SEC Settles Charges Against Investment Adviser for Failure to Supervise and Policies and Procedures Violations
Sept. 23, 2019
File No. 3-19494
September 23, 2019 - The Securities and Exchange Commission today announced the institution of settled administrative and cease-and-desist proceedings against HCR Wealth Advisors, a Los Angeles-based registered investment adviser. HCR agreed to settle charges that it failed to engage in reasonable supervision of Jeremy Joseph Drake, formerly an investment adviser representative of HCR, and failed to implement compliance-related policies and procedures in response to red flags about Drake's conduct. The SEC charged Drake with defrauding two of HCR's clients in August 2017. Drake subsequently pleaded guilty to wire fraud in a parallel criminal proceeding and was sentenced to 30 months incarceration and ordered to pay over $1.2 million in criminal restitution.
According to the SEC's Order, Drake defrauded two HCR clients, a married couple, for more than three years, telling them that they paid a special "VIP" annual rate of 0.15 to 0.20 percent of their assets under management in fees to HCR when in fact they paid 1 percent. The SEC's Order finds that Drake's deception led the clients to pay $1.2 million more in management fees than Drake represented. The SEC's Order further finds that, during the same period, Drake misappropriated a total of over $200,000 from the married couple and two other HCR clients to support a struggling restaurant in which Drake held a minority interest.
The SEC's Order finds that HCR failed to supervise Drake's outside business activities with respect to the restaurant, despite being warned by an outside compliance consultant that Drake might seek to use client funds to improperly support the business. According to the SEC's Order, HCR did not determine the source of investments into the restaurant or monitor accounts related to the restaurant as the outside consultant had advised. The SEC's Order further finds that, despite having policies and procedures in place that required a prompt, thorough, and fair review of all client complaints, HCR failed to conduct a reasonable investigation following contemporaneous complaints from two different clients about Drake's handling of their accounts. The SEC's Order finds that, in each instance, HCR failed to learn what Drake had done to precipitate the complaint, instead relying excessively on Drake's false descriptions of his own conduct, and that, by failing to investigate Drake's activities in response to client complaints, HCR missed opportunities to learn about Drake's ongoing management-fee fraud.
The SEC's Order finds that HCR failed reasonably to supervise Drake within the meaning of Section 203(e)(6) of the Investment Advisers Act of 1940 and willfully violated Section 206(4) of that Act and Rule 206(4)-7 thereunder, which require registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. Without admitting or denying the findings, HCR agreed to the entry of a cease-and-desist Order, a censure, and a $220,000 penalty. In light of the $1.2 million restitution order against Drake in the parallel criminal action and HCR's previous payment of $300,000 to the married couple clients, HCR further agreed to pay $328,912 to such clients and to implement the recommendations of a remedial compliance consultant.
The SEC's investigation was conducted by Lance Jasper of the Los Angeles Regional Office and supervised by Spencer Bendell. The SEC’s examination that led to the investigation was conducted by William Rosenthal and Joshua Bauder, and supervised by Yanna Stoyanoff and Charles Liao.