SEC Charges Arete Wealth’s Compliance Officer in Fraudulent Penny Stock Scheme

The Securities and Exchange Commission (SEC) recently filed a complaint against the chief compliance officer (CCO) of Arete Wealth Advisors, highlighting serious concerns about CCO liability in cases of firm misconduct. According to the SEC, UnBo (Bob) Chung, the CCO and general counsel, “aided and abetted” a fraudulent penny stock scheme by overseeing the use of agreements containing false information and an illegal liability disclaimer. The complaint alleges that Chung facilitated efforts to shield Arete from liability in the sale of Zona Energy stock, a sham oil-and-gas company.

Arete Wealth Advisors and its affiliated broker-dealer, Arete Wealth Management, are accused of violating compliance and antifraud rules under the Investment Advisers Act and recordkeeping provisions of the Securities and Exchange Act, respectively. The charges include actions by former advisers and broker-dealers Joey Miller, Jeff Larson, and Randy Larson, who sold $8.5 million worth of Zona Energy stock to 120 Arete clients. These sales allegedly included false representations to clients and were executed using off-channel communications on personal devices, which Arete failed to archive.

As instructed by Arete’s CEO, Chung allegedly required investors to sign agreements waiving liability for the firm and management. The SEC described these agreements as misleading, claiming they contained false statements such as denying that Arete representatives recommended Zona Energy investments. Over 100 clients signed these agreements in exchange for nominal compensation of $1 to $5,000, despite suffering substantial losses.

While Chung claimed he did not review the agreements, the SEC argued he “knew or should have known” about the false information. The SEC’s acting deputy director of enforcement, Sam Waldon, noted, “[This] action is a reminder to gatekeepers that if you find potential evidence of misconduct and take steps to cover it up, you may expose yourself to liability.”

The complaint raises broader concerns within the compliance community about the risks faced by CCOs. Critics worry CCOs can be held accountable for actions they were directed to take by superiors or for written communications they did not author. There is ongoing debate about the need for a clear liability framework for compliance officers, with Republican SEC members, such as Hester Peirce and Mark Uyeda, advocating for such measures. The current case exemplifies how liability often falls disproportionately on CCOs while higher-ranking executives, like Arete’s CEO, remain uncharged.

The SEC has settled with one unregistered broker-dealer involved, Michael Sealy, who agreed to pay $200,000 and a one-year ban from selling penny stocks. However, with the CEO still uncharged, questions linger about whether additional actions against Arete’s leadership are forthcoming. For now, Chung remains the highest-ranking individual facing repercussions for the fraudulent scheme.

By fLEXI tEAM