SEC Charges Investment Adviser with Defrauding Advisory Clients
Litigation Release No. 25061 / March 30, 2021
United States Securities and Exchange Commission v. Douglas E. Elstun, Case 4:21-cv-00206-BCW (W.D. Mo. filed March 29, 2021)
The Securities and Exchange Commission announced charges against Douglas E. Elstun of Lenexa, Kansas, an investment adviser, for repeatedly defrauding and breaching his fiduciary duty to advisory clients through his formerly registered investment adviser Crossroads Financial Management, Inc. (CFM).
The SEC's complaint alleges that from 2015 through 2018, Elstun fraudulently overcharged his advisory clients by charging undisclosed fees, including higher advisory fees than clients had agreed to pay, and by applying the advisory fee to non-advisory assets, including bank account balances, equity in homes and other real estate, and the value of vehicles, thereby increasing the fees charged to those accounts. The complaint alleges that Elstun also misled advisory clients about his trading in high risk, daily leveraged and/or inverse exchange-traded funds (ETFs) by failing to disclose the substantial risks of buying and holding these products, and by inaccurately representing that the products functioned as "insurance" or a "hedge" for their portfolios when his trading strategy for these products actually created significant risk for clients. The complaint further alleges that Elstun made unsuitable and risky investments in daily leveraged and/or inverse ETFs that were inconsistent with Elstun's clients' investment objectives and risk tolerances. As alleged in the complaint, as a result of Elstun's ETF trading, those clients lost millions.
The SEC's complaint, filed in federal court in the Western District of Missouri, charges Elstun with violating the antifraud provisions of Sections 206(1) and 206(2) of the Advisers Act, or in the alternative, aiding and abetting CFM's violations of Sections 206(1) and 206(2). The complaint also charges Elstun with aiding and abetting CFM's violations of the record-keeping, custody, cash solicitation, and compliance provisions of Sections 204(a) and 206(4) of the Advisers Act and Rules 204-2(a)(10), 206(4)-2, 206(4)-3, and 206(4)-7 thereunder. The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties.
The SEC's investigation was conducted by Eric Day and Kimberly S. Greer and supervised by Kimberly L. Frederick and Jason J. Burt of the SEC's Denver Regional Office. The litigation will be led by Zachery T. Carlyle and supervised by Gregory A. Kasper. The SEC examination that led to the investigation was conducted by Jason D. Morrison, Sabrina M. Silverstein, and Jeb Wildschut and supervised by Nicholas F. Madsen, Lisa Byington, and Thomas M. Piccone of the SEC's Denver Regional Office.