As reported on SEC.gov, in Press Release 2010-174, September 29, 2010.
The Securities and Exchange Commission today charged a Bay Area investment adviser with securities law violations for switching his clients between two related investments without informing them that the switch would boost the commissions they had to pay.
The SEC found that San Ramon, Calif.-based Valentine Capital Asset Management (VCAM) and its principal John Leo Valentine failed to disclose material conflicts of interest when they advised clients to exchange one series of an investment fund for another series in the same fund. These moves had the effect of increasing the commission stream to VCAM and Valentine. VCAM and Valentine agreed to settle the SEC’s case without admitting or denying the findings. They will return more than $400,000 in excess commissions to their clients and pay a $70,000 penalty.
“Investors are entitled to understand the fees they are being charged by their advisers and whether any conflicts of interest might be influencing the investment advice they are receiving,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Despite knowing that switching between funds would increase the costs to their clients, VCAM and Valentine did not fully disclose their conflicts in recommending the investment strategy.”
According to the SEC’s order instituting an administrative proceeding against Valentine and VCAM, Valentine advised his clients in mid-2005 to invest in Series A of a managed futures fund. Investors paid a 4 percent annual commission, which terminated in approximately 2½ years once an investor had paid 10 percent in total commissions. In December 2007, when many clients had reached or were close to reaching the 10 percent threshold after which they would no longer pay commissions, Valentine began advising clients to exchange at least some portion of their Series A holdings for Series B of the same fund — a largely identical investment but with higher leverage. But by making the switch, clients would have to restart the process of making the 4 percent annual commission payments. VCAM and Valentine did not clearly disclose this conflict of interest when advising clients to make a fund switch that would restart their commission charges.
The SEC’s order finds that as a result of Valentine’s recommendation, approximately 140 clients switched from Series A to Series B. The majority of those clients had reached or neared the 10 percent commissions cap. Therefore, this switching activity generated more than $400,000 in additional commissions for VCAM and Valentine.
The SEC’s order finds that VCAM and Valentine breached their fiduciary duties to their advisory clients. In settling the case, VCAM and Valentine have agreed to cease and desist from violating Section 206(2) of the Investment Advisers Act of 1940 (an antifraud provision), receive censures, pay the $70,000 penalty, and return $400,000 in excess commissions to their clients.
Sahil W. Desai, Sheila O’Callaghan and Cary Robnett of the SEC’s San Francisco Regional Office conducted the investigation.
If you (or someone you know) have questions or concerns about your investments or other securities matter, please contact the Law Offices of Mitchell S. Ostwald at 916.388.5100 or email us at info@molaw.com
