[ by Howard Haykin ]

Three individuals with Hovan Capital Management, LLC, an investment adviser registered with the SEC, agreed to settle SEC charges they misused so-called "soft dollars" obtained on rebates of commissions as paid for securities trades executed in the accounts of HCM clients.  [C-I Note:  Yes, the SEC still issues sanctions for soft-dollar violations, although such cases are reported about as often as jay-walking.] 

Profiles of Respondents.   The case involved the HCM's president, his wife and his brother - all associated with the firm - thus allowing for the "family affair" moniker. 

Kurt Hovan, 44, of Belvedere, CA, holds Series 7, 63, and 65 securities licenses.  He is the husband of Lisa Hovan and the brother of Edward Hovan, Jr.  Since 1999, Hovan has served as member, President, and Chief Investment Officer of Hovan Capital Management, LLC (“HCM”).  Among HCM’s clients was an SEC registered investment company - ("RIC" or "mutual fund") from August 2006 until March 2009., for which HCM served as a sub-adviser.

Edward Hovan, 47, of Bolton, CT, the brother of Kurt, from at least September 2008 through June 2009 served as EVP and Portfolio Manager of HCM.

Lisa Hovan, 45, the wife of Kurt, is a CPA currently licensed in California and previously licensed in New Jersey and New York. From 1999 through 2010, she was a member, indirect owner with her husband, and CFO of HCM.

Note to Readers:  There is an SEC case for individual.  Because the facts and circumstances in each case is essentially identical, we refer in this post only to what the SEC presented in Kurt Hovan's release.  Hyperlinks are provided below for each case.

SEC Findings and Allegations.   HCM respondents allegedly participated in a scheme to misuse so-called “soft dollars” that the firm had obtained as rebates on commissions paid for securities trades executed in the accounts of HCM clients.  Contrary to assurances to clients and others that the soft dollars would only be used for a limited category of services that benefited HCM clients, one or more of the respondents:

• used soft dollars to pay their own salaries;
• participated in an arrangement to provide invoices to brokerage firms to make soft dollar payments to an entity described as an independent, 3rd-party research firm - "Bolton Research LLC" - that, in reality simply was a conduit for the salary payments;
• spent soft dollars on office rent and office equipment.
• created and produced phony research reports, which were presented to SEC staff examiners.
• altered and sent due diligence questionnaires to SEC examiners to make it appear reports had been authored by Bolton Research, when they had not.

SEC Fines and Sanctions.  The SEC cited the following violations:  Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Exchange Act Rule 10b-5, Sections 204(a), 206(1), 206(2) and 207 of the Advisers Act, Advisers Act Rule 204-2(a)(7), and Section 17(e)(1) of the Investment Company Act of 1940

Kurt Hovan agreed to a permanent bar from the securities industry and was ordered to pay $140K in penalty and disgorgement.

Edward Hovan agreed to a 5-year ban from the securities industry, and had a $50K disgorgement order waived.

Lisa Hovan was charged with agreed to be barred from appearing before the Commission for 5 years, and to a permanent bar from the securities industry.

For further details, go to:

• In the Matter of Kurt Hovan:         [SEC IA Act of 1940 Release 3540, 1/29/13].
• In the Matter of Edward Hovan, Jr.:    [SEC IA ACT OF 1940 Release 3538, 1/29/13].
• In the Matter of Lisa Hovan, CPA:    [SEA of 1934 Release 68756, 1/29/13].