U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19815 / August 29, 2006
SEC v. Knox H. Fuqua and KHF Advisors LLC, Civil Action 2:06-0666 (Southern District of West Virginia)
Securities and Exchange Commission Sues Knox H. Fuqua and Registered Investment Adviser KHF Advisors, Inc. For Fraudulent Scheme to Misappropriate Client Funds
The Securities and Exchange Commission (Commission) filed a Complaint on August 28, 2006, in the United States District Court for the Southern District of West Virginia against investment adviser Knox H. Fuqua (Fuqua), 46, and Fuqua's alter ego, Commission-registered investment adviser KHF Advisors, LLC (KHF Advisors). The Complaint alleges that, from at least January 2003 until late 2005, Fuqua engaged in a fraudulent scheme to misappropriate money from his investment advisory clients. Fuqua engaged in much of his alleged fraudulent activity through KHF Advisors, an investment advisor he created and controlled.
According to the Complaint, Fuqua and KHF Advisors were fiduciaries of their investment advisory clients and, as such, owed their clients a duty of honesty, undivided loyalty, fair-dealing and full disclosure. Several of Fuqua's clients gave him discretionary authority over their money with the caveat that he not put their money in high-risk investments. These clients included 401(k) employee retirement plans and a widowed mother-of-two under court order to conservatively invest the estate of her late husband on behalf of her children.
The Complaint alleges that, instead of investing his investment advisory clients' money according to their instructions, Fuqua engaged in a fraudulent scheme to misappropriate client money to pay his own personal and business expenses, and to repay money he had misappropriated from other clients. To facilitate his fraudulent scheme, Fuqua created two investment vehicles which were little more than tools for Fuqua to access his clients' money. Fuqua funneled client money through these investment vehicles and into bank accounts that he alone controlled. He then used the client money transferred into these bank accounts to repay other clients wanting to redeem their investments, to pay business expenses and to siphon over $200,000 to pay a multitude of personal expenses, such as supermarket, pharmacy, and jewelry store bills. The Complaint further alleges that Fuqua was able to continue his scheme unchecked by deceiving his clients into believing their investments retained their value. He did so by, among other deceptive actions, inflating the share prices and account balances on his clients' account statements.
The Complaint alleges that the defendants violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. The Complaint additionally alleges that the defendants violated Sections 206(1) and (2) of the Investment Advisers Act of 1940 (Advisers Act), and that Fuqua aided and abetted KHF Advisors' violations of the Advisers Act. The Commission seeks permanent injunctions against both defendants, and an order directing that Fuqua disgorge all ill-gotten gains and pay civil money penalties.