A Snohomish, Wash., advisor allegedly took hundreds of thousands of dollars of client money to pay his taxes, travel the world and live rent-free.
Ronald A. Fossum Jr. was charged with fraud on Wednesday through a SEC complaint filed in the U.S. District Court for the Western District of Washington.
Fossum allegedly raised $20 million from more than 100 investors through unregistered securities offerings of three funds he controlled and owned: Accelerated Asset Group, Smart Money Secured Income Fund, and Turnkey Investment Fund, collectively known as the SMFG Funds.
Fossum and an accomplice solicited investments into the SMFG funds through the sale of promissory notes, often promising 8 percent to 12 percent annual returns purportedly through investing in distressed debt, oil and natural gas concerns, real estate, domain names and websites, stocks, bonds, options and other derivative investments.
In June 2016, each of the SMFG funds filed for bankruptcy. Today, the funds are being liquidated by a trustee, but in its complaint the SEC states that it is “not probable” that there will be sufficient assets for any meaningful repayment of the $20 million raised in the alleged scheme.
The SEC accuses Fossum of misappropriating investor funds to live rent-free in a home purchased by one SMFG Fund; to make more than $40,000 in mortgage payments; to pay for personal expenses; conduct “extensive” international travel to locations like Fiji, Africa, Hawaii and Mexico; and to pay $150,000 in personal taxes. SMFG assets were also allegedly used to buy life insurance policies for Fossum and his wife, to cover $83,000 in membership fees, to pay for $45,000 worth of automobile purchases and repairs, to eliminate $38,000 worth of credit card debt, and to buy $33,000 worth of exercise machines and parts. In addition, Fossum later rented out the home owned by the SMFG fund and allegedly pocketed $15,000 worth of rent payments.
According to the complaint, Fossum also breached his fiduciary duty to his funds by commingling their assets to satisfy each fund’s liquidity needs. Investors were told that funds like the Smart Money Fund had more than $40 million in assets and only $10 million in liabilities, when, in reality, the fund’s assets were closer to $14 million, by Fossum’s own estimates.
In June 2015, Fossum allegedly graduated into the ranks of Ponzi schemers. As his investors sought redemptions, the SEC alleges that the advisor continued to raise new funds while failing to disclose the liquidity crisis, in part to pay off redeeming investors.
The SEC also filed fraud charges alleging that Alonzo R. Cahoon, a Morgan, Utah-based advisor and an alleged partner of Fossum, helped to mislead investors and concealed income received from the scheme.
According to the complaint, Fossum and Cahoon told investors that they would receive a one-time management fee of $2,990 per investment unit sold and no additional compensation. Instead, the SEC alleges that the pair pocketed $20,000 or more in compensation from each investment.