John W. Rafal of Old Lyme, founder of Essex Financial Services, has admitted wrongdoing and agreed to pay $575,000 in fines to the U.S. Securities and Exchange Commission related to an illegal referral payment and cover-up, regulators said Monday.

At the same time, the SEC revealed Monday that the U.S. Attorney's Office for the District of Massachusetts is pursuing a criminal case against Rafal. He is accused of obstructing the proceedings of a federal agency.

Rafal, who was first demoted and then fired at the Essex-based financial services firm now owned by Essex Savings Bank, was accused of secretly paying attorney Peter D. Hershman of Branford fees for referring an elderly widow to his company, according to an SEC release. The SEC charged that Rafal neglected to report the fees, as legally required, then compounded the issue by lying to investigators and then mischaracterizing the regulatory agency's investigation to clients.

"Rafal and the lawyer agreed to disguise the payments as legal services purportedly provided by the lawyer's firm," the SEC said in a release. "After other Essex officers discovered and stopped Rafal's payment arrangement, Rafal continued to secretly pay the lawyer using other accounts he controlled."

When rumors swirled that Rafal was under investigation, the SEC said he sent emails to clients falsely claiming that the agency had completely exonerated both him and Essex Financial. At the same time, according to a release, Rafal was stonewalling investigators by failing to disclose additional payments he made to Hershman and indicating falsely that the lawyer had returned all fees.

"He will now be paying the price for his deceit," said Stephanie Avakian, acting director of the SEC's Enforcement Division, in a statement. "We will not tolerate attempts to mislead."

The SEC said Hershman agreed as part of the case to pay more than $90,000 in fines for aiding and abetting securities law violations.

In addition, both Rafal and Hershman are now barred from the securities industry and from serving in the role of director or officer of a publicly traded company or from appearing or practicing before the SEC as attorneys. Both are also barred from representing or advising clients about SEC matters.

According to the SEC, Essex Financial Services has agreed to pay more than $180,000 to settle charges resulting from Rafal's misconduct.

"Hershman and Essex neither admitted nor denied the findings against them in the SEC's orders," according to the release.

Rafal had consistently been listed as one of the nation's top independent financial advisers in the decade before the SEC investigation concluded.

l.howard@theday.com