Broker Employment Transition Ends in Jury Verdict Finding Fraud: Lessons Learned
From the Desk of Jim Eccleston at Eccleston Law Offices:
What should have been an unremarkable employment transition, from brokerage firm stockbroker to owner of a new investment advisory firm, ended in disaster for Benjamin Lee Grant and his firm, Sage Advisory Group, LLC (“Sage”). A Boston jury recently agreed with the Securities and Exchange Commission (SEC) that the defendants committed fraud in connection with the employment transition. Let’s explore what went wrong.
Benjamin Grant had been a successful broker. Prior to October, 2005, he was a registered representative at Wedbush Morgan Securities (“Wedbush”), with 300 customer accounts and more than $100 million under management. Virtually all of the customers’ assets in turn were managed by First Wilshire Securities Management, Inc. (“First Wilshire”), an investment firm based in California. Grant resigned from Wedbush Morgan Securities in September, 2005 to go into business for himself as Sage.
So far, so good. Brokers do change jobs, and some go into business for themselves by starting their own investment advisory firms. Furthermore, those who leave their firms typically seek to transfer their customer accounts to their next firm.
Not so, the SEC alleged. Starting on or about October 4, 2005, the SEC alleged that Benjamin Grant engaged in a fraudulent scheme to induce his former brokerage customers to transfer their assets to Sage, his new advisory firm. The allegation appears to be based solely upon a letter that Grant sent his customers on October 4, 2005, and upon subsequent communications related to that letter. The material representations of Grant’s letter, according to the SEC, are:
- At the suggestion of First Wilshire, customer accounts were being moved from Wedbush to a discount broker and that Sage had been formed to handle their investments.
- The charge to customers for their accounts was changing from a 1% management fee paid to First Wilshire (plus Wedbush's brokerage commissions) to a 2% "wrap fee" paid to Sage.
- First Wilshire had indicated that the wrap fee historically had been less expensive than the previous arrangement.
- If customers wanted to avoid any disruption in First Wilshire's management of their assets, they had to sign and return the new advisory and custodial account documents as soon as possible.
Additionally, the complaint alleged that in subsequent conversations with customers, Grant told them that First Wilshire no longer was willing to manage their assets at Wedbush and that they had to transfer to the discount broker and sign up with Sage.
What did the SEC fault? The SEC alleged (and a jury verdict confirmed) that those written and oral statements were materially false and misleading. Why? A few reasons:
- First Wilshire had not required a transfer from Wedbush.
- First Wilshire had not refused to continue managing the customers' assets at Wedbush.
- First Wilshire had not authorized Grant's statements.
Moreover, the SEC alleged that Grant's wrap fee statements were without factual basis. In particular, Grant failed to disclose that, while the switch from Wedbush to the discount broker would result in significant savings, those savings would flow to Grant and Sage rather than to the advisory clients! Grant failed to disclose that, as a result, Grant and Sage's compensation would be substantially increased. Indeed, once Grant's customers transferred their accounts from Wedbush to Sage, Grant more than doubled his own compensation!
In short order – after a mere 2 hour jury deliberation – the jury found fraud. Both defendants were found to have violated Sections 204A and 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rules 204A-1 and 206(4)-7 thereunder.
Notably, in 2011, the SEC filed a separate civil injunctive action against Grant’s father, Jack Grant. That civil action alleged that Jack Grant, a lawyer and former stockbroker, had violated a SEC bar from association with investment advisers by associating with his son Benjamin Grant's investment advisory firm, Sage, and by acting as an investment adviser himself. The Complaint further alleged that Jack Grant, Benjamin Grant and Sage fraudulently failed to disclose Jack Grant's checkered disciplinary history, including that he had been barred, to Sage's advisory clients. Jack Grant consented to settle the charges.
This case undoubtedly involved an employment transition that went very badly and which was based upon extreme facts. However, brokers and financial advisers of all stripes need to be careful in planning their employment transitions, with the assistance of competent legal counsel, and in not over-selling the reasons why their customers should follow them to their next firm.
The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.
Related Attorneys: James J. Eccleston