Two Florida advisors have been charged with defrauding their clients, including many retirees, in an offshore fraud scam.
Gregory Adams and Larry Grossman, two Tampa-area investment advisors, were charged by the Securities and Exchange Commission on Wednesday with committing fraud related to more than $4 million in compensation they received from offshore funds.
Adams and Grossman, owners of the Clearwater, Fla.-based investment firm Sovereign International Asset Management, failed to truthfully inform clients about the payment they received from the funds they were recommending as safe investments, despite substantial risks and red flags, according the SEC.
The advisors were also charged with contributing to violations of the custody rule that requires investment advisory firms to establish specific procedures to safeguard and account for client assets.
Adams and Grossman solicited and directed clients to invest almost exclusively in funds controlled by asset manager Nikolai Battoo, whom the SEC charged in a separate enforcement action last year, the SEC said. The two men failed to inform clients about the conflict of interest resulting from Battoo paying them millions of dollars in compensation for steering investors to his funds, according to an SEC announcement.
Investment advisers have a fiduciary duty to act in utmost good faith when recommending investments, and they must fully disclose all of the relevant facts to their clients, Eric Bustillo, director of the SECs Miami Regional Office, said in the SEC statement. Adams and Grossman breached this duty when they misstated their compensation and failed to disclose serious conflicts of interest.
Financial Planning was unable to reach Adams and Grossman for comment. Sovereign International filed for bankruptcy last year, and the number listed on the companys most recent ADV is out of service.
According to the SECs order instituting administrative proceedings, Grossman was paid approximately $3.3 million and Adams received $1 million in undisclosed compensation arrangements. The SEC said that Grossman and Adams promoted the investments as safe, diversified, independently administered and audited, and suitable for the investment objectives and risk profiles of their clients, who were often retirees.
However, Battoos funds were in fact risky, lacked diversification and lacked independent administrators and auditors, according to the SEC. Grossman and Adams also failed to investigate and in some cases wholly disregarded numerous red flags surrounding Battoo and his funds, the SEC charged.
Grossman and Adams aided and abetted Sovereigns violations of the custody rule when they instructed clients to transfer their investment funds to a bank account controlled by a related entity, the SEC said. Grossman and Adams pooled clients money in this bank account before investing it in Battoos offshore funds.
Sovereign failed to comply with the custody rule, which requires an investment adviser to comply with surprise examinations or certain other procedures to verify and safeguard client assets, the SEC said.