SEC Charges Investment Advisers with Failure to Disclose Financial Conflicts of Interest
Litigation Release No. 24738 / February 13, 2020
Securities and Exchange Commission v. Criterion Wealth Management Insurance Services, Inc., Robert Allen Gravette, and Mark Andrew MacArthur, No. 2:20-cv-01402 (C.D. Cal. filed February 12, 2020)
The Securities and Exchange Commission charged Criterion Wealth Management Insurance Services, Inc., a Santa Clarita, California, investment advisory firm, and its then co-owners Robert Gravette and Mark MacArthur, also of California, for breaching their fiduciary duty and defrauding their advisory clients by failing to disclose significant financial conflicts of interest when recommending investments in private real estate investment funds.
The SEC's complaint alleges that from 2014 to 2017 the defendants recommended that their advisory clients invest more than $16 million in four private real estate investment funds without disclosing that the fund managers had paid them more than $1 million, which was on top of the fees that defendants were already charging their clients directly. The complaint further alleges the defendants were incentivized to keep their clients invested in the funds, rather than allocate their capital elsewhere, because the additional side compensation was recurring and depended on Criterion's clients remaining invested. For two of the funds, this undisclosed compensation arrangement resulted in reduced investment returns for the defendants' advisory clients.
The SEC's complaint, filed in the U.S. District Court for the Central District of California, charges Criterion, Gravette, and MacArthur with violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC's complaint further charges Criterion and Gravette with violations of Section 207 of the Advisers Act, and Criterion with violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. The complaint also charges Gravette and MacArthur with aiding and abetting Criterion's violations of Sections 206(1) and 206(2) of the Advisers Act and Gravette with aiding and abetting Criterion's violation of Section 207 of the Advisers Act. The complaint seeks permanent injunctions from future violations of these provisions, disgorgement and prejudgment interest, and civil penalties from all defendants.
The SEC's investigation was conducted by DoHoang T. Duong and supervised by Spencer Bendell of the Los Angeles Regional Office. The examination that led to the investigation was conducted by Kelly Kibbie and supervised by Kent Woo and Sang W. Lee. The litigation will be led by Donald W. Searles and supervised by Amy J. Longo.