NEWPORT NEWS — The top executive of the Newport News brokerage firm MICG Investment Management LLC is under investigation in a host of securities violations including fraud, according to public documents posted to a securities regulator's website.
The Financial Industry Regulatory Authority, or Finra, has been examining the financial statements of the firm and CEO and Chairman Jeffrey A. Martinovich for the last 12 months.
Finra is an industry-funded regulator of U.S. securities firms that operates under oversight from the federal Securities and Exchange Commission. It is authorized by law to enforce federal security laws and its own SEC-approved regulations.
The authority informed Martinovich and MICG on March 10 that it is preparing to bring six specific charges as a result of the investigation and offered the company a chance to submit an official response to defend itself.
While Finra has not yet filed formal charges, the notice it served to MICG signals that the regulator is at an advanced stage of its investigation and is preparing to levy charges.
An attorney for MICG denied the firm defrauded investors and said it is working with Finra on what he described as "technical issues."
"MICG and Mr. Martinovich categorically deny that any investors or the investing public were defrauded," said Fred Knopf, a New York-based attorney for the firm. "It's important to point out that no complaint has been issued by Finra or anyone else involving this matter. The firm and Mr. Martinovich are working with Finra to sort out these technical issues."
MICG, Knopf said, has a long history of supporting area charities and the community and is "very committed to servicing customers and has an exemplary history with all regulators."
MICG, a 10-year-old privately held brokerage firm headquartered at City Center in Newport News, offers investment services, portfolio management, mortgage banking and insurance services, according to its website. The company also operates three hedge funds that attract wealthy investors. Only so-called "accredited investors" — those with a net worth greater than $1 million or whose individual annual incomes exceed $200,000 — can participate in the hedge funds.
The funds' investments include a share of a British soccer team and a portion of a solar-panel company.
As a result of Finra's year-long probe, the regulator alleged that Martinovich engaged in fraud and the improper use of funds in connection with an incentive fee charged to investors in one of its hedge funds, a subsidiary called MICG Venture Strategies LLC.
According to Venture Strategies' 2008 financial statements obtained by the Daily Press, the company's fund manager was to receive a 20 percent incentive payment based on the net growth of each investor's account each year.
For 2008, that incentive fee totaled $428,196. The fund listed total income of $20,055 on investments worth $11.6 million. Venture Stategies' total expenses, including the incentive fee, were $738,562, for a net loss of $718,507.
"That does not take into account the return on investments that investors actually received in these funds," Knopf said. "These issues ... are relatively complicated and can't fairly be determined on the basis of limited information." He would not reveal any specific financial information.
Finra also alleged that Martinovich engaged in fraud by offering for sale interests in Venture Strategies. In 2008, the firm reported $5.8 million in capital contributions to the fund.
Finra is largely unknown outside the financial community, but it can impose a host of disciplinary actions. They include censuring, suspending or expelling a firm or broker from trading securities, levying fines and ordering restitution to investors. Finra also can refer cases to the SEC or the federal and state court systems.
James D. Cox, a securities law professor at Duke University, said, "Most disciplinary actions brought against broker/dealers are brought by Finra and not the SEC."
The allegations against Martinovich, Cox said, "are certainly very serious."
He added, "A single violation could have multiple prosecutions. A broker could have lots of knocks on the door in the case they misbehave."
A Finra spokesman said Tuesday that the regulator does not comment on ongoing investigations.
Finra also alleges that:
• MICG improperly valued its holdings in EPV Solar Inc. and General Sports Derby Partners LLC.
• MICG Venture Strategies violated regulations by paying incentive fees to MICG Investment Management in 2007 and 2008.
• The company provided false valuations on customers' account statements because underlying investments were improperly valued.
Documents MICG filed with the SEC each year show the company has fallen on hard times in recent years.
In 2007, the last year for which an income statement was filed, the company lost $209,752 on $7.9 million in revenues. MICG's SEC filings also show the company's net assets declined to $1.9 million as of Dec. 31, 2009, from $3.5 million at the conclusion of 2007.
All U.S. brokerage firms are required to submit annual statements of financial condition that are required to be audited by an independent accountant.
MICG's 2007 and 2008 annual reports were audited by the Norfolk-based accounting firm Harbinger PLC.
Harbinger's sole partner, Michael T. Umscheid, was listed on MICG's website in January as the firm's chief financial officer. Later in the month, his name was removed.
Umscheid didn't return a call to his office Tuesday seeking comment.
Knopf, the MICG attorney said that's "not an issue that's come up with Finra or anyone else."
MICG is also the subject of two pending lawsuits. One was filed by an investor who contended that the company failed to liquidate and return his investments when requested.
The investor, Willi Fenske of Hopewell, is seeking $1.89 million from MICG and Martinovich, according to a suit filed in November in Chesterfield County Circuit Court. Fenske alleges that he asked Martinovich to return his investments in four MICG-controlled funds after finding that the firm's records were inaccurate and incomplete.
Fenske said Martinovich and MICG breached their contracts and fiduciary duty, wrongfully withheld property belonging to the Willi Fenske Trust and were negligent.
"We feel strongly that suit is without merit and we're vigorously defending it," said Todd M. Lynn, MICG's general counsel. A jury trial is scheduled for July.
The other lawsuit is a $64,000 case involving a lease dispute unrelated to the company's investment function.
MICG at a glance •Brokerage firm based in Newport News that offers portfolio management, hedge-fund investing, mortgage banking and insurance services. •Founded in 2000. •Branch offices in Norfolk, Richmond, Alexandria and New York. •Chairman and CEO is Jeffrey A. Martinovich. •Manages more than 9,000 separate accounts.