Doug E. Elstun promised in his practice to help former pro athletes make the transition to life off the playing field. But according to the Securities and Exchange Commission, he was gouging those clients with hidden fees and losing them millions on risky securities.
The agency said today that Elstun, principal of the now defunct Crossroads Financial Management in Kansas City, Mo., overcharged his former pro athlete clients—taking higher advisory fees than they had agreed on and adding fees for managing non-advisory assets like bank account balances, home equity, real estate and the value of their vehicles. The agency said he also fabricated advisory agreements with the higher percentages.
In some cases, clients who should have been paying 1% annual fees in their schedules were being charged 1.25%, the SEC said. Because of the added fees, clients were overcharged by some $360,000, the SEC said.
Elstun, who is 52 years old and a resident of Lenexa, Kan., also traded in high-risk securities like leveraged or inverse exchange-traded funds, the SEC claimed—investment vehicles unsuited to his clients’ investment goals—and misled the clients about the nature of the investments. As a result, the clients lost millions, the agency said.
“Between at least March 2013 and the end of 2018, Elstun invested the majority of his advisory clients in certain risky daily leveraged and inverse ETFs, holding these securities for long periods of time, and losing millions of dollars for his clients,” the SEC complaint said. “During this time period, Elstun made misleading statements to clients about these ETFs, and failed to disclose the risks associated with these ETFs in light of his trading strategy.”
Leveraged ETFs are investments that try to multiply the performance of regular indexes, while inverse ETFs seek the opposite performance of the indexes they follow. The Financial Industry Regulatory Authority (Finra) warned investors in 2009 that these products can be volatile and that their goals are daily in nature. Because of compounding, their performance over longer periods can stray far afield of their indexes, Finra said.
The SEC noted that two of the products Elstun traded were the ProShares Trust Ultra VIX Short fund (UVXY) and the ProShares Short VIX Short-Term Futures ETF (SVXY). The UVXY prospectus notes that an investor could lose the full principal value in a single day, suggesting products like these are to be used only as short-term tactical tools.
“The prospectuses for UVXY and SVXY cautioned that they were intended only for sophisticated investors and generally were intended to be used only for short-term holdings” the SEC complaint said. “Elstun bought UVXY and SVXY in various client accounts and held the products in the client accounts for months, and in many cases, years.
“For example, Elstun made numerous purchases of UVXY and two purchases of SVXY in the accounts of [one of his clients],” the complaint reads. “Elstun bought and held the vast majority of the UVXY and SVXY purchased in the accounts for at least several months, resulting in total losses exceeding $1.4 million. Of these purchases, Elstun bought approximately $1.17 million of UVXY that he held in the client’s accounts for over a year, resulting in realized and unrealized losses of approximately $1.1 million.”
He also misled investors by describing these products as hedges or insurance and telling clients he wasn’t holding them for as long as he was, the SEC said.