The SEC has charged a prominent San Diego-based financial advisor with fraud, accusing him and his firm of failing to disclose to clients a conflict of interest in an investment and lying to and misleading clients about a hedge fund he manages.
Kevin O’Rourke, the suit’s target, is the founder and president of Western Pacific Capital Management in Del Mar, Calif. He was named a top wealth manager by San Diego magazine in 2008 and 2010.
“Investment advisers have a fiduciary duty to act in the best interests of their clients and be forthcoming with them,” Marshall S. Sprung, assistant director in the SEC Enforcement Division’s Asset Management Unit, said in a statement on Thursday. “Western Pacific and O’Rourke fraudulently breached that duty by failing to disclose the commissions they would receive for the recommended investments and lying to clients about the liquidity of the fund they managed.”
Via his lawyer, O’Rourke said he plans to vigorously defend himself against all of the charges.
“Mr. O’Rourke believes (the suit) is based on erroneous analyses as to both the facts and the law,” Sylvia Scott, of Freeman, Freeman & Smiley in Los Angeles, wrote in an email.
The SEC suit alleges that O’Rourke urged his clients to invest in a non-public stock offering by another San Diego company called Ameranth. What he didn’t tell them is that his firm received 10% “success bonuses” for all the investments it brought in, the SEC claims. Ameranth is described in the SEC suit as a software provider to the hospitality, financial services and health care industries.
From 2005 to 2006, the suit alleges that Western Pacific earned $482,745 in success fees for raising $4,827,445 for the offering. The SEC further claims that O’Rourke was not registered as a broker-dealer when he was selling the shares.
To resolve a dispute with a client who no longer wanted his $800,000 in Ameranth stock, according to the suit, O’Rourke invested money from a hedge fund he manages, the Lighthouse Fund, into Ameranth, increasing the fund’s Ameranth position by 40%.
The commission alleges that O’Rourke invested $2 million from the fund into the software company, earning $200,000 of the total $482,745 in success fees. By March 2007, according to the suit, Lighthouse held $2,665,000 worth of Ameranth stock and had total assets of less than $3 million.
Clients concerned about liquidity in the fund asked O’Rourke to confirm that only 25% of the fund’s assets were illiquid, the SEC claims. In response, the SEC alleges, O’Rourke lied or mislead clients who had no idea that nearly 90% of the fund was held in illiquid investments and, therefore, unavailable for withdrawals.
The allegations now need to be heard by an SEC administrative law judge, according to Sprung. If the charges are upheld, O’Rourke and Western Capital could face monetary penalties or disbarment.