The Securities and Exchange Commission today charged the founder of an investment advisory firm located in suburban Chicago with defrauding investors in connection with a real estate venture for which his firm offered securities.
After an SEC examination of Kenilworth Asset Management LLC detected potential misconduct that was referred to the agency’s Enforcement Division, the ensuing investigation found that Robert C. Acri misled clients in the offer and sale of promissory notes issued for the redevelopment of a retail shopping center near Hammond, Ind. Despite saying the investments would specifically be used for this project and secured by a security interest in real estate, Acri misappropriated $41,250 of the proceeds for other uses and took no action to ensure that a security interest was recorded. Acri failed to disclose several other material facts to investors, including a primary purpose behind the investment offer – Kenilworth was attempting to rescue money that other Acri clients had previously invested in the developer of the same real estate project. Acri also concealed from investors that Kenilworth was to receive a five percent commission on each sale of notes.
Acri, a licensed attorney who lives in Winnetka, Ill., agreed to settle the SEC’s charges by disgorging the misappropriated investor funds and undisclosed commissions plus interest and an additional penalty for a total of approximately $115,000 in monetary sanctions. Acri also agreed to cease and desist from violations of the antifraud provisions of the federal securities laws and to be barred from the securities industry, from participating in penny stock offerings, and from appearing before the SEC as an attorney on behalf of any entity regulated by the agency. Acri resigned from Kenilworth in August 2012.
“Acri wasn’t honest with his clients and hid serious conflicts of interest from them while blatantly disregarding his fiduciary duty as an investment adviser,” said Robert J. Burson, senior associate regional director of the SEC’s Chicago office.
According to the SEC’s order instituting a settled administrative proceeding, Acri controlled Kenilworth’s bank accounts, hired employees, and made significant decisions about the firm’s policies, practices, and investment offers to clients. In early 2011, Acri decided to raise funds from Kenilworth clients for the Hammond, Ind., project when the project’s developer Praedium Development Corporation was unable to obtain financing from banks and other traditional lenders. As part of this effort, Praedium created a new entity Prairie Common Holdings LLC to issue the notes. One of Acri’s primary purposes for selling Prairie’s notes to Kenilworth clients was to give other Kenilworth clients who had invested in Praedium through a private fund several years earlier a chance to recover their money from that investment. Praedium had previously defaulted on a half-million-dollar loan from the private fund.
The SEC’s order finds that Acri purposely failed to disclose significant facts and conflicts of interest when offering the promissory notes to clients, who were not told about the prior loan or that Praedium and an affiliate had been delinquent in the payment of its mortgage, property taxes, and some contractor invoices. In fact, Acri did not even disclose that Praedium was the developer behind the Prairie project or that one of Praedium’s owners was having personal financial difficulties and was Acri’s personal friend.
According to the SEC’s order, Acri misappropriated $41,250 from the client funds that were supposed to be used to develop the Hammond, Ind. Project. Acri instead used that money to repay other clients and former clients, pay an individual to purportedly seek a loan for Praedium, and toward a settlement in a separate lawsuit that had been brought against him. Acri also did not inform investors about the $13,750 that Kenilworth received in commissions for selling the promissory notes.
The SEC’s investigation was conducted by James J. Thibodeau and Sruthi Koneru of the Chicago Regional Office and supervised by James A. Davidson. The examination that led to the investigation was conducted by Teresa A. Tyson, Matthew D. Harris, Gena M. Kusiak, and Erik J. Lillya of the Chicago Regional Office and supervised by Louis A. Gracia.