SEC Charges Adviser, Others In Fee Splitting Scheme

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A registered investment adviser and its principals were named as Respondents in a proceeding that centers on allegations of undisclosed revenue sharing arrangements, conflict of interest, violations of the custody rule and misrepresentations about due diligence claimed to have been undertaken regarding investments. In the Matter of Total Wealth Management, Inc., Adm. Proc. File No. 3-15842 (April 15, 2014) is a proceeding in which the Respondents are: The firm, a registered investment adviser; Jacob Cooper, its co-founder, sole owner and CEO; Nathan McNamee, its current president and CEO; and Douglas Shoemaker, its co-founder and former chief compliance officer.

Total Wealth is the owner and managing member of Altus Management, the general partner to the Atlas Funds. Atlas Fund Capital was founded by Mr. Cooper in 2009 to permit Total Wealth clients to pool their funds to meet the mandatory minimum investment requirements for certain funds. Two years later Mr. Cooper established the Atlus Portfolio Series pooled investment funds. Mr. Cooper makes all of the investments and recommendations. The investments of Total Wealth and the Altus funds are similar.

Total Wealth obtains new clients through paid weekly radio broadcasts, referrals, webinars, the website and other marketing activities. Prior to the formation of the Altus funds, Total Wealth clients could put their investment funds directly in the offerings recommended by the investment adviser. After the formation of the Altus funds, Total Wealth and Mr. Cooper began advising former clients to transfer their investments to the Altus Capital Fund. New Total Wealth clients were also offered the Altus Capital Fund.

Total Wealth established revenue sharing arrangements prior to the formation of the Altus funds. Under those arrangements other funds paid Total Wealth a fee for the placement of its clients’ investments in those funds. The revenue from these arrangements was distributed among the Respondents through a series of entities. While disclosure forms suggested that such arrangements “may” exist, the disclosures were materially incomplete and did not fully inform investors of the facts. Respondents McNamee and Shoemaker, two investment adviser representatives, were aware of these arrangements and the related misrepresentations and failed to fully disclose them to the clients.

Total Wealth also violated the custody rule. A proposed new auditor sent the adviser a draft engagement letter. It quoted, in part, statements from an SEC staff publication regarding the audits of pooled investment vehicles and the Custody Rule. Total Wealth elected not to retain the auditor. Rather, an unqualified accountant was hired to conduct the audit which is not in accord with the Rule. The firm selected also lacked independence since it was instructed to audit the financial statements for Altus Capital Fund after preparing them. Messrs. Cooper and McNamee are alleged to have aided and abetted the violation of the custody rule.

Finally, Total Wealth and Mr. Cooper misled Altus investors about the due diligence that was supposedly conducted with regard to investments selected. Potential investors were told that “rigorous due diligence” was conducted to select the investments. In fact Total Wealth received promotional materials, subscription agreements and unverified performance information for the underlying funds. It failed to review or analyze the documents or obtain any third party analysis.

The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It also alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. The proceeding will be set for hearing.

Topics:  Conflicts of Interest, Custody Rule, Due Diligence, Fee-Sharing, Fraud, Misrepresentation, SEC

Published In: Business Torts Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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