The Securities and Exchange Commission today charged a Phoenix-based investment adviser and his firm for recommending investments without telling clients about his personal stake and exploiting a client who was buying an ownership share in the firm.
The SEC’s Enforcement Division alleges that Walter J. Clarke advised clients at Oxford Investment Partners LLC to invest in two businesses without disclosing the conflicts of interest that he co-owned one of them and had financial ties to the owners of the other. Both investments later failed. And when Clarke’s own financial problems prompted him to sell a stake in Oxford to a client, he fraudulently inflated the value of his firm by at least $1.5 million to make the client overpay by at least $112,000.
“Investment advisers have a fiduciary duty to be forthcoming with their clients and act in their best interests,” said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. “Clarke breached that duty by deliberately overvaluing the firm and staying mum on his personal ties to the recommended investments.”
According to the SEC’s order instituting administrative proceedings against Clarke and Oxford, Clarke convinced three clients in late 2007 and early 2008 to fund more than $300,000 in loans originated by Cornerstone Funding Group, a company co-owned by Clarke. However, the clients were never told that Clarke was a co-owner and would personally profit from successfully originated loans. Within months of the loans being funded, the underlying borrowers defaulted, causing the clients to lose their investments. In November 2008, Clarke convinced four clients to invest approximately $40,000 in HotStix, a privately-held company. The clients were not informed that the owners of HotStix were also co-owners and paid consultants of Oxford. Shortly after the clients made these investments, HotStix sought bankruptcy protection and the clients lost their money.
The SEC’s investigation further found that amid financial woes, Clarke sold a client 7.5 percent of his ownership interest in Oxford in March 2008. The client paid $750,000 based on Clarke’s valuation of Oxford at $10 million. However, Clarke used several ploys to fraudulently inflate Oxford’s value. First, Clarke applied an excessive and baseless multiple to Oxford’s 2007 annual revenue. Second, Clarke calculated Oxford’s 2007 revenue by quadrupling Oxford’s revenue in the fourth quarter of 2007 – its most profitable quarter that year – and ignoring Oxford’s lower revenue in the previous three quarters. Third, Clarke added a baseless $1 million “premium” to Oxford’s valuation.
According to the SEC’s order, Oxford and Clarke willfully violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.
The SEC’s investigation was conducted by Paris A. Wynn and Mr. Sprung, who work in the Los Angeles Regional Office and are members of the Enforcement Division’s Asset Management Unit. Securities compliance examiner Ryan Hinson conducted the related examination under the supervision of Daniel C. Jung. The SEC’s litigation will be led by Mr. Wynn and David Van Havermaat.