SEC Charges Investment Adviser with Defrauding Clients
Litigation Release No. 24563 / August 15, 2019
Securities and Exchange Commission v. Craig Rumbaugh, Rumbaugh Financial Inc., and Desert Strategic Equity, LLC, No. 5:19-cv-01517 (C.D. Cal. filed August 14, 2019)
The Securities and Exchange Commission today charged Riverside County-based investment adviser Craig C. Rumbaugh and his companies, Rumbaugh Financial Inc. and Desert Strategic Equity, LLC, with defrauding clients by deceiving them about the terms of their investments and concealing Rumbaugh's intent to profit personally from those investments.
The SEC alleges that Rumbaugh advised clients to invest in promissory notes offered by Susan Werth and her companies, Corporate Mystic LLC and Commercial Exchange Solutions, Inc., against whom the SEC filed an emergency, civil injunctive action in October 2018 for operating a fraudulent securities scheme. According to the SEC's complaint, from August 2015 to June 2016, Rumbaugh persuaded eight clients to invest a total of over $3 million with Werth's companies. Three of those clients lost over $600,000 in principal when Werth failed to repay them. When recommending those investments, Rumbaugh and his companies failed to disclose that Rumbaugh was receiving 5% commissions on all of the funds raised from his clients for Werth. In addition, in some instances, Rumbaugh and his companies misled clients about the interest rates Werth's companies would pay on the proposed investments. Although Rumbaugh knew that Werth's companies offered 30% interest or more, Rumbaugh and his companies - intending to keep for themselves additional, undisclosed interest paid by Werth's companies - represented to clients that Werth's companies offered rates in the 5% to 10% range. In those cases when Werth's companies repaid investor funds to Rumbaugh and his companies at the true, higher interest rates, Rumbaugh and his companies repaid clients at the lower rates and secretly kept the difference.
The complaint charges Rumbaugh and Rumbaugh Financial Inc. with violating the antifraud provisions of Sections 206(1) and (2) of the Investment Advisers Act of 1940, Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act and the broker-dealer registration provisions of Section 15(a) of the Exchange Act. The complaint charges Desert Strategic Equity with violating the antifraud provisions of Sections 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and with aiding and abetting Rumbaugh's and Rumbaugh Financial Inc.'s violations of the Investment Advisers Act and Section 15(a) of the Exchange Act. The SEC is seeking injunctive relief, disgorgement of allegedly ill-gotten gains plus interest, and civil penalties.
The investigation was conducted by Lance Jasper and supervised by Spencer Bendell. The litigation will be led by Donald Searles.