The Securities and Exchange Commission has charged a San Diego-area investment advisory firm and its founder and president with fraud for failing to disclose a conflict of interest to clients and for lying about the liquidity of a hedge fund they managed.
The agency alleges that Del Mar, Calif-based Western Pacific Capital Management LLC and its president Kevin O'Rourke urged clients to invest in a security without disclosing that Western Pacific would receive a 10% commission.
According to the SEC, Western Pacific and O'Rourke acted as brokers in the non-public offering of stock by Ameranth Inc. during 2005 and 2006. Ameranth paid Western Pacific a 10% "success fee." In all Western Pacific earned $482,745 in success fees as a placement agent for Ameranth.
The SEC also alleges Western Pacific and O'Rourke failed to register as a broker, failed to provide required written disclosures to clients, improperly redeemed one hedge fund investor's interest ahead of another's, and made material misstatements and omissions to clients regarding the fund's liquidity.
"Investment advisers have a fiduciary duty to act in the best interests of their clients and be forthcoming with them," said Marshall S. Sprung, Assistant Director in the SEC Enforcement Division's Asset Management Unit. "Western Pacific and O'Rourke fraudulently breached that duty by failing to disclose the commissions they would receive for the recommended investments and lying to clients about the liquidity of the fund they managed."
The SEC says that although Western Pacific and O'Rourke advised their clients to purchase the Ameranth stock, they failed to advise each client that Western Pacific and O'Rourke would financially benefit from their clients' purchases of stock, and failed to provide any clients with the required written disclosures regarding their role in the offering.
The SEC also alleges that from 2005 to 2008, Western Pacific and O'Rourke misrepresented the liquidity of The Lighthouse Fund LP, a hedge fund that they formed and managed. Western Pacific and O'Rourke repeatedly stated that only 25% of the Lighthouse Fund was invested in illiquid assets, when in fact, the agency says, 90% of its assets consisted of illiquid securities.
The SEC claims that Western Pacific used Lighthouse Fund assets to resolve a dispute with a client who no longer wanted his $800,000 of Ameranth stock. O'Rourke caused the fund to buy some of the stock and permitted the client to use the remainder of the stock to finance his investment in the fund. O'Rourke ultimately redeemed the client's interest in the fund for cash ahead of another client who had previously requested a full redemption.
The SEC has instituted administrative and cease-an-desist proceedings while it investigates the matter. Western Pacific couldn't be reached for comment.