Parallax Investments, Tri-Star Advisors Accused of Conducting Thousands of Unauthorized Trades

Parallax Investments LLC and Tri-Star Advisors, both based in Houston, were charged by the SEC along with three executives with engineering thousands of principal transactions through their affiliated brokerage firm without informing clients, and making millions of dollars as a result.

One firm and its chief compliance officer was also charged with violating the “custody rule” that requires firms to meet certain standards when in custody of client funds or securities.

In a principal transaction, an investment adviser acting for its own account or thorough an affiliated broker-dealer buys a security from a client account or sells a security to it.

Principal transactions give rise to potential conflicts of interest because the interests of the adviser and the client are adverse to one another. Therefore, advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.

Potential conflict of interest must be disclosed. The client must consent to the deal with full knowledge of the conflict.

Parallax Investments LLC and Tri-Star Advisors were allegedly engaged in thousands of securities transactions with their clients on a principal basis through their brokerage firms without making the required disclosures or consent.

John P. Bott II, owner of Parallax and Tri-Star Advisors CEO William T. Payne and president Jon C. Vaughan were paid a total of $2 million in connection with these trades.

Bott allegedly initiated and executed at least 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Parallax clients. It was further alleged in the SEC press statement that Parallax worked in concern with Tri-Star Financial to purchase mortgage-backed bonds for Parallax clients and then transferred the bonds to the applicable client accounts.

Bott allegedly received nearly half of the sales credits collected by Tri-Star Financial on these transactions which totalled $1.9 million.

Parallax allegedly failed to comply with the custody rule. It did not undergo the procedures to safeguard and account for client assets. As Parallax was an adviser to a private fund known as Parallax Capital Partners LP, it was required to either undergo an annual surprise exam to verify the existence of the fund’s assets, or obtain fund audits by a PCAOB-registered auditor and deliver the financial statements to investors within 120 days after the fiscal year ends.

Parallax obtained an audit of PCP in 2010, but it failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time.

Parallax chief compliance officer F. Robert Falkenberg was aware of the 120-day deadline, but failed to take any steps to ensure that Parallax complied. According to the SEC even after Falkenberg and Bott learned that the fund’s auditor was not registered with the PCAOB he was still retained to do the 2010 audit and issue financial statements to investors.

Parallax allegedly violated the Investment Advisers Act of 1940 and Bott allegedly aided and abetted in these violations. Falkenberg is also accused of aiding and abetting the Parallax violations of custody and compliance regulations. Tri-Star stands accused of violating principal transactions and compliance violations. Payne and Vaughan allegedly acted in concert to cause the violations.

The Peiffer Wolf securities attorneys often represent investors who lose money as a result of Ponzi schemes, investment fraud or misconduct. They are currently investigating these allegations with a view towards assisting any victimized investors in recovering losses. They take most cases of this type on a contingency fee basis and advance the case costs, and only get paid for their fees and costs out of money they recover for their clients.

Investors who believe they lost money as a result of investment fraud or misconduct may contact the securities lawyers at Peiffer Wolf, Jason Kane or Joe Peiffer, for a free, no obligation evaluation of their recovery options, at 585-310-5140.

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In our legal system, every person is innocent until and unless found guilty by a court of law or a tribunal. Whenever we reference “allegations” or charges that are “alleged,” such allegations or charges have not been proven, and are merely accusations, not findings of fault, as of the date of the blog. We do not have, nor do we undertake, a duty to continue to monitor or follow cases about which we report, and/or to publish subsequent blogs regarding various developments that may occur in such cases. Readers are encouraged to conduct their own research regarding any such cases and any developments that may or may not have occurred in such cases.