The core principle of the Investment Advisors Act of 1940 is Investor protection. Its mission, and that of the SEC, is to shield investors from unscrupulous people who sneak into the position of an Investment Adviser Representative and claim to act as a fiduciary while violating the trust placed in them.
If you’ve committed to serving as a fiduciary on behalf of a client, it is imperative that you are open and honest in your disclosures about your practices and what you charge.
The following story highlights the depths to which one adviser stooped to perpetrate a fraud on a high-profile client.
Meet the Financial Adviser
Jeremy Joseph Drake was a financial adviser at HCR Wealth Advisers, where he offered his services to ultra-high-net-worth individuals in the Los Angeles area.
In November 2012, Drake began to represent a high-profile professional athlete and his spouse and managed more than $30 million in assets on their behalf. He told the clients they were being charged a “VIP rate” between 0.15% and 0.20% AUM on their managed accounts.
In reality, the couple was being charged 1%. This discrepancy resulted in over $1.2 million in excess management fees over the course of several years, $900,000 of which went to Drake himself as incentive-based compensation.
Drake sent false and misleading emails, deceptive management fee reports, and outright fabricated documents to perpetuate the scam. When his clients began to catch on, he even went so far as to create a fictitious persona, a representative from their custodian, complete with a false email address to reassure them of the charges saying that the discrepancy was a credit that “primarily came from bond interest paid by Schwab.”
The couple discovered Drake’s treachery in July 2016. Rather than come clean, he begged the client to lie to Schwab so he could keep his securities license, claiming it would cause bad publicity for the high-profile couple.
They refused to lie for him, and HCR terminated Drake on July 8, 2016.
However, the consequences of his actions did not stop there. The SEC charged Jeremy Drake with violating and aiding, and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. The SEC is seeking a permanent injunction, return of Drake’s allegedly ill-gotten gains plus interest, and penalties.
A U.S. District Judge ordered Drake to pay $1.2 million in restitution and serve both prison time and supervised release time. The SEC also barred Drake from future employment in the securities industry.
Of course, no financial adviser wants to end up in the situation Drake created for himself – disgraced, incarcerated, and unemployable. And fortunately, most advisers have a strong moral compass that prevents them from egregiously fleecing their clients the way Drake did.
However, advisers must also guard against making unknowing slights to their clients. While Drake’s actions were reprehensible, a well-intentioned adviser could still drastically overbill his clients simply by failing to notice a billing error or by misrepresenting how they charge clients in their disclosure documents by not thoroughly reviewing them prior to filing.
How can you avoid these issues?
- Ensure you’re using technology that supports your compliance efforts so you reduce the risk of missing something – whether it’s an outdated advertising disclosure or an incorrectly calculated fee.
- Document your policies in your written supervisory manual so you can point to them as guidance for your staff and demonstrate your diligence to the regulators.
- Get support when needed. At Red Oak, our compliance consultants stand ready and willing to assist you in auditing your efforts detecting potential issues before they become a problem.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.