A former Alabama investment advisor has been permanently barred from the financial services industry and ordered to pay a $50,000 civil penalty following a May 20 federal court judgment that held him liable for breaching his fiduciary duties to clients – duties he had explicitly promised to uphold when selling his advisory book of business.
The U.S. District Court for the Middle District of Alabama entered a final consent judgment against James Blake Daughtry, of Dothan, Alabama, resolving Securities and Exchange Commission allegations stemming from the 2019 sale of his advisory practice.
Following that sale, approximately $2.6 million was misappropriated from clients who had been moved to the acquiring firm, according to a statement from the SEC and court documents.
Without admitting or denying the SEC's allegations, Daughtry consented to a permanent injunction barring him from associating with any broker, dealer, or investment advisor, in addition to the civil penalty.
Daughtry had operated a solo advisory practice in Dothan, Alabama since 1999, serving 130 to 140 households with approximately $45 million in assets under management, according to the SEC's complaint filed in September 2022.
In March 2019, he sold his entire advisory and brokerage business – roughly $43 million in AUM across 150 clients and 250 accounts – to GraySail Advisors, a newly formed Wyoming limited liability company headquartered in Jacksonville, Florida, and owned by Jared D. Eakes.
The deal was structured such that Daughtry would receive $1 million payable over three years, $100,000 toward personal vehicles, a monthly stipend for life, and future stock options with a floor value of $1.5 million.
The SEC alleged that Daughtry conducted limited due diligence before completing the transaction, taking Eakes' at his word that GraySail managed approximately $100 million in assets. GraySail's own regulatory filings at the time, according to the SEC, showed just one client and total AUM of ten dollars at the time.
Daughtry moved 33 of his existing clients and recruited seven new ones to GraySail, bringing approximately $7.8 million in AUM to the firm.
The SEC's complaint alleged that Daughtry told clients – both those he transferred and those he newly recruited – that he would remain involved in their investment decisions. Specifically, the SEC said he told clients he would review any proposed transactions before they were executed and that their funds would not be invested without his input.
As the regulator tells it, he never followed through on those commitments and never informed clients that he had stopped.
Advisors who face fiduciary liability in cases like this often face scrutiny not just for what they did, but for what they failed to disclose. In Daughtry's case, he did not tell clients that he had received substantial compensation for transferring their accounts, nor did he reveal that GraySail had been granted broad discretionary authority over those accounts through a trading and management agreement. In some instances, clients only received the signature pages, according to the complaint.
That opened the door for Eakes to misappropriate approximately $2 million from 10 of Daughtry's former clients between May and November 2019, primarily through the sale of fictitious promissory notes purportedly issued by a company called Small World Capital, according to the SEC.
Eakes, who had no authority to act on behalf of Small World Capital, forged signatures on the notes and directed client funds to a Small World bank account before converting the proceeds for personal use. He used stolen funds to trade options in his personal brokerage accounts, pay down student loans and a business loan, and transfer $116,000 to a Las Vegas casino, the complaint states.
The former Merrill advisor ultimately faced the music in Florida last year, pleading guilty to wire fraud and bank fraud charges as part of a broader scheme targeting advisors looking to sell their businesses.
After clients raised concerns with Daughtry – one showed him a statement in October 2019 reflecting a $231,752 investment in an unsecured promissory note – he accepted Eakes' explanations without independent investigation, according to the SEC.
He repeated those explanations to clients even as red flags mounted, including a notice from the IRA custodian that it had terminated its agreement with GraySail after Eakes withdrew the firm's registration to avoid a regulatory examination.
Those issues apparently caught FINRA's attention. The brokerage industry regulator barred Daughtry in 2020, who until then had been registered as a broker with Kestra Investment Services, for not cooperating with an investigation into potentially fraudulent and unauthorized transactions within clients' accounts.
The SEC's Atlanta Regional Office, led by trial counsel Paul Kim and H.B. Roback under the supervision of M. Graham Loomis, pursued the Daughtry matter after the original September 2022 complaint – which named both Eakes and Daughtry – was severed and the claims against Daughtry were transferred to Alabama.
The Alabama Securities Commission issued orders to bar both Eakes and Daughtry at the state level in September 2022, concurrent with the original federal complaint.
The judgment against Daughtry – the permanent industry bar and $50,000 penalty – represents a significant enforcement outcome for an advisor who was not accused of stealing directly from clients, but of failing to protect them.
The SEC's case illustrates just how far investment advisors' legal obligation to act in clients' best interests could go under the Investment Advisers Act of 1940. It shows how advisors who transfer client accounts to another firm may still retain meaningful obligations, including the duty to disclose material conflicts of interest – such as compensation received for moving clients.
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