On July 1, 2019, the Securities and Exchange Commission (SEC) announced charges against a Massachusetts-based investment adviser and its principal for their role in defrauding clients, and against the principal for fraudulent misuse of investor funds.
Of note from the charges:
- From 2014 to early 2016, 40 of the adviser’s clients invested more than $7 million in securities of Oregon-based investment management company Aequitas Management LLC, which had been the subject of a previous SEC enforcement action. The adviser and its principal did not disclose to clients that Aequitas provided a significant financial incentive to recommend its securities: a $1.5 million loan and access to a $2 million line of credit.
- The SEC found that reports filed by the adviser and its principal included material misstatements and omissions, particularly false representations that the repayment terms of the loan from Aequitas were not contingent on its clients investing in Aequitas.
- The SEC’s order found that the principal, days after fraudulently inducing a $1 million investment from a client, spent $500,000 of that to pay off his personal taxes and make other payments to himself or for his personal benefit.
- Without admitting or denying the charges, the adviser and principal consented to the order finding that they violated the antifraud provisions of the federal securities laws. As a result:
- The principal was censured.
- The adviser and the principal were ordered to pay disgorgement and prejudgment interest of $1,047,971 and a penalty of $275,000.
- The principal was permanently barred from any association with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization.
The SEC’s order is available here.