Articles Posted in RIA

Stoltmann Law Offices, a Chicago-based securities, investor, and consumer rights law firm has spoken to victims of the DeepRoot Funds scam and continues to investigate claims against third parties to recover these losses. On August 20, 2021, the Securities and Exchange Commission filed a complaint against Robert J. Mueller, DeepRoot Funds, LLC, Policy Services, Inc., and several other “relief defendants” alleging that Mueller and DeepRoot abused their roles as investments advisors to the two primary DeepRoot funds; the 575 Fund, LLC and the Growth Runs Deep Fund, LLC. The SEC flat-out alleges that Mueller used these funds as his personal piggy bank, including paying for weddings to wives number 2 and 3, and paying for the divorce from wife number 2.  Investors are likely looking at a total loss of funds invested amounting to nearly $58 million. Because the SEC has already gone after Mueller and the Funds, investors need to look for viable third parties that could have liability for investor losses.

The first and most obvious target for investors here would be the financial or investment advisor that solicited the transactions in the first place.  If your RIA or broker solicited you to invest in DeepRoot, it is almost certain this solicitation constituted a breach of fiduciary duty. RIAs will, with a straight face, ask clients in these situations rhetorically “how were we supposed to know?” Well, the investment advisor with the licenses, training, education, and statutory fiduciary duties to their clients are paid to know.  Whether your advisor is a FINRA registered broker or a Registered Investment Advisor (RIA), they have obligations to understand and know the products they sell to their clients.  On their faces, these DeepRoot Funds were unregistered, private, unproven, and speculative private-investment plays. Right there is enough information to disqualify these funds for investment by almost every retail investor in America.

To put it bluntly, the law obligates fiduciary investment advisors to understand the risks and characteristics of the investments they offer to their clients. Failing to do so constitutes a breach of a fundamental and basic duty. Investment advisors can be liable to their clients for this fundamental breach of duty. How are they supposed to know? They are paid to know and they are licensed professionals who are obligated to know whether the fund that are recommending uses investor funds to legitimately invest, or, as with DeepRoot, used investor funds to pay for divorces, a wedding, amongst other abuses.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with broker-advisors affiliated with the Cetera financial group.  The securities regulator FINRA recently fined three Cetera Financial Group broker-dealers $1 million, claiming that Cetera’s “supervisory systems and procedures were deficient when handling securities transactions.”

Like many advisory firms, Cetera employs representatives who are “dually registered,” meaning they are broker-dealers and registered investment advisers. In the Cetera case, their representatives managed more than $80 billion in assets across 47,000 accounts. According to U.S. Securities and Exchange Commission (SEC) exams conducted in 2013, 2015 and 2017, Cetera was “aware of the supervisory deficiencies.”

Without admitting or denying the allegations, Cetera recently signed a FINRA letter of Acceptance, Waiver, and Consent and agreed to FINRA’s sanctions, which included a censure and an agreement that they would review and revise, as necessary, systems, policies and procedures related to the supervision of dually-registered reps’ securities transactions, according to ThinkAdvisor.com.

Stoltmann Law Offices previously posted about Scott Wayne Reed, former broker at Wells Fargo Advisors, selling away to his customers, including customers of Wells Fargo. On December 15, 2020, the Arizona Corporation Commission filed a “Notice of Opportunity for Hearing Regarding Proposed Order to Cease and Desist, Order for Restitution, Order for Administrative Penalties, Order for Revocation and Order for Other Affirmative Action” against Reed, his wife, Sarah Reed, Pebblekick, Inc. and Don K. Shiroishi, the Chief Executive Officer and President of Pebblekick.

According to the ACC’s notice, Mr. Reed sold at least $3.5 million of investments in short-term, high-interest notes issued by Pebblekick. Mr. Reed sold these notes as offering an annualized rate of return of sixty-percent (60%). In turn, Pebblekick paid at least $191,340 to Reed. He sold these notes to clients as “100% safe” investments and represented that he also invested in Pebblekick. He went as far as personally guaranteeing $100,000 of the $200,000 investment made by one investor.Reed also sold other outside investment to customers, which he alleged were connected to Pebblekick, including but not limited to Precision Surgical, Mako Studio, and Ascensive Creator.

Reed was a registered representative of Wells Fargo Advisors at the time that he sold this investment, but did not disclose that he was selling notes in Pebblekick or that he received nearly $200,000 in commissions and fees for selling Pebblekick. According to the ACC, “when Reed’s firm reported him for potentially selling away and the Securities Division requested Reed to provide information and documents concerning the allegation, Reed impeded the Division’s investigation by providing responses that were false, incomplete, and misleading.”

Stoltmann Law Offices is investigating claims made by the Securities and Exchange Commission (SEC) against Robert Gravette, Mark MacArthur, and their Registered Investment Advisory firm, Criterion Wealth Management Insurance Services, Inc. According to the complaint filed by the SEC on February 12, 2020, Gravette and MacArthur orchestrated a scheme whereby they funneled their clients’ money into four private placement funds without disclosing that the fund managers, with whom they were personal friends, paid them compensation in excess of $1 million for doing so. This compensation arrangement was recurring, so Gravette and MacArthur had an undisclosed financial incentive to keep their clients’ money in these funds, as opposed to allocating the money elsewhere, when appropriate.  Further, the huge fees Gravette and MacArthur received reduced the investment returns that the investors would have otherwise received.  The SEC alleges that these acts violated the fiduciary duties owed by Gravette and MacArthur to their investment advisory clients, and constituted fraud.  The SEC complaint alleges an impressive list of federal statutory violations, including Sections 206(1), 206(2), 206(4), and 207 0f the Advisers Act, 15 U.S.C. sections 80b-6(1), 80b-6(2), 80(b)-6(4), and 80b-7, and Rule 206(4)-7 thereunder.

At all times relevant to these allegations, both Gravette and McArthur were dually registered representatives with a FINRA registered broker/dealer called Ausdal Financial Partners. According to the SEC, Ausdal Financial was involved in these transactions because Criterion opened accounts for them at Ausdal and the private placement funds were held on Ausdal’s account statements.  Under FINRA Rules and regulatory notices, Ausdal Financial, at all times relevant, had a duty to supervise the disclosed Advisory activities of its registered representatives.  See FINRA Rule 3280, NTMs 91-32, 94-44, and 96-33.  The dual-registration of investment advisors creates supervisory challenges for brokerage firms like Ausdal because under SEC Rules, they must maintain and record transactions like those entered into by their dually registered agents on their books and records, or its a violation.  Since they must maintain transaction records which they did by virtue of holding these funds on their account statements, they also must supervise those transactions and the activities of their registered representatives, even if they appeared to be acting solely on behalf of their advisory firm. FINRA does not care and neither should the victims of this scam, which was executed in plain sight.  Any competent compliance department would have supervised the transitions in these real estate private placement funds.

The very nature of these funds being “private placements” would have required an added measure of scrutiny by Ausdal compliance. Private placements tend to be speculative and exposed investors to unique risks like lack of liquidity, concentrated risk, key-man risk, and management risk not typically found in publicly traded investments like mutual funds.  The most substantial issue with a private placement is that they typically pay their brokers very high commissions compared to more standard investments.

Stoltmann Law Offices is investigating claims on behalf of defrauded victims of California Registered Investment Advisor Strong Investment Management. According to a complaint filed by the SEC on February 21, 2018, Strong and its President and sole owner Joseph B. Bronson defrauded its advisory clients by engaging in what is called a “cherry picking” scheme.   The complaint alleges that for at least four years Bronson abused his clients’ trust by earmarking profitable trades to himself while booking the losers in his clients’ accounts.  The complaint also alleged that Bronson and Strong misrepresented the trading strategy they were engaging in, stating that all trades were allocated pursuant to a pre-trade allocation statement. In reality, alleged the SEC, Bronson reaped substantial personal profits to his clients’ detriment.

On September 25, 2019, the SEC obtained a final judgment against Bronson and Orange County-based Strong Investment which were ordered to pay over $1 million in restitution to defrauded investors. Bronson also faces a lifetime bar from the securities industry. Cherry-picking schemes like that engaged in by Bronson are fairly common unfortunately.  On September 20, 2018, a Louisiana based investment advisory firm, World Tree Financial, was charged by the SEC with orchestrating a $54 million cherry picking scheme. In January 2017, the SEC uncovered another cherry-picking scheme engaged in by Massachusetts based investment advisory firm Strategic Capital Management with a $1.3 million cherry picking scheme.  The list of investment advisors that have engaged in this scheme goes on and on.

Cherry Picking schemes are pretty easy to execute which is why they’re fairly common.  A lot of investment advisors use omnibus accounts to trade their clients’ investments in bulk and then allocate the gains and losses directly to client accounts pursuant to an allocation practice. These practices have to be disclosed on the advisory firm’s Form ADV, but no one is looking over their shoulder to make sure these allocations are done correctly. No one audits these accounts to make sure the investment advisor, who is provided full discretion to execute these transactions, is not cherrypicking or skimming off the top.  The only entity that should be aware of this sort of scam is the brokerage firm through which these cherry-picking schemes are executed.

No yield hungry investor wants to miss out on the next Google, the next big thing.  But as this Securities and Exchange Commission civil prosecution shows the only big things in some start-ups may be fraud.  A number of high net worth individuals thought an Orange County, California investment adviser was appealing.  But they were mistaken and taken to the cleaners for $14 million for undisclosed and excessive fees, claims the SEC.

According to an SEC court filing, Stuart Frost and his investment advisory firm, Frost Management Company, raised $63 million from the investors to put into another firm he owned, Frost Data Capital (FDC) that was supposedly performing operational support and other services to help incubate a portfolio of start-ups.  In reality, much of the money was said to have been diverted to fund a lavish lifestyle for him which included a boat, luxury cars and an archery range.

“When Frost needed more cash to fund his lavish lifestyle, he created new portfolio companies and, after investing more fund capital into the new companies, FDC then extracted even more incubator fees,” according to the SEC complaint.  The SEC is alleging Frost and his investment advisory firm violated their fiduciary duties by keeping the super-charged fees hidden from the investors.

CNBC
FOX Business
The Wall Street Journal
Bloomberg
CBS
FOX News Channel
USA Today
abc NEWS
DATELINE
npr
Contact Information