Jury Finds for SEC, Against Advisor Re Undisclosed Fees

Last week a jury in the Central District of California found in favor of the Commission in a case centered on sham transactions used by corporate insiders to essentially misappropriate unregistered shares of the company. The shares were then sold into the market through others who funneled the cash back to the insiders.

This week a jury in the District of Connecticut found in favor of the Commission in a case were an investment adviser disregarded its fiduciary obligations and lined its pockets, and those of its controlling shareholder, at the expense of clients. SEC v. Westport Capital Markets, LLC, Civil Action No. 3:17-cv-02064 (C.D. Cal. Verdict March 16, 2020).

Named as defendants in the action are: Westport, a dually registered investment adviser and broker-dealer. During the period the advisory was paid fees for investment advice and the management of client accounts. Defendant Christopher McClure is the President CEO, CFO and COO of the advisory. He also personally advised certain clients and had authority to make investment decisions for select clients.

Defendants, according to the complaint, charged clients for undisclosed mark-ups on certain securities and 12(b)-1 fees on certain mutual fund shares without disclosing these facts to the advisory clients involved. First, beginning in 2011, and continuing for about four years, Westport acquired certain shares at a discount from a group of underwriters. Specifically, the advisory entered into an arrangement with the underwriters pursuant to which it was able to purchase shares in underwritten offerings at a discount. Those shares were then sold to certain advisory clients at full price. The mark-ups were not disclosed to the clients.

Over the period the advisory clients paid the firm $1.7 million in advisory fees. In addition, the advisory received about $650,000 in undisclosed mark-ups from Mr. McClure’s advisory clients who purchased shares held in the firm’s account that had been acquired from the syndicate at a discount. Mr. McClure was paid by the firm from the net profits.

Second, during approximately the same period certain advisory clients purchased mutual fund shares that carried 12b-1 fees. The fees were not disclosed to the clients despite the conflict of interest. The advisory received about $130,000 from those fees. The complaint alleged violations of Advisers Act Sections 206(1), 206(3), 206(3) and 206(7).