A dually registered investment adviser and broker defended his investment strategy after being charged today by the Securities and Exchange Commission with switching clients in and out of related funds without telling them the changes would boost his commission.
A dually registered investment adviser and broker defended his investment strategy after being charged today by the Securities and Exchange Commission with switching clients in and out of related funds without telling them the changes would boost his commission.
The SEC said in a statement that John Leo Valentine and his firm, Valentine Capital Asset Management Inc. of San Ramon, Calif., failed to disclose conflicts of interest when advising clients to exchange one series of investment fund for another series of the same fund.
Those switches boosted commissions for the firm and Mr. Valentine, and both agreed to settle the case without admitting or denying the SEC's findings. The firm and Mr. Valentine are returning more than $400,000 in excess commissions to clients and paying a $70,000 penalty.
Mr. Valentine said he's happy the SEC's action was behind him and the firm, and defended the investment strategy.
“It was a timely exchange, it was suitable, and it was profitable to the clients in 2008, a year the markets saw turmoil,” he said. “I'm looking forward to working hard for our clients and making them money,” he said, declining to comment further on the matter.
Mr. Valentine, whose brokerage license is currently with Purshe Kaplan Sterling Investments Inc., was affiliated with Geneos Wealth Management Inc. from May 2005 to April 2008.
According to the SEC's statement, Mr. Valentine advised his clients in mid-2005 to invest in a Series A of a managed-futures fund. Investors paid a 4% annual commission, which ended in about two and a half years once they paid a total of 10%.
Mr. Valentine and his firm breached their fiduciary duty to their advisory clients, the SEC said. The SEC did not mention Geneos or any specific brokerage firm in its complaint but said that Mr. Valentine and the firm failed to disclose that they would “receive additional commissions through Valentine's association with the registered broker-dealer that executed clients' transactions.”
Russ Diachok, CEO of Geneos, was not immediately available Wednesday afternoon to comment.
Valentine Capital Management has $211 in assets under management and over 500 clients, the SEC said. At the end of 2007, he managed an additional $400 million as a broker, the SEC said.
According to the SEC, in December 2007, when many of Mr. Valentine's clients had reached or were close to reaching the 10% threshold and finished paying commissions, Mr. Valentine and the firm began advising clients to exchange at least some portion of their Series A holdings of the fund for Series B, the SEC said. That second fund was “a largely identical investment but with higher leverage,” the SEC said.
After making the switch, clients would again start paying the 4% annual commission, the SEC said, adding that the firm did not clearly disclose this conflict of interest. About 140 clients switched from the Series A to Series B of the fund, the SEC said.
Mr. Valentine said that, in 2008, the B Series of shares outperformed the A Series, with the B Series increasing more than 45%, and the A Series increasing 30%.
