WASHINGTON (Legal Newsline) - The U.S. Securities and Exchange Commission has permanently barred the CEO of an investor firm that allegedly paid off the commission with client funds from participating in the securities industry.
Brenda P. Murray, chief administrative law judge for the SEC, said in her initial decision Monday that Jacob Cooper, CEO of Total Wealth, operated a scheme to defraud his investors and a course of business that “operated as a fraud.”
“Despite his protestations to the contrary, it is clear that Cooper’s main motivation in selecting investments for his clients was the likelihood of revenue sharing and consulting fees for himself, not the potential return or suitability for his investors,” Murray wrote in the 47-page decision.
“Cooper’s fraudulent schemes and business practices allowed him to enrich himself on the backs of his investors, who collectively lost millions.”
The SEC sued Total Wealth and Cooper in a California federal court in February, alleging the company charged its clients administrative fees but didn’t provide information explaining the fees.
The lawsuit also alleges Total Wealth, a San Diego-based investment firm that runs several unregistered hedge funds, took client funds to pay a proposed settlement with the SEC.
The company allegedly told its clients it was closing down the Altus Fund -- the fund the company allegedly used to misappropriated funds -- and that some of the investments were “impaired” and withdrawals were restricted.
Of the $103 million in assets Total Wealth managed, about $41 million belonged to the Altus Fund, with 86 beneficial owners, according to the SEC’s lawsuit.
In her decision this week, Murray said Total Wealth and Cooper failed to adequately disclose the revenue sharing agreements.
The company’s written disclosures, she explained, merely disclosed that it “may” have revenue sharing agreements with various entities.
“However, these disclosures were made after Total Wealth had already entered into revenue sharing agreements with numerous entities and had invested enormous amounts of client funds in these entities,” the judge wrote.
“It was grossly inaccurate and misleading for an investment adviser to represent that revenue sharing agreements ‘may’ happen, when they had in fact already happened and governed a substantial portion of client investments.”
Cooper’s failure to properly disclose the agreements was a “material misstatement and omission,” Murray said.
In addition, the due diligence the company and Cooper claimed to conduct on their investments -- in sales literature, for example -- “bore no resemblance” to the rigorous efforts advertised and “fell woefully short” of industry practice, the judge wrote.
“Total Wealth had no written policies concerning due diligence until 2011 and then failed to properly document the due diligence that was conducted,” Murray wrote.
Because of his actions, the judge said “public interest requires” Cooper be permanently barred from participating in the securities industry.
A cease-and-desist order also will serve the public interest, Murray said.
“His total lack of understanding or remorse indicates a high likelihood of future violations and necessitates imposition of the broadest possible sanction,” the judge wrote. “For these reasons, a cease-and-desist order against Cooper is in the public interest and will be imposed.”
In addition, the judge deemed disgorgement of the revenue sharing and consulting fees earned appropriate.
“Cooper did not make investors aware that he was enriching himself with fees which clearly called into question his investment advice and allocations,” Murray wrote. “If Cooper had disclosed this information, many investors would not have chosen to invest with him, thereby depriving him of considerable monetary gain.”
The judge ordered Cooper to disgorge $982,057.72 in revenue sharing fees and $833,935.27 in consulting fees, and pay prejudgment interest on those amounts running from March 1, 2014 and from June 1, 2013, respectively, through the last day of the month in which disgorgement is paid.
Murray also assessed Cooper civil penalties in the amounts of $750,000 and $30,000.
The disgorgement amounts, prejudgment interest and civil monetary penalties will be used to create a Fair Fund for the benefit of the clients who were harmed by Cooper’s violations, the judge noted.
From Legal Newsline: Reach Jessica Karmasek by email at email@example.com.