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June 29 — The SEC suffered an unusual loss in its own administrative court after an administrative law judge tossed an enforcement action June 27 against Equity Trust Co. ( In re Equity Trust Co., SEC, Admin. Proc. File No. 3-16594, initial decision 6/27/16 ).
The company wasn’t liable simply for being the custodian of retirement accounts that were stocked with investments promoted by fraudsters, the ALJ said in the first case of its kind against a self-directed individual retirement account custodian.
Some of Equity Trust's customers invested in products recommended by Ephren Taylor and Randy Poulson, who were both convicted of fraud in connection with a $5 million Ponzi scheme that targeted churchgoers.
Because Equity Trust ran self-directed IRAs, ALJ Carol Fox Foelak held, it didn't breach the standard of care for it to be held liable under federal securities laws.
“Self-directed IRA custodians are responsible only for holding and administering the assets in a self-directed IRA,” Foelak said, quoting from the Securities and Exchange Commission's own guidance on the products. “Self-directed IRA custodians generally do not evaluate the quality or legitimacy of any investment in the self-directed IRA or its promoters.”
The SEC's Enforcement Division argued that Equity Trust ignored red flags of Taylor and Poulson's fraud and continued to market and add investments despite this.
Taylor, however, appeared to be legitimate, and once Equity Trust got wind of Poulson's bad conduct, it stopped processing the investments, Foelak held in dismissing the action against the company.
“At bottom, unless Equity Trust assumed the role of an investigator, it is unclear how it would have known of the fraud” in Taylor's case, Foelak said. She added that “by the time Equity Trust knew or should have known that its conduct would contribute to a primary violation by Poulson, it had stopped the conduct.”
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For the initial decision, visit https://www.sec.gov/alj/aljdec/2016/id1030cff.pdf
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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