Sierra Financial Advisors, a KS-based investment adviser, and its 2 principals agreed to settle SEC charges they used their discretionary authority to invest client funds in entities owned by the principals without disclosing their conflicts of interest, and in contravention of statements in SFA’s Forms ADV.  

From 2004 through 2007, principals Michael Earl and Michael Breakey used the funds they had invested in these entities for undisclosed purposes - including the financing of other entities in which Earl and Breakey had interests.  The firm failed to maintain required records documenting its clients’ investments and failed to adopt and implement WSP's reasonably designed to prevent violations of the Advisers Act and rules thereunder.

According to SFA’s Form ADV Part I filings, assets under management ranged from $25.8 to $93.4 million, for anywhere from 116 to 904 accounts.  SFA and principals typically had full discretion to direct transactions in client accounts.Throughout the relevant period, Earl and Breakey controlled SFA and were the only persons responsible for managing SFA client accounts.

PPR Trust, LLC.   PPR Trust was formed in 2001 to make real estate investments and to provide funding and cash flow for other real estate ventures that Earl and Breakey owned and managed.  They raised about $2.2mn from sales of LLC membership interests to 24 investors, nearly all of whom were SFA clients.  They also used SFA’s discretionary authority to invest client funds in PPR Trust.  Earl then made net transfers of about 1.74mn from the PPR Trust to various other businesses that he and Breakey owned.  For years, Earl directed these affiliated companies to pay other obligations but not to repay the purported loans from PPR Trust. Earl loaned the bulk of the remaining PPR Trust investor funds to companies run by friends or acquaintances. These loans also were not repaid. Earl also received $5,000from PPR Trust and directed transfers totaling $7,500 from PPR Trust to SFA.

PPR Trust has been insolvent since February 2008 and has been dissolved.  Only 3 PPR Trust investors have received any return of their principal.C   

Southwinds Development MS, LLC.   Southwinds was formed to invest in residential and commercial real estate ventures in the Mississippi gulf region. Initial funding came from notes sold to SFA clients that would purportedly pay 10%-15% annual interest, with terms of 1 or 2 years.  Earl used SFA’s discretionary authority to direct the investment of at least $825,000 in Southwinds from at least eight SFA clients.  Southwinds funds were frequently transferred to Earl's personal bank account and to other businesses - he received direct payments of $119,000, and he made net transfers of approximately $439,000 from Southwinds to other businesses and properties in which he had an interest. 

Southwinds, too, has no funds or operations, and has been dissolved.  It never made a single payment on any of the notes it issued.

    Custody of Client Funds and Securities.   Although SFA’s client accounts were maintained by qualified custodians, SFA retained custody of client funds and securities because it had discretionary authority to withdraw and obtain possession of assets held in these accounts.  SFA was therefore required to keep various books and records relating to securities held by its clients pursuant to Advisers Act Rule 204-2(b), including records reflecting the ownership of and transactions in PPR Trust and Southwinds securities.

However, SFA did not maintain adequate records showing the purchases, sales, receipts, and deliveries of PPR Trust and Southwinds securities; separate ledger accounts for each client showing comparable information and the date and price of each purchase and sale of PPR Trust and Southwinds securities; or records for each PPR Trust and Southwinds security showing the names of clients with interests, the amounts SFA invested on their behalf in PPR Trust and Southwinds, and the location of each security. Earl and Breakey were responsible for maintaining records for the investments in PPR Trust and Southwinds that they directed.

    Disciplinary Action.   All 3 respondents asserted an inability to pay disgorgement, prejudgment interest or a civil penalty.  Accordingly, no payments were required.  SFA's RIA registration was revoked.  Earl and Breakey were barred from the industry.   [SEC Admin Proceeding 3-14067, 9/23]