May 05, 2021

Blucora / Ancora Proxy Fight Highlights Reputation Risks of Pay-to-Play Violations

For the last few months, Blucora – a FinTech company providing software solutions for wealth management and tax preparation – has waged a war against Ancora, an Ohio-based investment advisor who had acquired a minority stake in the company and sought to reconstitute Blucora’s board.

Last week, Ancora appeared to lose the proxy vote, with Blucora announcing that all 10 of their incumbent directors were re-elected.

Ancora argued that Blucora was mismanaged, under-performing, and in need of new leadership. Meanwhile, Bluroca focused heavily on issues with Ancora’s board nominees – and in particular, with Ancora CEO Fred DiSanto. Blucora highlighted a legal opinion that he had a conflict of interest that would potentially create legal snares for the board, and a series of pay-to-play violations for which Ancora had been censured by the SEC.

In a series of letters to investors, reports, and public releases, Blucora drew attention to the 2018 violation, which Ancora was fined $100,000 by the SEC for.

“[DiSanto] has both significant tone-at-the-top issues, having made improper pay-to-play campaign contributions, and Clayton Act issues prohibiting him from lawfully serving on Blucora’s Board” (Blucora Release)

“These findings compound other serious concerns about Mr. DiSanto’s ability to play by the rules and his appropriateness to serve on the Board of Blucora, which operates in two highly regulated fields. In December 2018, the SEC censured and ordered a $100,000 fine against Ancora Advisors LLC, the wealth management firm which Mr. DiSanto leads, for violating federal “pay-to-play” rules. Between January 2013 and June 2017, Mr. DiSanto personally made over $44,000 in improper campaign contributions to candidates for elected office in Ohio. Ancora subsequently provided money management and advisory services to pension systems over which those officials had influence. So-called “pay-to-play” political contributions have been illegal under federal law for many years, as is well known in the asset management business. At the time of the censure and fine, Ancora attempted to downplay the violation and Mr. DiSanto’s personal involvement. Even during this election contest, Ancora has never acknowledged that its CEO and candidate for the Blucora Board engaged in conduct that is prohibited for every employee of an asset management firm that seeks to manage money for public pension funds or other political entities. Ancora has attempted to ignore this serious violation of law and ethics.” (Blucora Letter)

Blucora wasn’t the only observer to look negatively on the pay-to-play violation – Glass Lewis also highlighted it heavily in their recommendation against electing him or any of Ancora’s other directors, questioning the way it was handled and his firm’s compliance architecture:

“Shifting to Mr. DiSanto… Blucora highlights the fact that Ancora was recently censured by the SEC and compelled to pay a $100,000 civil penalty in December 2018 in connection with a violation of the Commission’s so-called ‘pay-to-play’ rule applicable to investment advisers. … Ancora’s meeting materials do not refute Blucora’s characterization of Mr. DiSanto’s involvement, and they seem to bypass recognition of the censure altogether. We view this taciturn methodology as fairly significant, 2 as it seems to reflect both a disconcerting absence of candor and an apparent disinterest in acknowledging Ancora lacked fundamental compliance architecture capable of timely identifying costly oversight failures within its advisory business, in our view.” “That Mr. DiSanto himself appears to have been one of the individuals running afoul of the rule in question invites even greater scrutiny here, and works against the notion that Blucora investors would unequivocally benefit from his advisory and wealth management expertise.” “Further complicating Mr. DiSanto’s candidacy is the fact that Blucora has openly argued his prospective service would represent a violation of Section 8 of the Clayton Antitrust Act of 1914, primarily as a result of competitive similarities purportedly existing between Blucora and Ancora.” “With respect to Mr. DiSanto, we would again emphasize investors cannot presently be certain his election would hold up against potentially significant legal challenges and regulatory obstacles, an issue we find largely mooted by Ancora’s apparent determination to sidestep confronting an SEC censure which directly undermines Mr. DiSanto’s credibility as a Blucora director.” (Blucora Release)

In fact, Blucora even released a whole opposition-research style document, focused on the pay-to-play issue, which you can read here – “Ancora Advisors’ Pay-to-Play Violation Due to Multiple Improper Campaign Contributions by Fred DiSanto.”

Ultimately, shareholders rejected all of Ancora’s candidates. And, while Ancora’s pay-to-play violation wasn’t the only issue that Blucora raised, it was central to their campaign throughout – highlighting the reputational risk that these issues can represent for advisors, and the importance of robust compliance systems to protect against them.

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David Lombardy recently launched his own regulatory and compliance consulting firm, Pillar Compliance Group, to assist investment managers with the development, implementation, and ongoing monitoring of their compliance programs. In reviewing the regulatory environment around pay-to-play compliance, he saw the value in using illumis’ political contribution monitoring platform to provide the best risk coverage available for his clients.
We are excited to announce that illumis has been named “Best RegTech Startup” in the 2021 FinTech Breakthrough Awards! The award recognizes our creativity in mitigating operational risk related to political contributions and pay-to-play risk.