A federal jury found an investment advisor liable for fraud after he allegedly enticed his former brokerage clients to transfer their assets from Wedbush to his RIA practice.
The SEC brought its complaint in September 2010, charging that Benjamin Lee Grant had engaged in a scheme to deceive customers about a transition in the management of their assets, inventing circumstances that compelled clients to move their assets to Sage Advisory Group, the independent RIA Grant set up in Boston, and ran as a sole proprietor upon leaving his brokerage.
After two hours of deliberation this week, the jury found Grant and his firm liable in the fraud charges, with the court due to set sanctions against the defendants at a later date.
The SEC is asking the court to require Grant and his firm to return the gains they made through the scheme and pay a civil penalty, and is seeking a permanent injunction barring Grant and any of his associates from engaging in conduct similar to what the commission described in its complaint.
Andrew Ceresney, the director of the SEC's enforcement division, sees the case as an object lesson for brokers looking to go the RIA route, and a reminder of the ethical standards involved in bringing their clients along with them.
"This case sends an important message to investment advisers that they must put the needs of their clients before their own," Ceresney says in a statement. "When brokers decide to convert their business to an investment advisory firm and want customers to follow them, they owe a duty of full and fair disclosure to those prospective advisory clients."
Attorneys for Grant did not immediately respond to requests for comment.
Prior to going independent, Grant had worked as a registered representative at Wedbush Morgan Securities, a California-based broker-dealer where he had approximately $100 million in customer accounts that were almost entirely managed by the advisory firm First Wilshire Securities Management.
The SEC's operative piece of evidence in the case was a letter, written on Sage Advisory Group letterhead, that Grant sent to clients dated Oct. 4, 2005. Grant advised them that First Wilshire had decided to move its accounts from Wedbush to Charles Schwab, and that Sage had been created to act as their "advisor and primary contact." Going forward, the letter explained, clients would be charged a 2% wrap fee instead of the 1% management fee plus commissions from trades.
"We expect the new fee to be less expensive than the previous fee in heavy trading years and more expensive than the previous fee in light trading years," Grant wrote. "First Wilshire has indicated that the 'wrap fee' has historically been slightly less expensive for their clients."
The SEC alleged that First Wilshire had indicated no such thing. The commission successfully argued that Grant's statements were "materially false and misleading" because First Wilshire had not, in fact, decided to move from Wedbush to Schwab. Nor had it not offered the claims about the historic advantages of the wrap fees that Grant cited in his letter, or authorized the transfer of accounts to Sage Advisory Group.
The SEC further cited Grant for failing to disclose how his compensation would change under discount broker and the wrap fee model. Following his clients' switch to Sage, Grant saw his compensation more than double from under $500,000 in 2004 and 2005 to more than $1 million in 2006 and 2007, the SEC said.
In an added twist, the SEC has another case pending against Grant involving his father, Jack Grant. In that case, the SEC charges that Benjamin Lee Grant and Sage violated the Investment Advisers Act by failing to disclose that Jack Grant, a lawyer and former broker who had previously been barred from association with any investment advisor, had in fact acted as an advisor himself while operating as an affiliate of Sage.
Jack Grant agreed to settle the charges last year, but the action against Benjamin Lee Grant and Sage is still pending, with a trial date yet to be set.