A California investment advisory and insurance firm, and its former co-owners, were charged with breaching their fiduciary duty and cheating clients out of $16 million by failing to disclose significant financial conflicts of interest when recommending investments in private real estate investment funds, according to the Securities and Exchange Commission.
The complaint alleged that from 2014 to 2017, Criterion Wealth Management Insurance Services of Santa Clarita, Calif., Robert Gravette, 54, also of Santa Clarita, and Mark MacArthur, 52, of Newhall, Calif., recommended that their advisory clients invest more than $16 million in four private real estate investment funds without disclosing that the fund managers had paid them more than $1 million in income on top of the fees that defendants were already charging their clients directly.
The complaint further alleged that because the additional side compensation was recurring and depended on Criterion’s clients remaining invested in the subject funds, Criterion, Gravette and MacArthur were incentivized to keep their clients invested in the funds rather than allocate their capital elsewhere. The complaint also noted that the undisclosed compensation the parties at Criterion received for two of the private placement funds resulted in reduced investment returns for the defendants' advisory clients.
Criterion Wealth and its co-owners, the complaint said, owed their clients, who entrusted them with the discretionary management of their money, a fiduciary duty to act with loyalty, fairness and good faith. But they kept them in the dark. It also added that the undisclosed compensation arrangements rendered Criterion’s Form ADV filings with the SEC materially misleading, and no policies and procedures had been adopted and/or implemented at Criterion to prevent these compliance failures.
The complaint noted that Criterion, which offers discretionary asset management services, was registered with the SEC as an investment advisor until September 2018. It is currently registered as an investment advisor in California and Idaho, with Gravette being the sole owner and president.
After MacArthur left Criterion in June 2016, the complaint noted, he created M2 Financial LLC, state-registered investment advisor where he serves as president, managing member and chief compliance officer.
The SEC complaint, which was filed in the U.S. District Court for the Central District of California, seeks permanent injunctions from future violations of SEC provisions, disgorgement and prejudgment interest and civil penalties from Criterion, Gravette and MacArthur.