U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21582 / June 29, 2010
Securities and Exchange Commission v. Life Wealth Management, Inc. and Jeffery S. Preston, United States District Court for the Central District of California, Civil Action No. CV-10-4769 RSWL (MANx)
SEC CHARGES SOUTHERN CALIFORNIA INVESTMENT ADVISER AND ITS PRINCIPAL WITH FRAUD AND BREACH OF FIDUCIARY DUTY
On June 28, 2010, the Securities and Exchange Commission filed a civil action in the United States District Court for the Central District of California charging Life Wealth Management, Inc. and its owner Jeffery S. Preston with fraud and breach of fiduciary duty for placing clients in unsuitable investments and misrepresenting and failing to disclose the risks of these investments.
The SEC alleges that Life Wealth and Preston invested $6.9 million of client funds in unsecured promissory notes issued by Atherton-Newport Investments, LLC, a real estate company that buys and renovates distressed properties and is headquartered in Irvine, Calif. Beginning in or about October 2005, Preston recommended the notes to Life Wealth clients even though the notes were not suitable to the clients' risk tolerances. Preston also characterized the notes as a "solid" and "strong" investment without disclosing the risks inherent in an unsecured loan. Atherton-Newport defaulted on all of the outstanding notes in September 2007, which amounted to almost total losses for Life Wealth clients.
According to the SEC's complaint, Preston recommended the Atherton-Newport unsecured promissory notes to his clients despite the fact that in July 2005, Life Wealth's attorney had cautioned him about the "enormous risk" of such an investment. Nevertheless, not only did Preston recommend the notes to clients, he also falsely reassured clients that their principal would be safe. Even though Preston began to doubt the viability of Atherton-Newport in early 2007, he did not disclose his concerns to Life Wealth clients. Preston then redeemed his own unsecured promissory note several weeks before Atherton-Newport defaulted on all of the outstanding notes. Even after Atherton-Newport defaulted on the notes, Preston persuaded three Life Wealth clients to invest $235,000 in unsecured promissory notes issued by Atherton-Newport. In addition, Preston recommended the notes to clients even though the investment was highly unsuitable for many of them, such as one client who invested 86.2 per cent of her total net worth in the notes.
The SEC's complaint charges Life Wealth and Preston with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is seeking permanent injunctions barring future violations of the federal securities laws, disgorgement of the defendants' ill-gotten gains with prejudgment interest, and monetary penalties.