SEC vs Khalsa Financial Services, Inc. – Findings and Sanctions

This is Gurujot Singh Khalsa’s second bust, occuring after his Smuggling Drugs and Weapons bust.

“From January 1988 to the present, Khalsa, Gurujot and Darshan willfully violated Sections 206(1) and 206(2) of the Advisers Act in that they, by use of the mails and the means and instrumentalities of interstate commerce, directly and indirectly, employed devices, schemes and artifices [*3] to defraud investment advisory clients, and engaged in transactions, practices or courses of business which operated as a fraud or deceit upon such clients or prospective clients.”

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In the Matter of Khalsa Financial Services, Inc., Gurujot Singh Khalsa, and Darshan Singh Khalsa

Admin. Proc. File No. 3-8169

SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT OF 1940, Release No. 1383

1993 SEC LEXIS 2534

September 24, 1993
TEXT: [*1]

ORDER INSTITUTING PUBLIC PROCEEDINGS, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS

I.

The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that administrative proceedings be instituted pursuant to Sections 203(e) and 203(f) of the Investment Advisers Act of 1940 (Advisers Act) against Khalsa Financial Services, Inc. (Khalsa), an investment adviser registered with the Commission pursuant to Section 203 of the Advisers Act, Gurujot Singh Khalsa (Gurujot) and Darshan Singh Khalsa (Darshan).

In anticipation of the institution of these administrative proceedings, Khalsa, Gurujot and Darshan have submitted Offers of Settlement (Offers) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings contained herein, except for those set forth in paragraph II. A. below, which are admitted, and prior to a hearing pursuant to the Commission’s Rules of Practice, 17 C.F.R. ยง 201.1 et seq, Khalsa, Gurujot and Darshan, by their Offers, consent to entry of the findings, [*2] and the imposition of the remedial sanctions, set forth below.

Accordingly, IT IS ORDERED that proceedings pursuant to Sections 203(e) and 203(f) of the Advisers Act be, and hereby are, instituted.

II.

On the basis of this Order Instituting Public Proceedings, Making Findings and Imposing Remedial Sanctions, and the Offers submitted by Khalsa, Gurujot and Darshan, the Commission finds and the respondents admit that:

A. Khalsa has been registered with the Commission as an investment adviser, pursuant to Section 203(a) of the Advisers Act, since January 1988. At all times relevant to this proceeding, Gurujot was the president and sole shareholder of Khalsa and Darshan was the vice-president, secretary and treasurer of Khalsa. Gurujot controlled the day-to-day operations of Khalsa.

The Commission further finds, and the respondents neither admit nor deny, but consent to the following findings:

B. From January 1988 to the present, Khalsa, Gurujot and Darshan willfully violated Sections 206(1) and 206(2) of the Advisers Act in that they, by use of the mails and the means and instrumentalities of interstate commerce, directly and indirectly, employed devices, schemes and artifices [*3] to defraud investment advisory clients, and engaged in transactions, practices or courses of business which operated as a fraud or deceit upon such clients or prospective clients.

As part of their conduct:

1. In approximately January 1988, Gurujot and Darshan caused Khalsa to open a money market account in Khalsa’s name at the Heritage Bank in McLean, Virginia. Khalsa characterized this account in its books and records as the “Time Deposit Account” (TDA). Khalsa pooled client funds in this account. Of the client funds it managed, Khalsa deposited approximately $ 481,000 into this account. The remaining client funds were invested in limited partnerships, mutual funds and other investments.

2. Khalsa informed its advisory clients through quarterly investment statements that their funds placed into the TDA were investments in “Time Deposits.” In fact, the “Time Deposits” were maintained in a money market account until, without adequate disclosure to clients, Gurujot and Darshan caused Khalsa to use the client funds in the TDA account to make loans to companies controlled by the respondents, and to repay loans owed to these companies. The funds were never invested in certificates [*4] of deposit or treasury bills.

3. The client funds loaned to companies controlled by the respondents, together with other income of those companies, were used by these companies to pay operating expenses, including salaries paid to the individual respondents, and fees for services to other companies controlled by the respondents.

4. As part of its broad discretionary authority, Khalsa could, on behalf of its clients, make loans or investments in which Khalsa, its officers and members of its board of directors, principals, employees, agents and affiliates, had an interest. However, for each such loan or investment, Khalsa was required to make full and complete written disclosure to its clients of the nature and extent of Khalsa’s interest, or that of any affiliated party, which it failed to do.

5. As of September 30, 1991, clients were owed at least $ 301,000 in funds which respondents had characterized as “Time Deposits.” None of these funds have been repaid to these clients.

C. From January 1988 to the present, Khalsa, Gurujot and Darshan willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-2(a) thereunder, in that they, by use of the mails and means and [*5] instrumentalities of interstate commerce, directly and indirectly, engaged in acts, practices and courses of business which were fraudulent, deceptive and manipulative.

As part of their conduct, Khalsa, Gurujot and Darshan, while in custody and possession of funds and securities in which clients had a beneficial interest, at times failed to do the following:

1. maintain client funds in the name of Khalsa as agent or trustee for the client;

2. maintain a separate record for each client account reflecting the name and address of the bank where the account is maintained, the dates and amounts of deposits in and withdrawals from the account, and the exact amount of each client’s interest in the account;

3. notify clients in writing of the place and manner in which their funds and securities would be maintained;

4. send each client an itemized statement at least once every three months showing the funds and securities in Khalsa’s custody or possession, and all debits, credits, and transactions in a client’s account during the relevant quarter; and

5. arrange for a verification of client funds and securities in Khalsa’s custody by actual examination by an independent public accountant. [*6]

D. During various times in 1990 through the present, Khalsa, Gurujot and Darshan willfully violated Section 204 of the Advisers Act and Rules 204-2(a) and 204-2(b) thereunder.

As part of their conduct, Khalsa, Gurujot and Darshan failed to make and keep true, accurate and current the following records:

1. a cash receipts and disbursements journal;

2. a general ledger;

3. order memoranda;

4. trial balances;

5. records of advisory representative transactions;

6. a record reflecting all purchases, sales, receipts and deliveries of securities, and all debits and credits to such accounts;

7. a separate ledger account for each client showing purchases, sales, receipts and deliveries of securities and the date and price of each purchase or sale and all debits and credits;

8. copies of confirmations of all transactions for clients; and

9. a record for each security in which any client has a position reflecting the name of the client, the amount of interest and the location of the security.

E. From January 1988 to the present, Khalsa, Gurujot and Darshan willfully violated Section 204 of the Advisers Act and Rules 204-1(b)(2) and 204-1(c) thereunder. Respondents failed [*7] to file a certified balance sheet on Schedule G of Khalsa’s Form ADV, or file a Form ADV-S, within 90 days of the end of Khalsa’s fiscal year.

F. From January 1988 to the present, Khalsa, Gurujot and Darshan willfully violated Section 204 of the Advisers Act and Rule 204-3(a) thereunder. Respondents failed to furnish each advisory client or prospective client with Part II of Khalsa’s Form ADV or a written document that contained the information required in Part II.

G. From January 1988 to the present, Khalsa, Gurujot and Darshan willfully violated Section 204 of the Advisers Act and Rule 204-1(b)(1) thereunder. Respondents failed to promptly file an amendment to Khalsa’s Form ADV to correct information contained therein which had become materially inaccurate. In this regard, the filing inaccurately stated that, in the prior ten years, no advisory affiliate had been convicted of or pled guilty to any felony. However, in April 1991, Gurujot entered an Alford plea of guilty to a conspiracy to import 22 tons of marijuana into the United States, and received a three-year suspended sentence.

H. From December 1987 to the present, Khalsa and Gurujot willfully violated Section 207 [*8] of the Advisers Act by making untrue statements of material facts and omitting to state facts which were required to be stated therein, in a registration application and reports filed with the Commission pursuant to Section 203 or 204 of the Advisers Act.

As part of their conduct:

1. Khalsa, acting through Gurujot, filed a Form ADV with the Commission in December 1987, which contained the following misrepresentations: (a) prior to investment, all Khalsa clients solicited to invest are fully advised in writing of Khalsa’s and any related person’s interest in an investment and are fully advised of all aspects of the transaction; (b) all Khalsa clients solicited to invest are provided with full and complete disclosure documents; and (c) clients must approve an investment in writing and are provided with periodic reports on investments; and

2. Khalsa caused to be filed a certified balance sheet on January 15, 1992, for the period ending December 31, 1990, which contained misleading information. Among other things, the balance sheet falsely stated that client funds were invested in “Money Market Funds.” In fact, client funds were deposited into the TDA and, inter alia, loaned [*9] to companies which the respondents controlled.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offers.

Accordingly, IT IS HEREBY ORDERED that:

A. Respondent Khalsa Financial Services, Inc.’s registration with the Commission as an investment adviser is revoked.

B. Respondent Gurujot Singh Khalsa is barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company.

C. Respondent Darshan Singh Khalsa is barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company.

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From: RoseLotus1 3/8/05 2:31 PM
To: RoseLotus1 (2 of 7)
759.2 in reply to 759.1

SECURITIES AND EXCHANGE COMMISSION V. KHALSA FINANCIAL SERVICES INC., ET AL. (U.S. District Court, Eastern District of Virginia, Alexandria Division, Civil Action No. 92-1367-A)

SECURITIES AND EXCHANGE COMMISSION

LITIGATION Release No. 13498

1993 SEC LEXIS 170

January 25, 1993
TEXT: [*1]

On September 29, 1992, the Securities and Exchange Commission (Commission) filed a Complaint in the U.S. District Court for the Eastern District of Virginia against Khalsa Financial Services Inc. (Khalsa), a registered investment adviser located in Sterling, Virginia, Gurujot Singh Khalsa (Gurujot), the president and sole shareholder of Khalsa, and Darshan Singh Khalsa (Darshan), the vice-president, secretary and treasurer of Khalsa. The Commission seeks a permanent injunction, an order of accounting, disgorgement and civil penalties. The Complaint alleges that Khalsa and Gurujot, aided and abetted by Darshan, violated numerous provisions of the Investment Advisers Act of 1940 (Advisers Act). Specifically, the Complaint alleges that the defendants violated the antifraud provisions of Sections 206(1) and 206(2); the custody provisions of Section 206(4) and Rule 206(4)-2(a) thereunder; the recordkeeping and reporting provisions of Section 204 and Rules 204-1(b)(1), 204-1(b)(2), 204-1(c), 204-2(a), 204-2(b), and 204(3)(a) thereunder; and the filing provisions of Section 207.

In its Complaint, the Commission alleges that from January 1988 to the present, Khalsa, through Gurujot and [*2] Darshan, engaged in a scheme to defraud nine advisory clients of approximately $ 481,000 that was placed with Khalsa for investment. Both Gurujot and Darshan are part of the American Sikh community and the majority of Khalsa’s clients are part of the Sikh community. In approximately January 1988, Gurujot and Darshan caused Khalsa to open a money market account in Khalsa’s name at a bank in Virginia. Khalsa characterized this account in its books and records as a “Time Deposit Account” (TDA) and used the TDA as a general operating account in which client funds were pooled. The Complaint alleges that Khalsa informed its advisory clients through quarterly investment statements that their funds placed into the TDA were investments in “Time Deposits” when, in fact, the supposed “Time Deposits” were never invested in certificates of deposit, treasury bills or notes, or any type of term investment. Rather, Gurujot and Darshan took these funds out of the TDA, treated the funds as loans to Khalsa, and used them to make loans to affiliated entities; to repay funds previously borrowed from affiliated entities; to pay the operating expenses of affiliated limited partnerships; and to return [*3] principal and make interest payments to certain clients. The Complaint further alleges that the defendants failed to disclose these actions to Khalsa’s clients. Moreover, Khalsa never disclosed the use of client funds, as required by its investment advisory agreement.

The Commission further alleges that the defendants failed to safeguard funds of Khalsa’s advisory clients in its custody; failed to make and keep true, accurate and current certain books and records relating to Khalsa’s investment advisory business; and failed to make and disseminate certain reports relating to Khalsa’s investment advisory business.

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