On December 19, 2019, the SEC filed a complaint in federal court against a Sacramento, California-based investment advisory firm and its owner. The complaint alleged that the Registered Investment Adviser (RIA) and its owner defrauded hundreds of retail clients, most of whom were retired or close to retirement.
The SEC’s complaint presented six factual allegations:
- The defendants solicited prospects with false and misleading advertisements;
- The defendants breached their fiduciary duty to their clients;
- The defendants made material misrepresentations and omissions in Forms ADV;
- The defendants failed to amend and deliver Forms ADV in a timely manner;
- The RIA’s compliance program was inadequate; and
- The RIA failed to maintain the required books and records.
Allegations pertaining to false and misleading advertisements
According to the SEC, the firm’s advertisements contained false and misleading claims about the defendants’ compensation and conflicts of interest. The advertisements also inflated or misstated the owner’s expertise and prominence in the industry. Furthermore, the advertisements misstated the amount of resources dedicated to managing client accounts. In addition, the advertisements falsely asserted that the defendants did not receive incentives to recommend or direct funds into specific investments.
Many clients learned about the owner and his firm through a radio show hosted by him. The advertisements falsely stated that the owner was selected to host the show, because of his industry expertise. The owner did not disclose that he paid the radio station to host and broadcast the program.
The RIA also paid to sponsor content on websites such as Forbes.com and Money.com. These paid advertisements were in the form of articles written by the adviser. The RIA then directed its employees to create versions of the articles that said “Published” at the top along with the Forbes or Money logo. These employees also made false claims that the adviser was asked by Forbes to write about successful retirement planning.
In addition, marketing materials boasted that the owner held the “Qualified Retirement Advisor” designation, which was not the case. Those marketing materials falsely claimed that the RIA did not have conflicts of interest when making investment recommendations to their clients. As an example, the RIA’s website claimed that the defendants would “never receive any incentives to use an investment in our client portfolios.” In fact, the defendants received millions of dollars from undisclosed compensation arrangements.
The SEC’s complaint also alleged that the owner went to great lengths to hide prior charges brought by the Commission, as well as his disciplinary history with the New York Stock Exchange. He hired internet search suppression consultants and instructed employees not to provide certain information to prospects. The consultants’ role was to make certain that a Google search for the investment adviser would not reveal his checkered past.
Allegations that the defendants breached their fiduciary duty
As investment advisers, the owner and the RIA owed their clients an affirmative duty of the utmost good faith. They must also provide full and fair disclosure of all material facts and may not mislead their clients. Fiduciaries owe a duty to inform clients about their conflicts of interest, which might cause them to render investment advice that is not disinterested.
Among other allegations, the SEC’s complaint charged that the RIA and its owner breached their fiduciary duty by:
- Failing to disclose conflicts of interest pertaining to annuity purchases;
- Failing to disclose conflicts of interest related to the use of third-party asset managers for advisory services; and
- Placing their own interests above those of their clients.
As a result of their fraudulent conduct and breaches of fiduciary duty to their advisory clients, the defendants were charged with violating federal securities laws.
Additional SEC allegations
The SEC’s complaint alleged that the owner and the RIA committed a number of other compliance violations, including making material misrepresentations and omissions in Forms ADV. They also failed to timely amend and deliver Forms ADV.
The adviser knew, or was reckless in not knowing, that the firm did not maintain certain books and records. In particular, the RIA failed to keep records detailing when the firm delivered its Form ADV Part 2A to clients. The firm also failed to retain copies of its advertisements, customer complaint documentation, and annual compliance reviews.
The RIA knew, or was reckless in not knowing, that the firm failed to adopt and implement written policies and procedures reasonably designed to prevent violation by the firm and its supervised persons of the Advisers Act and rules promulgated thereunder. Not surprisingly, the complaint alleged that the RIA’s compliance program was inadequate.
The complaint can be accessed at https://www.sec.gov/news/press-release/2019-274.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.