A broker who formed his own RIA has been charged with fraud by the Securities and Exchange Commission for allegedly lying to his clients so they would move more than $100 million in assets to his new firm.
The SEC filed the complaint in the Massachusetts U.S. District Court against advisor Benjamin Lee Grant and his firm, Sage Advisory Group LLC in Boston. Michael Unger, Grant's lawyer, says the facts will refute the SEC's charges.
"I think the complaint brought by the SEC is unfair and that the charges they are alleging overstate actual events," Unger maintains.
He adds this is the type of case that should concern other advisors. "If the SEC is second guessing and dissecting every word and sentence an advisor may send to clients, there's a chance that at some point in the future [other advisors] could be at risk if the SEC doesn't agree with what was said," Unger commented.
Grant, 38, worked as an independent registered representative for Wedbush Morgan Securities, a full-service broker-dealer based in Los Angeles, from December 2001 through December 2005 and as a registered rep for First Wilshire Securities from February 1998 through December 2001. At Wedbush, Grant used Pasedena, Calif.-based First Wilshire as money manager for virtually all of the assets in his more than 300 customer accounts, the SEC says. Grant resigned from Wedbush in September 2005 to form Sage, his own independent RIA.
Grant wrote a letter on Sage letterhead dated October 4, 2005, in which he told clients that First Wilshire suggested that their account custodian be changed from Wedbush to Charles Schwab & Co. The letter also told Grant's customers that the charge for their accounts was changing from a 1% management fee plus brokerage commissions to a 2% wrap fee. "We expect the new fee to be less expensive than the previous fee in heavy trading years and more expensive than the previous fee in light trading years. First Wilshire has indicated that the 'wrap fee' has historically been slightly less expensive for their clients," the letter says.
When some customers asked questions about the October 4 letter, Grant told them that if they wanted to retain First Wilshire as a money manager, they had to transfer their business to Sage and Schwab, the SEC says.
First Wilshire had not refused to continue managing customer assets at Wedbush nor suggested the transfer, the SEC says. Grant failed to tell his customers that because the switch from Wedbush to Schwab was going to significantly reduce the brokerage costs for their transactions, the only person likely to benefit from the new 2% wrap fee was himself, the SEC says.
"Grant's scheme to induce his brokerage customers to follow him to Sage was a success. Virtually all of his brokerage customers at Wedbush became his advisory clients at Sage, and his compensation more than doubled as a result-from less than $509,000 in 2004 and in 2005 to more than $1 million in 2006 and in 2007," the complaint says.
Unger responds the SEC is misrepresenting the facts. "I think the SEC case with respect to the letter is based on their interpretation and subjective reading of it, which we disagree with," Unger says. "What is not noted anywhere in the complaint is that Sage's clients who were invested with First Wilshire have seen their investments perform quite well over the years and ahead of standard indices."
The SEC is seeking an injunction prohibiting Sage and Grant from further violations of securities law, disgorgement of Sage and Grant's ill-gotten gains and civil penalties.