Investment Adviser and Its Principals Settle SEC Charges that They Failed to Disclose Risks of Investing in Their Advisory Business
Jan. 23, 2018
File No. 3-18349
January 23, 2018 – The Securities and Exchange Commission today announced that AmericaFirst Capital Management, LLC, a Sacramento, California area-based registered investment adviser, and its principals agreed to settle charges that they failed to tell individual retail investors about the risks of investing in their advisory business.
According to the SEC’s order, an investigation found that by at least December 2012, AmericaFirst was struggling financially because its ongoing business expenses exceeded the amount of money it generated from advisory fees. To bridge this gap, AmericaFirst’s CEO, Rick Gonsalves, decided to borrow cash from investors, including the firm’s advisory clients, through notes that offered a 12% rate of return. According to the SEC’s order, however, in the course of marketing these notes, Gonsalves and AmericaFirst’s President, Robert Clark, failed to provide investors with the full picture of AmericaFirst’s poor financial condition, including its ongoing cash flow problems, declining net income, and increasingly negative net worth. Gonsalves and Clark also failed to adequately disclose to investors that there was a significant risk AmericaFirst might not be able to repay noteholders unless its business improved. Additionally, Clark, according to the SEC’s Order, led investors to believe that AFCM was profitable. AmericaFirst ultimately raised or renewed approximately $2.7 million in promissory notes between 2012 and 2015. Of the 21 individual retail investors who purchased or renewed notes during this period, 14 were AmericaFirst advisory clients whose portfolio accounts were managed by Gonsalves.
The SEC’s order institutes settled administrative and cease-and-desist proceedings against AmericaFirst and finds that it violated Section 17(a)(2) of the Securities Act of 1933 and willfully violated Section 206(2) of the Investment Advisers Act of 1940. The SEC’s order also institutes settled cease-and-desist proceedings against Gonsalves and Clark and finds that Gonsalves violated Section 17(a)(2) of the Securities Act and Section 206(2) of the Advisers Act, and that Clark violated Section 17(a)(2) of the Securities Act and caused AmericaFirst’s violations of Section 206(2) of the Advisers Act. AmericaFirst agreed to pay a $50,000 penalty, and Gonsalves and Clark agreed to each separately pay a $25,000 penalty. The SEC’s order also imposes a cease-and-desist order on AmericaFirst, Gonsalves, and Clark, as well as a censure on AmericaFirst. In addition, the SEC’s order includes undertakings regarding AmericaFirst’s enhanced compliance procedures and policies in connection with the promissory notes. Without admitting or denying the findings, AmericaFirst, Gonsalves, and Clark consented to entry of the SEC’s order.
The SEC’s investigation was conducted by John P. Mogg and Michael Foley and supervised by Jennifer J. Lee of the Division of Enforcement’s San Francisco Regional Office.