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SEC charges San Diego-based investment adviser with fraud

Apr 15, 2014 @ 3:02 pm

By Mason Braswell

sec, investment adviser, revenue sharing, kickback
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The Securities and Exchange Commission has charged a San Diego-based investment advisory firm and its executives with breach of fiduciary duty and fraud, claiming the firm received undisclosed kickbacks for recommending investments to clients.

The firm, Total Wealth Management Inc., put around 75% of its 481 client accounts into a family of proprietary funds known as Altus Funds, according to the complaint. Total Wealth then invested those assets into outside funds with which the firm had established a revenue-sharing agreement, according to the SEC. The regulator said that constituted a conflict of interest because the agreements were not disclosed to clients.

“Investment advisers owe a fiduciary duty of utmost good faith, and full and fair disclosure to their clients,” said Michele Wein Layne, director of the SEC's Los Angeles Regional Office. “Total Wealth violated that duty with its pervasive practice of placing clients in funds holding risky investments while concealing the revenue-sharing fees they paid themselves.”

The firm's founder and chief executive, Jacob Cooper, along with the chief compliance officer, Nathan McNamee, and its co-founder and former chief compliance officer, David Shoemaker, created business entities to further conceal the fact that they were receiving the payments, according to the SEC's complaint.

Mr. Cooper also mislead investors about the level of due diligence it was doing on investments selected by Altus Funds, the SEC said.

“Cooper is responsible for selecting the investments recommended by Total Wealth and held by the Altus Funds, and he identifies those investments mainly through word of mouth,” the complaint said.

The SEC's complaint did not disclose the outside funds in which client assets had been invested.

Mr. Cooper and others at the firm did not return calls requesting comment.

Dan Bernstein, a director of research and development at MarketCounsel, said that revenue-sharing agreements are not always illegal, but become can be an issue if they are intentionally covered up.

“If these individuals were able to show that these revenue-sharing agreements were in the best interest of clients and they properly disclosed the revenue sharing, this may well have not been an issue,” he said.

Mr. Cooper, moreover, was not dually registered as a broker-dealer, according to records with the Financial Industry Regulatory Authority Inc.

Mr. Cooper resigned from Sun America Securities in 2005 after allegedly forging signatures on account application paperwork, according to the complaint.

Some of the revenue-sharing agreements had been in place since 2008, the complaint said. The SEC has ordered the firm to cease-and-desist, and is seeking undisclosed punitive and remedial fines.

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