U.S. Securities and Exchange Commission
Litigation Release No. 24007 / December 11, 2017
Securities and Exchange Commission v. Westport Capital Markets, LLC and Christopher E. McClure, Civil Action No. 3:17-cv-02064 (D. Conn., filed December 11, 2017)
SEC Charges Advisory Firm and its Principal for Enriching Themselves at the Expense of Their Clients
The Securities and Exchange Commission today charged a Connecticut-based investment advisory firm and its principal with breaching their fiduciary duties and defrauding advisory clients, including by repeatedly purchasing securities that generated significant amounts of undisclosed compensation.
The SEC's complaint, filed in the U.S. District Court for the District of Connecticut, alleges that Westport Capital Markets, LLC, a dually registered investment adviser and broker-dealer, and Westport's principal, Christopher E. McClure, repeatedly invested advisory clients' funds in risky securities that generated hundreds of thousands of dollars in undisclosed mark-ups for Westport and resulted in more than $1 million in losses for clients. According to the complaint, Westport for several years purchased securities from underwriters at a discount to the public offering price and then, acting as a principal for its own account, re-sold those same securities to its advisory clients at higher prices without disclosing the mark-up. Westport and McClure sometimes held the securities in client accounts for only a short period of time before re-selling the securities and then investing client funds in another offering with a mark-up. The complaint further alleges that Westport and McClure defrauded a client by acting contrary to the client's express objectives and instead repeatedly investing the client in risky offerings that generated hidden mark-ups. In addition, the complaint alleges that Westport and McClure made false and misleading representations to clients regarding the compensation that Westport would receive from their accounts.
The complaint further alleges that Westport, in its capacity as a broker-dealer, received undisclosed mutual fund distribution fees, known as 12b-1 fees, when Westport and McClure invested advisory clients in certain mutual fund share classes. Westport and McClure allegedly did not disclose to clients the conflict of interest that this created. According to the complaint, in certain instances, Westport and McClure invested clients in mutual fund shares with 12b-1 fees even when cheaper shares of the same funds were available without 12b-1 fees.
The SEC's complaint alleges that Westport's advisory clients paid approximately $780,000 in undisclosed mark-ups and fees on top of the advisory fees they paid the firm.
The SEC's complaint charges Westport with violating Sections 206(1), 206(2), 206(3), and 207 of the Investment Advisers Act and charges McClure with violating Sections 206(1), 206(2), and 207 of the Investment Advisers Act and with aiding and abetting Westport's violation of Section 206(3). The complaint seeks injunctive relief, disgorgement of ill-gotten monetary gains plus interest, and penalties.
The SEC's investigation is being conducted jointly by staff of the Asset Management Unit and the SEC's Boston Regional Office, including Rory Alex, Robert Baker, and Michael Moran. The litigation will be handled by Kathleen Shields of the Boston Regional Office, Mr. Baker, and Mr. Moran. SEC staff in the examination that led to the investigation included Jennifer Duggins, Mayeti Gametchu, Marie Hagelstein, and Paul Prata.