U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21057 / May 26, 2009
Securities and Exchange Commission v. Gendreau & Associates, Inc., and Jacques R. Gendreau, United States District Court for the Central District of California, Civil Action No. CV 09-03697 AHM (FMOx).
SEC CHARGES REGISTERED INVESTMENT ADVISER AND ITS PRINCIPAL WITH FRAUD AND BREACH OF FIDUCIARY DUTY
On May 26, 2009, the Securities and Exchange Commission charged a Monarch Beach, Calif.-based registered investment adviser and its principal with fraud and breach of fiduciary duty for failing to adequately disclose to clients the substantial risks associated with their investment strategies and failing to invest client assets in a manner suitable to clients’ risk tolerance.
In a complaint filed in federal court in Santa Ana, Calif., the SEC alleges that Gendreau & Associates, Inc. (G&A) and Jacques R. Gendreau, age 67, who as of October 2007 had approximately 185 clients and $97 million in assets under management, advised their clients to become heavily leveraged and invested client funds using substantial margin. The SEC alleges that Gendreau failed to disclose to clients that his investment strategies were high-risk. The SEC also alleges that this high-risk strategy was unsuitable for many G&A clients due to their age, retirement status, and otherwise lower risk tolerance. According to the SEC’s complaint, as a result of Gendreau’s misconduct, G&A clients suffered catastrophic financial losses.
In its complaint, the SEC alleges that Gendreau invested client funds using substantial margin even though many clients had retired, needed the money in the short-term, or had otherwise expressed concerns about incurring additional losses. The SEC further alleges that in late August and early September 2008, Gendreau implemented his riskiest investment strategy by investing client funds using maximum margin solely in the preferred shares of Citigroup Inc. and Wachovia Corporation. The SEC’s complaint contends that Gendreau invested client funds in the banks’ preferred shares using significant margin even though this strategy was not suitable for many clients and was contrary to some clients’ express instructions. Further, the SEC claims that Gendreau misrepresented to his clients that this investment strategy was “guaranteed” or with “practically no risk.” According to the complaint, shortly after Gendreau purchased the preferred shares on behalf of his clients, the prices declined and G&A’s custodial broker issued margin calls on the client accounts. The SEC alleges that Gendreau failed to meet these margin calls resulting in the custodial broker cancelling margin and liquidating the G&A client accounts. As a result of this investment strategy, according to the SEC’s complaint, clients lost approximately $12 million (approximately 72% of their assets) within days, and approximately 42 G&A clients were left owing the custodial broker approximately $300,000 for margin loans.
The SEC’s complaint charges G&A and Gendreau 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 (Advisers Act); G&A with violating Section 204 of the Advisers Act and Rule 204-2 thereunder; and Gendreau with aiding and abetting G&A’s violation of Section 204 of the Advisers Act and Rule 204-2 thereunder. The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against the defendants.