An RIA — with a CEO who also served as chief compliance officer — failed to detect a co-founder’s seven-year-long alleged theft until he had taken $6 million from his firm, partly by overbilling clients, according to the SEC.
The commission is suing the firm's co-founder and former COO Richard T. Diver, 62, in federal court in New York and seeking a jury trial.
A single call to M&R Capital Management’s CEO John Maloney in December from a client concerned about excessive charges brought the fraud to an end, the SEC says in its complaint. At the time, Maloney owned 91% of the firm and Diver owned the balance at 9% and made a base salary of $100,000 before bonuses, in 2017 and 2018, it says.
When Maloney took the client's concern to Diver, who handled billing and payroll for the firm, Diver "confessed to overbilling clients in order to personally profit himself," the complaint says.
"Diver told CEO that he had no financial ability to make restitution and claimed that he had engaged in wild personal spending," it says.
Diver spent some of the funds on trips to Europe and for an apartment on Manhattan’s Upper West Side that he kept in addition to his family home in New Jersey, according to a person familiar with the situation, speaking on condition of anonymity.
Diver did not respond to multiple attempts to reach him. A woman answering the phone at M&R Capital said Maloney would not comment on the case.
However, M&R has made “every client 100% whole,” Terry Rooney, the firm’s spokesman says.
“The unconscionable actions of Richard Diver have hurt many people, most particularly his family. He will have to live with the consequences,” a statement from the firm says. “Every account [from affected clients] was reviewed. Every client that was financially impacted was paid 100 cents on the dollar, plus interest, for the time from when the money was taken fraudulently taken out of their accounts. We continue to provide our clients with the same high-level service which is the hallmark of our separately managed account programs.”
As of Thursday, a photo of Diver and Maloney, heads tilted companionably together, remained on the company website, describing the firm they co-founded with a third partner in 1993.
M&R managed $457 million for 84 high-net-worth clients, plus another 278 individuals, as of March, according to its most recent SEC Form ADV.
"When a firm has nearly a half billion in assets under management, you would expect that they would be able to hire people who could protect investors and the firm against these kinds of issues," says securities lawyer Benjamin Edwards with the University of Nevada in Las Vegas, who is not involved in the case. "A person whose only job was to focus on compliance might have stood a higher chance of detecting non-compliance with the law or ordinary books and records issues."
In addition to holding the CEO and CCO titles, Maloney also serves as M&R's chief investment officer, according to SEC filings.
In the wake of the alleged theft, Rooney says, the firm has decided to separate its compliance function from its CEO and CIO roles.
Maloney “doesn’t have the person quite started yet, but he has a handshake on it,” Rooney says, regarding a new chief compliance officer. “He recognized that those responsibilities needed to be separated, so they are doing that.”
A colleague in the 5,000-person town of Spring Lake Heights, New Jersey, where Diver lives and serves as councilman expressed astonishment at the news.
"The allegations are a shock and are uncharacteristic of Mr. Diver's performance on the governing body," says John Barrett, administrator of the borough of Spring Lake.
Barrett says he saw Diver two weeks ago when he came to his office following a hospital stay. During that visit, he made no mention of the charges to come, Barrett says.
"Mr. Diver is obviously innocent until proven guilty," he adds. "We wish Mr. Diver the very best and I would expect to hear from him in the near future as to whether he will continue to serve on the governing body."
For six or seven years before he began overbilling clients, Diver stole from his firm by inflating his income by hundreds of thousands of dollars a year through the firm’s outside payroll service, which he oversaw, the SEC says. Between 2011 and 2018, Diver would call the service and give verbal instructions to issue him and his colleagues paychecks, allegedly increasing payments to himself.
Diver would "direct his assistant to access at the beginning of each quarter the client accounts at the [firm's] custodians and transfer the calculated fees to fee accounts held in [Diver's] name at the custodians," the SEC says. "Diver would then transfer the client advisory fees from the fee accounts at the custodians to [Diver's] bank account, which Diver used to pay [his] expenses."
Starting in 2017, he began altering the firm's billing cycles, levying fees on clients, not at the firm's customary quarterly intervals, but five or six times a year, the complaint says.
The commission has asked the court to order Diver to repay the money he allegedly stole.
"Diver lined his own pockets by stealing from hundreds of advisory clients," Marc Berger, director of the SEC’s New York Regional Office, said in a statement, "until his scheme was exposed by an investor who asked the right questions about charged fees."
Editor's note: The headline has been updated to reflect Richard Diver's role as COO rather than advisor.
