The Securities and Exchange Commission today announced fraud charges against a registered investment adviser and its owner for allegedly engaging in self-dealing and failing to disclose material facts to clients regarding conflicts of interest, use of investor funds, and the risks of the investments they recommended.
In a complaint filed in U.S. District Court for the District of Massachusetts, the SEC alleges that Family Endowment Partners LP and its owner, Lee Dana Weiss, of Newton, Massachusetts, urged their clients to invest more than $40 million in illiquid securities issued by several related companies without disclosing that Weiss had an ownership interest in the parent company of these entities and received payments from these entities.
In addition, the SEC’s complaint alleges that FEP and Weiss recommended that their clients invest in entities that Weiss owned and controlled without disclosing that the investments would be used primarily to benefit FEP. FEP and Weiss also allegedly advised clients to invest in a consumer loan portfolio while concealing that Weiss himself would secretly pocket half of the clients’ profits from these investments.
“Investment advisers have an obligation to act in their clients’ best interests,” said Antonia Chion, Associate Director in the SEC’s Division of Enforcement. “However, as alleged in the complaint, FEP and Weiss repeatedly abused their clients’ trust and placed their own interests ahead of their clients’ interests.”
According to the SEC’s complaint:
- Between 2010 and 2012, FEP and Weiss advised 11 FEP clients and Weiss caused two FEP-affiliated hedge funds to invest more than $40 million in securities issued by subsidiaries of a French company that purportedly had designed methods to reduce the harmful effects of tobacco smoking.
- FEP and Weiss failed to disclose numerous conflicts of interest, including that Weiss had a financial interest in the French company and that Weiss and entities he controlled received more than $600,000 in payments from that company and related entities shortly after the FEP clients and hedge funds invested in it.
- In July 2011, Weiss recommended that an FEP client invest $2.5 million in one of the French company’s subsidiaries, even though he knew that the client’s money would be used to pay delinquent interest owed to other FEP clients.
- Between late 2012 and 2014, FEP and Weiss recommended that five FEP clients invest approximately $8.25 million in notes or shares of companies that were owned by Weiss. In at least one instance, FEP and Weiss failed to disclose to the FEP client that the note was for a company that Weiss owned. In other instances, FEP and Weiss failed to disclose that they intended to use funds to pay FEP’s financial obligations, rather than benefit the companies in which the clients invested. FEP and Weiss also failed to disclose the significant risk that the notes would never be repaid in light of the companies’ financial condition.
- In late 2011, FEP and Weiss recommended that FEP clients invest $5 million in a consumer loan portfolio. Weiss structured the transaction so that a portion of the investment proceeds, totaling more than $300,000, were paid to a purported third-party “manager.” FEP and Weiss did not disclose to clients that the “manager” was an inactive real estate company owned by Weiss’s close friend, which transferred the payments it received to Weiss and other third parties identified by Weiss.
The SEC alleges that FEP and Weiss violated the antfraud provisions of the federal securities laws and related SEC antifraud rules and that FEP violated and Weiss aided and abetted violations of SEC rules concerning custody of client assets and the need to provide timely disclosure of significant events.
The SEC’s investigation was conducted by Stacy Bogert with assistance from Bert Braganza, and supervised by Alexander Koch. The SEC’s litigation will be conducted by Kevin Lombardi, David Mendel, and Ms. Bogert. A related SEC examination was conducted by Eric Whitman, Peter DiMartino, Erin Harrison, Steven Morton, and Steven Dittert of the Philadelphia office’s investment adviser examination program.