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.