SEC Charges Investment Adviser for Defrauding Advisory Clients by Charging Improper Transaction Costs
Litigation Release No. 24595 / September 13, 2019
U.S. Securities and Exchange Commission v. Dean Patrick McDermott, McDermott Investment Advisors, LLC and McDermott Investment Services, LLC
Washington D.C., September 13, 2019 - The Securities and Exchange Commission today announced charges against McDermott Investment Advisors, LLC (MIA), a Fort Myers, FL investment advisory firm, and Dean Patrick McDermott, the principal and sole owner of the firm, for defrauding their advisory clients and violating their fiduciary duties.
The SEC's complaint alleges that MIA and McDermott unlawfully invested their clients in a version of unit investment trusts (UIT) that carried significant transactional sales charges when another version of the same UITs was equally available without those costs. MIA and McDermott chose among two versions of the UITs on behalf of their clients: a "fee-based version," made available to advisory clients who paid a periodic advisory fee for advisory services, and a "standard" version for retail broker-dealer clients that were not in an advisory program and paid for their investing services on a transaction-by-transaction basis. The more expensive, standard version of the UITs included a "transactional sales charge." The SEC's complaint alleges that MIA and McDermott, selected the "standard" version of various UITs on behalf of many of MIA's advisory clients, thereby causing those advisory clients to pay unnecessary transactional sales charges to MIA's affiliated broker-dealer, McDermott Investment Services, LLC (MIS), without making appropriate disclosures. The complaint further alleges that McDermott and the other investment adviser representatives that made those purchases were also the registered representatives of MIS that reaped the benefits of the transactional sales charges that were generated. As a result, the complaint alleges that MIA and McDermott violated their duties to seek best execution and to disclose all material conflicts of interest.
The SEC's complaint charges MIA and McDermott with directly and indirectly violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, names MIS as a relief defendant, and seeks a permanent injunction, joint and several disgorgement and prejudgment interest, civil monetary penalties, and any further relief the court may deem just and proper.
The SEC's investigation was conducted by Matthew S. Raalf and Assunta Vivolo of the Philadelphia Regional Office, and supervised by Kelly L. Gibson and G. Jeffrey Boujoukos. The litigation will be led by Christopher R. Kelly and Jennifer C. Barry. The examination that led to the investigation was conducted by Karen Kondisko, Mark Fowler, Paul Lipinski, and Cesar Davis of the SEC's Philadelphia Regional Office under the supervision of Diane Hagy.