Two Boston-area financial advisors pleaded guilty to charges that they misappropriated about $500,000 in client money for personal investments and expenses while affliated with Morgan Stanley.
James Polese and Cornelius “Cory” Peterson entered guilty pleas Wednesday in U.S. District Court, District of Massachusetts, in Boston to charges of adviser fraud, bank fraud and conspiracy. Polese was also charged with aggravated identity theft.
Polese and Peterson were also charged with fraud in an SEC civil complaint filed Wednesday in the same U.S. District Court.
The criminal conspiracy and fraud charges each provide for sentences of up to five years in prison, three years of supervised release and a fine of $250,000 or twice the gross gain or loss.
According to the U.S. Attorney’s Office for the District of Massachusetts, Polese and Peterson exploited their fiduciary relationships to conduct three schemes to misappropriate and misuse client assets without their knowledge and consent.
In the first scheme, Peterson became director of a private fund raising money for a wind-farm investment, telling Morgan Stanley that he would not solicit the firm’s clients as investors, yet did so with at least one client without authorization. The SEC further alleges that the wind farm investment was contrary to the client’s stated risk tolerance and investment objectives. The wind farm investment ultimately failed, resulting in the loss of $100,000 of client money.
In a second alleged scheme, the criminal case claims that Peterson and Polese used $400,000 of an elderly client’s money in May 2015 as collateral to back a letter of credit for the wind farm investment without the client’s knowledge or authorization. According to the SEC, this caused the client to incur $12,000 in additional fees for the issuance and renewal of the credit.
The SEC also alleges that Polese breached his fiduciary duty in July 2015 by asking the same elderly client to loan him $50,000 to pay for his children’s college expenses despite knowing that Morgan Stanley prohibited such behavior. According to the complaint, the loan was not documented, Polese provided no collateral to the client, made no agreement on interest payments, and has not yet repaid the loan.
In March 2016, Polese and Peterson also allegedly used $100,000 of the same elderly client’s money to each make $50,000 investments “for their own benefit” in a private real estate fund. As part of this third alleged scheme, the SEC claims that Polese and Peterson wired $350,000 from a loan account in the client’s name to the real estate fund. The accused allegedly forged the client’s signature and falsely stated that the transaction was verified with the client by telephone.
The real estate fund’s representatives allegedly contacted Polese after recognizing that $350,000 had been routed to cover two $50,000 investments. According to the SEC, Polese told them that the overpayment was intended to pay for his children’s tuition expenses and requested that the excess $250,000 be wired into his personal bank account.