The core principle of the Investment Advisors Act of 1940 is Investor protection. Its mission, and that of the SEC, is to shield investors from unscrupulous people who sneak into the position of an Investment Adviser Representative and claim to act as a fiduciary while violating the trust placed in them.
If you’ve committed to serving as a fiduciary on behalf of a client, it is imperative that you are open and honest in your disclosures about your practices and what you charge.
The following story highlights the depths to which one adviser stooped to perpetrate a fraud on a high-profile client.
In November 2012, Drake began to represent a high-profile professional athlete and his spouse and managed more than $30 million in assets on their behalf. He told the clients they were being charged a “VIP rate” between 0.15% and 0.20% AUM on their managed accounts.
In reality, the couple was being charged 1%. This discrepancy resulted in over $1.2 million in excess management fees over the course of several years, $900,000 of which went to Drake himself as incentive-based compensation.
Drake sent false and misleading emails, deceptive management fee reports, and outright fabricated documents to perpetuate the scam. When his clients began to catch on, he even went so far as to create a fictitious persona, a representative from their custodian, complete with a false email address to reassure them of the charges saying that the discrepancy was a credit that “primarily came from bond interest paid by Schwab.”
They refused to lie for him, and HCR terminated Drake on July 8, 2016.
However, the consequences of his actions did not stop there. The SEC charged Jeremy Drake with violating and aiding, and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. The SEC is seeking a permanent injunction, return of Drake’s allegedly ill-gotten gains plus interest, and penalties.
A U.S. District Judge ordered Drake to pay $1.2 million in restitution and serve both prison time and supervised release time. The SEC also barred Drake from future employment in the securities industry.
However, advisers must also guard against making unknowing slights to their clients. While Drake’s actions were reprehensible, a well-intentioned adviser could still drastically overbill his clients simply by failing to notice a billing error or by misrepresenting how they charge clients in their disclosure documents by not thoroughly reviewing them prior to filing.
How can you avoid these issues?