The Securities Exchange Commission (“SEC”) recently filed a complaint for fraud in connection with risky securities sold by a Registered Investment Advisor. The SEC complaint states that Tamara Steele and her investment advisory, defrauded retail investors by recommending high risk technology stocks with massive commission markups that were not disclosed to the clients. According the to the SEC complaint, from December 2012 through to October 2016 Steele and her wholly owned investment advisory Steele Financial marketed over $13 million of securities issued by a private company and was acting as a broker for the company.
The SEC complaint states that the high-risk securities were connected to a private issuer who the investment advisor had a relationship with. The registered investment advisor was receiving high commissions on these private securities in the range of 8 to 18% – a material piece of information that was not disclosed to investors in violation of the duty of care and duty of loyalty and breach of the investment advisors’ fiduciary duty. The SEC complaint goes on to state that Steele and Steele Financial marketed and sold these high-risk securities to clients even though neither entity was registered as a broker.
The clients who were marketed this product were not accredited investors. Rather most of the investors were employees of a school system. Steele was marketing these risky private securities while working for a broker dealer known as Comprehensive Asset Management. Steele was fired after disclosing to the broker dealer that she had been marketing the private securities without the firms approval or knowledge – a practice known as selling away. As stated in our post on Selling/Trading away FINRA rules mandate that an investor advisor provide prior notice to the broker dealer and receive approval for all private securities marketed. Brokers are required to report in writing.
According to FINRA broker check – Tamara Steele has now been involved in six different customer disputes alleging in addition to selling away, unsuitable investments, negligent account management and the sale of unregistered, nonexempt securities.
Investing with independent registered investment advisors can be an extremely risky for a number of reasons. First it is essential to explain the difference between a broker and an investment advisor. Brokers are regulated by FINRA while Investment Advisors are registered with either the SEC or the state securities agency where the Investment Advisor has his principal place of business. Investment Advisors must obtain a Series 65 license and if they manage more than $100 million they must register with the SEC.
The positive aspect of investing with an investment advisor as opposed to a broker, is that investment advisors are fiduciaries. In exchange for a fixed percentage of assets under management being charged by the investment advisor, the investor receives a fiduciary duty from the broker to act in the investors best interest. This should include divulging excessive commissions, potential conflicts, and material market events.
The risks are that many investment advisors’ market private placement securities not suitable to retail investors. Private placement securities lack liquidity and trade in opaque markets. Unlike bonds and stocks which trade on an open market and generally carry ratings from the major rating agencies, private placements are not openly traded and carry no ratings from Standard and Poor’s or Moody’s, making it very difficult to assess the strengths and weaknesses of the private security. Unsophisticated investors with limited investment experience are forced to rely on the affirmations of the investment advisor concerning the private security. The issue is that the commissions and mark ups for these securities are very high giving the investment advisor a huge incentive to market them even though they may not be suitable to their clients risk tolerance or investment objectives.
Investment advisors are mandated to disclose to clients any “soft dollar commission” arrangements to investors. These are commissions provided to the investment advisor for marketing certain investment products. Independent advisors have no compliance department and are making all these required disclosers almost completely at their own discretion.
Independent Investment advisors who commit market fraud and are sued by investors my not have the assets to pay the client back in a settlement. In the event of a lawsuit and favorable verdict against the investment advisor the client may have a hard time collecting money damages if the advisor declares bankruptcy. Furthermore many investment advisors have clients sign new account forms with arbitration clauses, making it a challenge for the investor to pursue an action in state court.
If you believe you have been the victim of market fraud committed by an investment advisor please contact the securities attorneys of Lubiner Schmidt and Palumbo for a consultation.