SEC Settles with Investment Adviser Who Failed to Disclose Conflicts of Interest and Misled Advisory Clients About the Terms of Their Investments
Litigation Release No. 24969 / November 24, 2020
SEC v. Rumbaugh et al, Case No. 5:19-cv-01517-PSG-SP (C.D. Cal.)
On November 20, 2020, the U.S. District Court for the Central District of California entered final judgments by consent against Craig Rumbaugh and two companies he owns and controls, Rumbaugh Financial, Inc. (RFI), a California-registered investment adviser, and Desert Strategic Equity, LLC (DSE). The SEC had charged Rumbaugh and his companies with misleading RFI's advisory clients about the terms of their investments, while concealing their self-dealing and receipt of commissions in connection with the investments they recommended.
The SEC's complaint, filed on August 14, 2019, alleged that Rumbaugh advised RFI's clients to invest in promissory notes offered by Susan Werth, who claimed to provide short-term high interest rate loans to real estate developers but, unbeknownst to Rumbaugh, was in fact operating a Ponzi scheme. According to the 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 a total of more than $650,000 when Werth's Ponzi scheme collapsed. The complaint alleged that Rumbaugh and his entities concealed commissions totaling $140,000 that Werth paid Rumbaugh on funds raised from his clients. Rumbaugh and his companies also allegedly misrepresented the interest rates Werth's promissory notes offered, and retained the difference when the notes repaid interest at a higher rate.
Without admitting or denying the allegations in the complaint, Rumbaugh, RFI, and DSE agreed to pay $676,000 in disgorgement, with $137,808 in prejudgment interest, on a joint-and-several basis, and Rumbaugh consented to pay a civil penalty of $192,768. The judgments also permanently enjoin the defendants from violating the antifraud provisions of Sections 206(1) and 206(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, and the broker-dealer registration provisions of Section 15(a) of the Exchange Act, and further enjoin Rumbaugh and RFI from violating the securities registration provisions of Sections 5(a) and (c) of the Securities Act.
In a related administrative proceeding, Rumbaugh consented to the entry of an order that bars him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and bars him from participating in any offering of a penny stock.
The SEC's investigation was conducted by Lance Jasper and supervised by Spencer Bendell of the Los Angeles Regional Office. The litigation was led by Donald Searles, and supervised by Amy Longo.