A federal jury in Connecticut found investment advisory firm Westport Capital Markets and its owner Christopher McClure guilty of defrauding their clients by repeatedly purchasing securities that generated undisclosed compensation that enriched themselves at their clients’ expense.
According to the US Securities and Exchange Commission (SEC)’s legal complaint, Westport and McClure violated their fiduciary duties and misused their authority when they repeatedly purchased securities in client accounts that generated undisclosed mark-ups and fees. The hidden mark-ups and fees were on top of the advisory fees that the clients already paid Westport to manage their investments. The undisclosed mark-ups and fees totaled approximately $780,000.
“The securities that generated undisclosed mark-ups for Westport and McClure were risky and caused substantial losses for clients,” the complaint said.
Between March 2012 and June 2015, Westport and McClure received undisclosed mark-ups when Westport sold securities from its proprietary brokerage account to client accounts. Federal law requires investment advisers to obtain client consent before completing each transaction when selling securities from an adviser’s own account to a client. The SEC said Westport was required to provide clients with sufficient information to make an informed decision, but did not.
“Westport was thus required—but failed—to disclose its financial conflict of interest to clients,” the complaint said. “Clients were deprived of key information they needed to evaluate Westport’s and McClure’s financial motives in buying these risky securities in their accounts.”
Additionally, Westport accepted mutual fund distribution, or 12b-1 fees, when it invested advisory clients in certain mutual fund share classes. However, the SEC said Westport and McClure did not tell their clients that the mutual fund investments generated this additional form of compensation for Westport and McClure. The regulator also said that in some cases Westport and McClure invested their clients in mutual fund share classes that charged a 12b-1 fee even when a share class of the same fund was available without the fee.
“Investment advisers cannot mislead their clients about conflicts of interest,” Adam Aderton, co-chief of the SEC’s Asset Management Unit, said in a statement. “Today’s jury verdict underscores the well-settled principle that investment advisers must provide accurate information so that their clients can make informed decisions.”
In September, a federal district court granted partial summary judgment in the SEC’s favor in its legal action against Westport and McClure. The court’s order held that the two acted at least negligently when they failed to disclose their conflicts of interest. The court had reserved judgment for a jury to determine whether Westport and McClure acted intentionally, knowingly, or recklessly under the antifraud provisions of the Advisers Act, and whether they acted willfully under the antifraud provisions of the act. Last week, the jurors returned a verdict in the SEC’s favor on those counts.
The SEC is seeking injunctive relief, disgorgement of ill-gotten monetary gains plus interest, and penalties.