BROWSE BY TOPIC
- Bad Brokers
- Compliance Concepts
- Investor Protection
- Investments - Unsuitable
- Investments - Strategies
- Investments - Private
- Rules & Regulations
- Bad Advisors
- Boiler Rooms
- Terminations/Cost Cutting
- Wall Street News
- General News
- Donald Trump & Co.
- Regulatory Sanctions
- Big Banks
Stories of Interest
- Sarah ten Siethoff is New Associate Director of SEC Investment Management Rulemaking Office
- Catherine Keating Appointed CEO of BNY Mellon Wealth Management
- Credit Suisse to Pay $47Mn to Resolve DOJ Asia Probe
- SEC Chair Clayton Goes 'Hat in Hand' Before Congress on 2019 Budget Request
- SEC's Opening Remarks to the Elder Justice Coordinating Council
- Massachusetts Jury Convicts CA Attorney of Securities Fraud
- Deutsche Bank Says 3 Senior Investment Bankers to Leave Firm
- World’s Biggest Hedge Fund Reportedly ‘Bearish On Financial Assets’
- SEC Fines Constant Contact, Popular Email Marketer, for Overstating Subscriber Numbers
- SocGen Agrees to Pay $1.3 Billion to End Libya, Libor Probes
- Cryptocurrency Exchange Bitfinex Briefly Halts Trading After Cyber Attack
- SEC Names Valerie Szczepanik Senior Advisor for Digital Assets and Innovation
- SEC Modernizes Delivery of Fund Reports, Seeks Public Feedback on Improving Fund Disclosure
- NYSE Says SEC Plan to Limit Exchange Rebates Would Hurt Investors
- Deutsche Bank faces another challenge with Fed stress test
- Former JPMorgan Broker Files racial discrimination suit against company
- $3.3Mn Winning Bid for Lunch with Warren Buffett
- Julie Erhardt is SEC's New Acting Chief Risk Officer
- Chyhe Becker is SEC's New Acting Chief Economist, Acting Director of Economic and Risk Analysis Division
- Getting a Handle on Virtual Currencies - FINRA
We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.
Stay Informed with the latest fanancialish news.
NEWSLETTERS & ALERTS
Investment Adviser Defrauded Pro Athlete and his Wife - SEC
by Howard Haykin
The SEC charged investment adviser Jeremy Drake with defrauding 2 clients - a high profile professional athlete and his wife - by deceiving them about the investment advisory fees they were paying. Drake allegedly went to elaborate lengths to conceal his fraud, including creating and sending false documents and masquerading as another person to corroborate his lies.
DEFENDANT’S BACKGROUND. Jeremy Drake, a resident of Los Angeles, CA, worked as a registered investment adviser representative of HCR Wealth Advisors from March 2009 until early July 2016, when HCR terminated him for his misconduct. Prior to his termination, Drake had been managing over $50 million in assets for more than 20 clients. Before joining HCR, from 2003 to 2009, Drake had been associated with 2 broker-dealers – UBS Financial Services and Morgan Stanley. According to the SEC, Drake is currently associated with an investment adviser registered with the State of California.
HCR Wealth Advisor / Heller Capital Resources is a Los Angeles, CA-based investment advisor (“RIA”) that's been registered with the SEC since 1999. As of February 2017, HCR reported having some 500 clients and $900 million in assets under management (“AUM”). HCR maintains its client accounts at Charles Schwab, which serves as the custodian for HCR’s clients’ securities and HCR trades on behalf of its clients through Schwab. Therefore, each HCR client typically has one or more accounts at Schwab, managed by HCR.
HCR charges its clients an annual management fee for IA services. The fees, which are billed quarterly in advance, are automatically deducted from the Schwab accounts. HCR’s management fees typically start at 1.0% of a client’s assets under management, but clients sometimes negotiate lower fees with HCR.
SEC FINDINGS. Drake met the clients (“the Clients” or “Mr. A” and “Ms. A”) in 2008, while he was working for Morgan Stanley. It was not until September 2009 that the Clients entered into an investment advisory relationship with Drake – about 6 months after he joined HCR Wealth Advisors. The Clients ultimately placed more than $35 million of their assets with Drake. Drake was the Clients’ sole contact at HCR during the time he acted as their investment advisor. At the time, the Clients agreed to pay an annual management fees equal to 1% of the assets under management. And, HCR would continue to charge the Clients a 1% management fee throughout the time they were Drake’s clients, which Schwab deducted each quarter from their various brokerage accounts and paid to HCR.
Yet, it was during a meeting in November 2012 that Drake told Ms. A and her assistant that, since 2010, the Clients had been paying a special “VIP” management advisory rate of between 0.15% and 0.20%. He explained that the Clients paid an initial fee of 1%, but then received periodic “credits” in their brokerage accounts that resulted in a “net” fee in the discounted range. Those representations were false, and Drake’s misrepresentations would continue until July 2016.
During the course of Drake’s deception, the Clients paid approximately $1.5 million in management fees - over $1.2 million more than Drake represented to the Clients that they were paying - and Drake received approximately $900,000 of those fees as incentive-based compensation.
Drake perpetrated this deception by repeatedly lying to the Clients and their representatives in person, in text messages, and over the telephone. He also sent the Clients and their representatives false and misleading emails, deceptive management fee reports, and a number of fabricated documents to corroborate his lies. The fabricated documents that Drake sent included falsified Schwab account statements where Clients’ securities were held and a falsified HCR investment advisory agreement.
In early 2016, Ms. A tried again to understand the management fees, this time with the aid of a dfferent assistant and a newly hired accountant. Over the next several months, Drake repeatedly made false and misleading representations to all 3 of them in their efforts to understand the fees.
In June 2016, Ms. A asked Drake to provide a contact person at Schwab who could explain the fee credits - saying she wanted a clear explanation of everything immediately. In response, Drake created a false persona named “Ron Stenson” whom he held out as an employee of “Charles Schwab Advisor Services” who could help explain the fee credit system. He created a misleading “Ron Stenson” email address from which he sent false and misleading emails and attachments. And he brought on an individual to play the role of “Ron Stenson,” who purportedly corroborated Drake’s story.
However, by the end of June, Ms. A came to believe that Drake had been lying to her about the management fees for years. At which point she contacted Schwab directly, and Schwab contacted HCR about Drake. On 7/4/16, Drake sent Ms. A an email in which he confessed about lying, but warned her that reporting his misconduct could result in bad publicity for her husband. She refused to cooperate.
The SEC charged Drake with violating and aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. The SEC seeks disgorgement of Drake’s ill-gotten gains plus interest, and penalties. The SEC investigation continues.
FINANCIALISH TAKE AWAYS. Two troubling aspects with regard to HCR's acccount arrangements.
► First, the Clients did not receive brokerage statements directly from Schwab. This should be standard operating procedures for all HCR clients, and failure to do so would be non-sensical and a critical deficiency in HCR's operations. One would expect that an RIA who manages $900 million of client assets would have a 'Customer Service' Dept. that is separate and apart from advisory managers. Such a set-up provides for segregation of duties as well as controls to ensure that all clients receive standardized service.
► Second, Jeremy Drake was the Clients' only contact in this advisory relationship. Such an arrangement is deficient, as well. It would have been prudent for HCR to assign at least one other investment manager to each and every client - to serve as a fall-back should the primary manager be unavailable, and to attend client consultations from time to time. This would strengthen client relationships and provide a control mechanism against fraudulent behavior.