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Enforcement News: Atlanta-Based Advisory Firm Charged With Securities Fraud for $90 Million Fix-and-Flip Securitization Scheme

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  • Posted on: Aug 12 2022

By: Jeffrey M. Haber 

“Understanding what investors value and look for in a financial adviser is critical to both the client’s and adviser’s success.”1 One factor investors consider is reputation. For an adviser, a good reputation can be a valuable tool. It can be used to attract new clients and generate revenue. But, it can also undermine an advisor’s business.

Indeed, there are many circumstances that can negatively impact an adviser’s reputation (e.g., here). These include, among others: 

Misleading Investors – Advisers who mislead investors with false and misleading information can severely undermine the strength of their reputation.

Poor Working Conditions – An advisory firm can see its reputation negatively affected by promoting a toxic culture, subjecting employees to discrimination, or acting unethically toward employees.

Poor Service – Poor performance can sink an adviser’s reputation. 

Poor Data Security and Privacy – Data breaches are a significant source of reputational risk. Advisers who cannot safeguard client data and information can see their reputation plummet in the eyes of their clients and potential clients.

Poor Regulatory Compliance – Poor regulatory compliance is a source of reputational risk. Enforcement actions and regulatory investigations negatively impact the perception of an adviser in the eyes of clients.

The importance of a good reputation was at the heart of the SEC’s enforcement action against (and settlement with) Atlanta-based Angel Oak Capital Advisors, LLC and its portfolio manager Ashish Negandhi. As discussed in the SEC’s announcement of the charges (here), the SEC charged Angel Oak and its portfolio manager Ashish Negandhi for misleading investors about the firm’s fix-and-flip loan securitization’s delinquency rates. Angel Oak and Negandhi agreed to settle the charges and pay a penalty of $1.75 million and $75,000, respectively. 

According to the SEC’s order (here), in March 2018, Angel Oak raised $90 million through a first-of-its-kind securitization of loans made to borrowers for the purpose of purchasing, renovating, and selling residential properties, also known as “fix-and-flip” loans, which were originated by an Angel Oak-affiliated entity. The deal included a provision that would accelerate Angel Oak’s obligation to return funds to certain investors if delinquencies reached a pre-defined threshold. Shortly after the deal closed, loan delinquency rates increased unexpectedly.

Concerned about the reputational and financial harm its securitization business would suffer from an early repayment, Angel Oak and Negandhi allegedly artificially reduced delinquency rates by improperly diverting funds ostensibly held to reimburse borrowers for renovations made to the mortgaged properties, to instead pay down outstanding loan balances. Because Angel Oak and Negandhi did not disclose these actions, said the SEC, the performance data regularly disseminated to investors provided an inaccurate view of the actual delinquency rates on the mortgages in the securitization pool as well as the securitization’s compliance with the early repayment trigger.

The SEC found that had Angel Oak and Negandhi not engaged in the foregoing practices, the triggers would have been breached, and an early amortization would have been declared, in November 2018.

“Angel Oak and Negandhi failed to disclose the firm’s improper use of funds while continuing to issue larger securitizations, which painted a misleading picture for investors,” said Osman Nawaz, Chief of the Division of Enforcement’s Complex Financial Instruments Unit. “Firms must provide investors with full and accurate information regarding the performance of an investment, even after closing, to ensure the integrity of our markets.”

The SEC found that Angel Oak and Negandhi violated the antifraud provisions of the Securities Act of 1933, and that Angel Oak violated, and Negandhi caused Angel Oak’s violation of, the antifraud provisions of the Investment Advisers Act of 1940. Without admitting or denying the SEC’s findings, Angel Oak and Negandhi agreed to a cease-and-desist order, a censure, and the imposition of civil monetary penalties in the amounts referenced above.


Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.


Footnote

  1.  Ryan O. Murphy, PhD.; Samantha Lamas; and Ray Sin, PhD. Identifying What Investors Value in a Financial Adviser: Uncovering Opportunities and Pitfalls, Journal of Financial Planning (July 2020) (here).
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