A Phoenix-based advisor has been charged by the SEC with selling investments to clients without telling them about his personal stake in them.
Walter J. Clarke, 49, was also accused of exploiting a client who bought an ownership share in his firm, Oxford Investment Partners LLC, by inflating the value of the firm, according to a lawsuit filed today by the SEC.
The SEC alleges that Clarke advised clients to invest in two businesses-Cornerstone Lending Group, a Phoenix-based lending firm, and HotStix, a privately held company that makes golf club fittings-without disclosing that he co-owned one of the businesses and had financial ties to the owners of the other.
When both investments later failed and Clarke's own financial problems prompted him to sell a stake in Oxford to an unidentified client, he inflated the value of his firm by at least $1.5 million to make the client overpay by at least $112,000, according to the SEC.
"Investment advisors have a fiduciary duty to be forthcoming with their clients and act in their best interests," said Marshall S. Sprung, deputy chief of the SEC Enforcement Division's Asset Management Unit. "Clarke breached that duty by deliberately overvaluing the firm and staying mum on his personal ties to the recommended investments."
The SEC claims that Clarke convinced three clients in late 2007 and early 2008 to fund more than $300,000 in loans originated by Cornerstone Funding Group, co-owned by Clarke. The clients were never told that Clarke was a co-owner and would personally profit from successfully originated loans, according to the SEC.
Within months of the loans being funded, the borrowers defaulted, causing the clients to lose their investments, according to the SEC.
In November 2008, Clarke convinced four clients to invest about $40,000 in HotStix without informing them that the owners of HotStix were co-owners and paid consultants of Oxford, according to the SEC. Shortly after the clients made the investments, HotStix sought bankruptcy protection and the clients lost their money.
The SEC claims that amid Clarke's financial woes, he sold a client 7.5 percent of his ownership interest in Oxford Investment Partners LLC in March 2008. The client paid $750,000 based on Clarke's valuing Oxford at $10 million.
The SEC charges that Clarke used several ploys to fraudulently inflate Oxford's value: First, Clarke applied an excessive and baseless multiple to Oxford's 2007 annual revenue. Then he calculated Oxford's 2007 revenue by quadrupling Oxford's revenue in the fourth quarter of 2007-its most profitable quarter that year-and ignoring Oxford's lower revenue in the previous three quarters. Finally, he added a baseless $1 million "premium" to Oxford's valuation.
The SEC is seeking disgorgement of any ill gotten profits and civil penalties.