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Investment Adviser, Lawyer Settle Charges in Secret Referral Fee Scheme

Published Jan 10, 2017

A Connecticut-based investment adviser has agreed to admit wrongdoing and pay more than $575,000 to settle charges that he defrauded a client and then compounded his scheme by attempting to mislead SEC investigators while lying to other clients about the status of the SEC’s investigation.

According to the SEC’s order against John W. Rafal, he secretly paid a lawyer for referring a legal client’s large account to Essex Financial Services, an investment advisory firm Rafal founded.  Instead of disclosing the referral fee arrangement to the elderly widow who owned the account, as required by law, Rafal and the lawyer agreed to disguise the payments as legal services purportedly provided by the lawyer’s firm.  After other Essex officers discovered and stopped Rafal’s payment arrangement, Rafal continued to secretly pay the lawyer using other accounts he controlled. 

The SEC’s order further finds that while the SEC’s investigation was ongoing, Rafal reacted to escalating rumors that he had committed a securities law violation by sending numerous emails to Essex clients falsely stating that the SEC had “fully investigated all matters” and “issued a ‘no action’ letter completely exonerating” him and the firm.

According to the SEC’s order, Rafal also tried in vain to throw SEC enforcement investigators off the track.  During testimony while responding to direct questions about the referral fees, Rafal concealed the additional payments he made after Essex halted the arrangement and falsely indicated that the lawyer had returned all the money he was previously paid. 

Enforcement investigators referred the suspected obstruction to the SEC’s Office of Inspector General, whose agents conducted a parallel investigation along with the U.S. Attorney’s Office for the District of Massachusetts, which today announced a criminal case against Rafal for obstructing the proceedings of a federal agency.

“Rafal misled one client by hiding referral fees, misled other clients by falsely stating the SEC’s investigation was over, and then attempted to mislead those investigating him.  He will now be paying the price for his deceit,” said Stephanie Avakian, Acting Director of the SEC’s Enforcement Division.  “We will not tolerate attempts to mislead and we will continue to refer possible obstruction cases to the SEC’s Office of Inspector General.”

SEC Inspector General Carl Hoecker said, “The charges announced by the U.S. Attorney’s Office reflect the Office of Inspector General’s commitment to investigate individuals who obstruct SEC enforcement activities.”

The lawyer involved in the payment scheme, Peter D. Hershman, agreed to pay more than $90,000 to settle SEC charges against him for aiding and abetting Rafal’s securities law violations.  Both Rafal and Hershman also agreed to be barred from the securities industry and from serving as an officer or director of a publicly-traded company, and they agreed to be permanently suspended from appearing and practicing before the SEC as attorneys.  The SEC’s orders prohibit them from representing clients in SEC matters, including investigations, litigation, or examinations, and from advising clients about SEC filing obligations or content. 

Rafal is no longer affiliated with Essex Financial Services, which agreed to pay more than $180,000 in disgorgement and interest to settle charges related to Rafal’s misconduct.  Hershman and Essex neither admitted nor denied the findings against them in the SEC’s orders.

The SEC’s investigation was conducted by Dawn Edick, Marc Jones, and Amy Gwiazda of the 

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