Texas RIA and founder in hot water over crypto-backed model portfolio

An Austin, Texas registered investment advisor and its founder last month were charged with making misleading statements concerning the risks of one of its model portfolios, which was invested in crypto-backed investments and volatile exchange-traded funds. 

According to a cease and desist order by Washington State Department of Financial Institutions Division of Securities, Advisors Crypto Inc. and its founder, Eric W. Kendrick, also failed to disclose material information regarding its investment strategy and risks and made investment recommendations that were not suitable for senior citizen clients. 

The firm was formally named KG Advisors, which had clients and an office in Washington, before changing its title in 2023 to Advisors Crypto.

The firm has $11.2 million in client assets, according to its Form ADV.

Kendrick, the firm’s president, CEO and chief compliance officer, in an email to InvestmentNews wrote that he and the firm respectfully dispute Washington securities regulators' "characterization of these legacy matters." 

"The allegations relate to KG Advisors’ historical Washington advisory business during an extraordinary 2021–2022 market period, not Advisors Crypto’s current Texas-based, SEC-registered internet adviser model," according to Kendrick. 

"Importantly, these legacy issues were previously reviewed in a full SEC investigation by their San Francisco office," he wrote. "After a multi-year review, SEC staff concluded this January the matter with no recommendation of enforcement action."

Washington State plans to fine the firm $50,000 and fine Kendrick $30,000.

Starting in 2020, one of the firm’s in-house investment portfolios, called the Dynamic Model portfolio, began trading in crypto-backed investments, including Greyscale Bitcoin Trust – with the ticker GBTC – and Greyscale Ethereum Trust – or ETHE, according to Washington State’s order.

The portfolio also began buying and selling leveraged and inverse exchange-traded funds, complex investment products designed for trading and not buy and hold investors.

“Trading in these complex securities significantly increased the volatility and risk for retired senior citizen clients whose funds were invested in the Dynamic Model portfolio,” according to the order, which was dated June 17. “Many of these clients experienced significant volatility and declines in the value of their investment accounts in 2022.”

“Between approximately 2019 and 2021, KG Advisors representatives made misleading statements to advisory clients regarding the risk and volatility of its Dynamic Model portfolio,” according to Washington State. “KG Advisors representatives repeatedly represented to clients that the Dynamic Model was ‘conservative’ when in truth, it was not conservative and later experienced significant volatility and declines in value in 2022.”

According to his profile with the Securities and Exchange Commission, Kendrick has not been registered with is RIA since the end of 2023. Since then, he has settled three investor complaints for a total of $741,000, the last in 2024, with investors’ allegations similar to those of Washington State.

Kendrick denied all allegation of wrongdoing in those settlements, according to his SEC profile.