A New York money manager who once worked with personal finance guru Suze Orman has settled charges with the Securities and Exchange Commission that he allegedly misled investors about his success through 140-character tweets and an email newsletter to 60,000 subscribers.
The SEC said it charged New York-based Mark Grimaldi, of Navigator Money Management, with making false claims about investment advice to puff up his success, including the allegation that he "cherry-picked highlights but ignored less favorable recommendations and other data that would have made the facts complete".
Grimaldi, whose performance claims were questioned by the SEC in 2008 then by the Wall Street Journal in 2012, agreed to a penalty of $100,000 and to maintain an independent compliance consultant for three years. The Journal called Grimaldi "Suze Orman's investing guru." Orman cut ties with Grimaldi soon after, stressing that she had no involvement in his stock picks.
The SEC charged Grimaldi with using his popular newsletter, The Money Navigator, as well as his Twitter presence to present high-flying investment performance.
In one "materially misleading" claim in The Money Navigator, according to the SEC, Grimaldi told investors that one of his funds was ranked No1 out of 375 in a group tracked by Morningstar.
The SEC said Grimaldi highlighted the fund's performance during only a one-year period, and that it "had a poorer relative performance during other time periods".
The SEC also said that Grimaldi used Twitter to claim "responsibility for model portfolios in his newsletters that 'doubled the S&P 500 the last 10 years.'" Grimaldi apparently neglected to mention that for the first three of the 10 years, he had no involvement in the model portfolio performance, the SEC said in its announcement. Grimaldi did not respond to requests for comment.
On Wall Street, most money managers are judged by how well they imitate the performance of the S&P 500. Going further and outperforming the index for one year is considered strong, and for 10 years, it is so uncommon that it's the mark of fund managers considered legends, such as Peter Lynch of Fidelity.
The SEC has cited Twitter in other enforcement cases in 2011 and 2010.
April Rudin, CEO of wealth marketing firm The Rudin Group, advises money managers on how to advertise their businesses. She says online behavior is usually a mark of offline behavior – perhaps the financial equivalent of "where there's smoke, there's fire".
"Some of these claims are so ridiculous that it's hard to believe a firm would actually use those and think they would get anywhere with that kind of ad," said Rudin.
Twitter is an environment that is hardly alien to self-promotion, particularly for financial services professionals. Large communities and daily alliances exist in which day-traders and investors talk about stocks and brag about their performance, all within the normal social parameters of conversation.
For established financial firms and accredited financial advisers, the challenge is to use Twitter and other social media without succumbing to the temptation to brag. Longstanding SEC rules prohibit money managers from advertising their performance in most instances.
One hedge fund official said he regards Twitter with wariness.
"If you're a hedge fund, what do you use social media for? You can't talk about your investment strategies, because then you're giving away your secret sauce. You can't talk about your returns, because the SEC won't allow that," he said. "There's nothing much to talk about."
Yet the urge persists for many. In December, a group of powerful financial regulators including the Federal Reserve and the Federal Deposit Insurance Corporation released a 19-page set of social media guidelines, covering everything from Twitter to Flickr to games like Second Life and FarmVille. The guidelines primarily told investors and financial institutions to get good legal advice and put a social media policy in place including a plan to respond to negative comments. The majority of the guidelines served as reminders of existing laws on fair lending, debt collection and marketing bank accounts.
Rudin said she frequently advises clients to use social media despite the perceived pitfalls. She encourages money managers to use social media to grow their corporate and personal brands without talking about investments.
"There's no way to know this adviser didn't do the same thing in the past over lunch," Rudin said, adding: "People don't all of a sudden hop on to social media and start doing anything differently than they've done in the past."
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