Articles Posted in Investment Advisers

SEC Accused Investment Adviser of Profiting from Cherry Picking
The US Securities and Exchange Commission has filed a civil fraud case against Strong Investment Management, which is a California-based investment adviser, and its president/owner Joseph B. Bronson. The regulator is accusing them of running a cherry picking scam that defrauded the firm’s clients.

The Commission contends that Bronson used Strong’s omnibus account to trade securities but would wait to see how they performed during the day before distributing them to certain client accounts. Meantime, Bronson purportedly made healthy profits at cost to clients by cherry picking the trades. He is accused of giving himself trades that were profitable while sending unprofitable ones to firm clients.

The SEC’s complaint contends that in Forms ADV, Bronson and Strong misrepresented trading and allocation practices by falsely stating that every trade would be allocated according to the terms of pre-trade allocation statements with no preference granted to any account. Bronson’s brother, ex-Strong chief compliance officer John B. Engebreston, is accused of not fulfilling his job by failing to make sure that Strong’s policies and procedures for trade allocation were followed. He also is accused of “repeatedly” ignoring “red flags” when it came to Strong’s allocation practices.

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Scottrade is Accused of Improper Sales Practices Involving Retirement Accounts

Massachusetts Secretary of the Commonwealth William Galvin has filed a complaint against Scottrade accusing the brokerage firm of engaging in improper sales practices that it knew violated the US Department of Labor’s fiduciary rule regarding impartial conduct standards. Under the rule, advisors and their firms are obligated to act in a fiduciary capacity when making investment recommendations, as well as act in their clients’ best interests.

In his complaint, Galvin is contending that Scottrade employed a culture that includes “aggressive sales patterns,” and that the firm and its agents failed to abide by its duty to Massachusetts retirees between 12/2015 and 6/2016 when it ran a number of national call nights that included the incentive of raffle tickets for those who cold called customers. Scottrade also conducted quarterly sales contests offering at least $490K in prizes. This included the “Q3 Win and Retain Sales Contest “that offered $285K and paid out $2500/agent to the top 25 branches according to percentage increase in new net assets brought in.

Massachusetts Secretary of the Commonwealth William Galvin has filed charges against investment adviser Thomas Riquier for allegedly defrauding investors of at least $1M in a real estate scam that has gone on for more than a quarter of a century. According to the administrative complaint, Riquier solicited funds from people, mostly older investors (some of them his firm’s clients), to buy property that was then to be sold at a profit. His employer, United Planners Financial Services of America, is charged with failure to supervise.

In its investment adviser fraud case, the regulator claims that investors’ money was used instead to buy property already belonging to Riquier. The property has yet to be improved or sold. It has not rendered any returns for investors. The state regulator notes that because the alleged scam has been going on for so long—26 years—a number of investors have passed away. The rest of them have yet to make money from the venture.

Riquier is also accused of soliciting over $830K in private loans from clients. Galvin said that this violates federal and state laws.

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Ex-Wells Fargo Brokers Barred Over Unsuitable Energy Securities Sales
The Financial Industry Regulatory Authority has barred brokers Charles Lynch and Charles Frieda for making unsuitable recommendations to investors, resulting in substantial financial losses to the latter. Lynch and Frieda are former Wells Fargo (WFC) representatives who were based in Southern California. Both Lynch and Frida were fired from the firm. Previous to working at Wells Fargo, both men worked at Citigroup (C) and Morgan Stanley (MS).

According to the self-regulatory organization, between 11/12 and 10/15, the former brokers recommended an investment strategy revolving around certain speculative energy stocks to over 50 customers. These securities were volatile. Because investors became very concentrated in these energy securities, they were placed at risk of substantial losses.

FINRA contends that the two brokers did not do a proper job of making sure these investments were suitable for the customers to whom they were recommending these securities.

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The SEC has filed civil charges against Westport Capital Markets LLC and principal Christopher E. McClure. The Connecticut-based, dually registered brokerage firm and investment adviser and its principal are accused of defrauding clients, costing them over $1M in losses.

According to the regulator’s securities fraud complaint, the investment advisory firm and McClure invested clients’ money in risky securities on numerous occasions, resulting in hundreds of thousands of dollars in undisclosed mark-ups that went to Westport even as the clients lost more than $1M. The broker-dealer would allegedly buy securities from underwriters at a reduced rate and later re-sell them to its own clients at the full public offering price while keeping the difference.

Westport and McClure are accused of making false and misleading representations to clients about the compensation that the financial firm received from their accounts. Also, the brokerage firm is accused of receiving 12b-1 fees, which are mutual fund distribution fees, when clients’ money was placed in certain mutual fund share classes and again not telling clients about these fees. The SEC said that the fees created a conflict. McClure and Westport allegedly invested clients in mutual fund shares that charged these fees even when less expensive shares that didn’t carry the fees could have been purchased instead.

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James C. Tao, an ex-financial adviser, has settled civil charges accusing him of bilking investors in a private equity fund. It was the US Securities and Exchange Commission that brought the Texas investment fraud charges against him.

Among the allegations was that Tao misappropriated investor money and made material misstatements in offering documents for the Presidio Venture Capital fund. Donna Boyd, Tao’s ex-partner, also settled SEC charges in this case.

The regulator’s complaint contends that the two of them set up the fund four years ago to invest in Houston-based technology startups. They raised about $860K.

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Regulator Orders Alleged Ponzi Scammers to Pay $15.7M Plus Interest
In its final judgement against ex-pro football player William D. Allen, Susan Daub, and three entities, the US Securities and Exchange Commission is ordering the defendants to pay over $15.7M in disgorgement of ill-gotten gains in addition to prejudgment interest for an alleged Ponzi scam that raised nearly $32M from investors. Allen, formerly of the Miami Dolphins, and Daub, who both pled guilty to related to criminal charges last year, have been sentenced to six years in prison. They must pay $16.8M in restitution for that action. The SEC’s order will be deemed met “based on the restitution order” in the criminal case.

The SEC’s complaint contends that Daub and Allen and the entities misled investors about the loans, which were supposed to go to professional athletes. Instead, they allegedly used just part of the money to issue the loans while using investors’ funds to cover nightclub and casino expenses, other ventures, and to pay back other investors.

Microcap Issuer and Its Ex-CEO Resolve Investor Fraud Allegations
Integrated Freight Corporation and its ex-chairman/CEO David N. Fuselier have settled SEC charges accusing them of investor fraud. Both Fuselier and the company, however, did not deny or admit to the allegations.

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Texas Investment Adviser Suspend for Violating Earlier Securities Agreement
The Texas State Securities Board has suspended investment adviser John Michael McDonough for 90 days after he violated a past agreement that limited his business activities and required 212 Advisory Group to enhance its supervision of him. The undertaking agreement was a requirement for him to be approved as a registered investment adviser in Texas in 2015 while he worked with the Georgia-based firm.

At the time, the Financial Industry Regulatory Authority had already sanctioned McDonough, who used to be registered with AXA Advisors, LLC, over allegations that he engaged in “outside business activities” and a number of undisclosed private securities transactions. He was fined $10K and suspended by the self-regulatory organization.

Earlier this year, the Texas State Securities Board found that McDonough was in total violation of the undertaking agreement. Meantime, 212 Advisory was found to have failed in making sure that McDonough did not engage in any supervisory-like acts nor did it ensure that a firm principal was appointed as his direct supervisor.

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The US Securities and Exchange Commission has filed civil charges against a former broker and investment adviser. According to the regulator’s investment adviser fraud complaint, Jay Costa Kelter defrauded three retirees of over $1.856M. Meantime, prosecutors in Tennessee have filed a criminal case against him related to one of the clients. A federal grand jury indicted him on multiple counts of wire fraud, mail fraud, and security fraud.

The SEC contends that from 9/2013 through last year, Kelter, who owns insurance and investment firm BEK Consulting Partners LLC (known in the past as Kelter & Company LLC), made misrepresentations to the older investors, whom he’d persuaded in 2013 to transfer their accounts to TD Ameritrade (AMTD) after he left his former employer. The former broker had access to their new accounts and was authorized to keep giving them investment advice and make trades on their behalf while, meantime, he allegedly used the funds for himself.

For example, Kelter is accused of misappropriating $1.467M from a 75-year-old widow who was nearly totally financial dependent on her investments by engaging in fraud and forgery. The SEC’s complaint said that the client had told him she was only interested in making conservative investments.

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Lawrence Allen DeShetler will serve 60 months in federal prison for Texas investor fraud. The Houston man pleaded guilty to mail fraud earlier this year after he fraudulently solicited $1.9M from five clients.

Starting in 2014, the former investment advisor, certified planner, and head of DeShetler & Company started persuading clients that if they let him invest their funds they would make higher returns. These clients took money from their investment accounts and gave them to him. Unfortunately, DeShetler used the money on himself.

He has since admitted to using some of investors’ funds to build a house abroad. DeShetler also admitted that he persuaded one widow who was an octogenarian to liquidate a trust and transfer nearly $190K to him. He even stayed in her home while she went away. Upon her return DeShetler was gone and so were her investment documents.

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