Washington, D.C., Sept. 24, 2008 (LAWFUEL) – The Securities and Exchange Commission today charged a San Luis Obispo, Calif.-based investment adviser and its owner with fraud for failing to disclose a material conflict of interest when recommending that their clients invest in a hedge fund that made undisclosed subprime and other high-risk investments.
The SEC alleges that WealthWise LLC and its principal Jeffrey A. Forrest recommended that more than 60 of their clients invest approximately $40 million in Apex Equity Options Fund, a hedge fund managed by Salt Lake City-based Thompson Consulting, Inc. (TCI). According to the SEC’s complaint, WealthWise and Forrest failed to disclose a side agreement in which WealthWise received a portion of the performance fee that Apex paid TCI for all WealthWise assets invested in the hedge fund. From April 2005 to September 2007, WealthWise received more than $350,000 in performance fees from TCI. Apex collapsed in August 2007, and WealthWise clients lost nearly all of the money they invested.
“Today’s action demonstrates that investment advisers will be called to account when, as we allege here, they receive undisclosed kickbacks for putting their clients into investments,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “We will aggressively pursue advisers who seek to line their pockets at the expense of their clients.”
Rosalind R. Tyson, Regional Director of the SEC’s Los Angeles Regional Office, said, “Investment advisers have a fiduciary duty to act in the best interests of their clients. As alleged in the complaint, WealthWise and Forrest breached that duty and committed fraud by failing to disclose the performance fee arrangement with TCI.”
The SEC’s complaint, filed in federal district court in Los Angeles, charges WealthWise and Forrest with violating the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. The SEC seeks an injunction, an accounting of the total amount of performance fees that WealthWise received from TCI, disgorgement of those fees, and financial penalties.
On March 4, 2008, the SEC filed a civil action in federal district court in Salt Lake City against TCI and three of its principals in connection with the collapse of Apex and another hedge fund.