The United States Securities and Exchange Commission (SEC) recently filed a complaint in the United States District Court in the Central District of California alleging that an investment adviser had defrauded a professional athlete and his wife (the Clients) in violation of the Investment Advisers Act of 1940 (the Advisers Act). The individual defendant in the case was a registered investment adviser representative of an investment adviser registered with the SEC (the Adviser). At one point, the defendant managed over $50 million in assets for over 20 clients

According to the SEC's complaint, the defendant violated his fiduciary duty to his Clients. The SEC alleged that the defendant "lied to his Clients . . . about the amount [they] were paying in management fees, provided false and misleading information about those fees, fabricated and sent false documents, created a false persona to support his deception, and enlisted a confederate to assist in deceiving the Clients." The SEC asserted therefore that the defendant violated Sections 206(1) and (2) of the Advisers Act, which are commonly known as the anti-fraud provisions of the Advisers Act. The SEC also alleged that the defendant aided and abetted the Adviser's violations of Sections 206(1) and (2) of the Advisers Act. Interestingly, however, the SEC did not name the Adviser as a defendant in this case.

The SEC alleged that the defendant's fraud caused the Clients to pay $1.2 million more in management fees than the defendant represented. The SEC seeks relief that, among other things, permanently enjoins the defendant from violating the anti-fraud provisions of the Advisers Act, requires disgorgement of all funds received from his illegal conduct, and imposes civil penalties.

If the SEC's allegations are true, the defendant defrauded his Clients over many years and went to great lengths to conceal his fraud. These allegations are an example of egregious conduct that only tarnishes the reputation of the securities industry and its legions of law-abiding investment adviser representatives and financial advisers. Robust compliance policies and procedures are a critical component in preventing such conduct.

For a copy of the complaint, click here.