SEC Prevails in Jury Trial Against IA and Principal

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The Commission prevailed in another jury trial this week, securing a favorable verdict against a registered investment adviser, Sage Advisory Group, LLC, and its principal, Benjamin Grant. SEC v. Sage Advisory Group, LLC, Civil Action No. 1: 10-cv-11665 (D. Mass.).

The action centered around Mr. Grant’s efforts to transfer his brokerage clients to his newly formed advisory service, Sage. Prior to October 2005 Mr. Grant was a registered representative at broker dealer, Wedbush Morgan Securities in Los Angeles, California. He had a substantial book of business with over 300 customer accounts holding more than $100 million in assets. Most of those assets were managed by First Wilshire Securities Management, Inc., a local investment adviser.

Mr. Grant resigned from Wedbush at the end of September 2005. He established Sage Advisory. In an effort to transfer his business to Sage, Mr. Grant sent a letter to each of his clients stating:

1) Sage had been formed to handle investments;

2) At the suggestion of First Wilshire, their brokerage accounts were being moved from Wedbush to Charles Schwab & Co., Inc.;

3) Customer charges would change from a 1% management fee paid to First Wilshire plus a brokerage fee to Wedbush to a 2% wrap fee paid to Sage; and

4) Historically a wrap fee was less expensive, according to First Wilshire.

To avoid any disruption in management by First Wilshire, clients were instructed to execute an enclosed form which established Sage as their investment adviser and Schwab as the custodian for their brokerage accounts. At the time First Wilshire was delivering above average returns.

Some customers raised questions regarding the proposed arrangement. In response Mr. Grant told them that if they wanted to retain First Wilshire they had to transfer their business to his new firm and Schwab because First Wilshire would no longer manage accounts at Wedbush.

Virtually all of Mr. Grant’s brokerage clients followed him to Sage and became advisory accounts. This more than doubled his income from less that $500,000 in 2004 and 2005 to over $1 million in 2006 and 2007.

The representations made to the clients to induce them to transfer their accounts were false, according to the SEC’s complaint. Wilshire had not suggested the transfer of accounts from Wedbush to Schwab. Nor had the firm refused to continue managing the accounts at Wedbush. Accordingly, clients did not have to transfer their accounts. Mr. Grant also failed to inform the clients that because of the reduction in brokerage by transferring from Wedbush to Schwab, the only person that would likely benefit from the new 2% wrap fee was him.

The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4), 207 and 204A. The case was submitted to the jury on Counts based on Advisers Act Sections 206(1), 206(2), 207, 206(4)) and 204A. The jury returned a verdict in favor of the SEC on each except the Section 207 claim. See Lit. Rel. No. 23066 (August 13, 2014).

 

Topics:  Enforcement, Enforcement Actions, Investment Adviser, Jury Trial, SEC

Published In: Business Torts Updates, General Business 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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