The U.S. Securities and Exchange Commission today charged a San Francisco Bay Area advisor with urging his clients to switch assets between related funds without disclosing that his firm reaped extra commissions as a result of the transactions.
John Leo Valentine, founder and president of Valentine Capital Asset Management in San Ramon, Calif., entered into a consent agreement with the SEC, under which he and his firm neither admitted nor denied any of the claims and agreed to pay a $70,000 penalty and return $400,000 in excess commissions to clients.
In an interview today, however, Valentine defended his actions, saying his clients ended up profiting. "I just am saying that the investment was suitable," he said. "It was very timely and profitable to the clients in 2008-a year when the market was down heavily. The clients walked away with a profitable return on that investment exchange."
Asked whether he disclosed the commissions that resulted, Valentine said, "I can't admit or deny anything. All I'm saying is the clients signed an exchange form."
The SEC charged that Valentine advised his clients in mid-2005 to invest in Series A of a managed futures fund that carried a 4% annual commission that terminated in about two and a half years, after an investor paid about 10% in total commissions. In December 2007, when most clients had reached or were close to reaching the 10% threshold, Valentine began advising clients to shift at least some assets from Series A to Series B of the same fund-a transfer that forced clients to once again start paying 4% annual commissions, according to the SEC.
The SEC charged that Valentine and his firm breached their fiduciary duties by not informing clients of the commission charges that would result from the transfers. About 140 clients switched from Series A to Series B, according to the SEC, leading to about $400,000 in additional commissions for Valentine and his firm.
"Investors are entitled to understand the fees they are being charged by their advisors and whether any conflicts of interest might be influencing the investment advice they are receiving," said Marc Fagel, director of the SEC's San Francisco Regional Office. "Despite knowing that switching between funds would increase the costs to their clients, VCAM and Valentine did not fully disclose their conflicts in recommending the investment strategy."
Valentine Capital has about $211 million assets under management and services more than 500 clients, according to the SEC.