promoters and that Equity Trust’s activities were consistent with its role as a passive custodian. Judge Foelak further held that even had Equity Trust complied with all of the duties the SEC’s Division of Enforcement claims a SDIRA custodian should follow, it still would not have known of either promoter’s fraudulent conduct. Judge Foelak found that no other SDIRA custodian was engaging in the level of review of its customer accounts “that Equity Trust pioneered” and that the Division of Enforcement’s proposed standard of care in the case was “essentially made up of whole cloth.”
Mr. Groedel believes that Equity Trust’s voluntarily-adopted investment review procedures effectively halted efforts by the investment promoters to cause further harm to Equity Trust customers, and that the SEC judge agreed with Equity Trust that its custodial agreements complied with the standards set forth in the SEC’s 2011 Investor Alert on Self-Directed Individual Retirement Accounts and a similar 2014 advisory issued by the North American Securities Administrators Association.
In accordance with SEC rules, the decision in this matter will not become final until the SEC issues an order of finality. Judge Foelak has given both parties 21 days to petition her decision to the SEC.