The SEC announced it charged advisory firm Navellier & Associates and its founder with fraud for providing misleading advertisements and performance records on investment strategies they offered over a three-year period.

The charges, filed in federal court in Boston, deepen regulatory scrutiny on the already embattled investment firm, and its principal Louis Navellier, who are investigating separate concerns that some of their clients may have been overcharged transaction fees, according to regulatory filings.

Navellier, who gained prominence through the firm’s popular Emerging Growth newsletter, violated fiduciary duties by knowingly providing clients with false track records for the “Vireo AlphaSector” investment strategies, the SEC says.

The firm’s advertisements claimed the strategies could beat the markets with little risk, and that client assets, invested for seven years beginning in 2001, had significantly outperformed the S&P 500, the regulator says.

Bloomberg News

“When Navellier performed its (inadequate) due diligence, it ignored and concealed red flags indicating that the investment strategies had not performed as advertised,” according to the complaint. “In fact, no client assets had tracked the strategy from April 2001 through September 2008, and even as a back-test the claimed performance was substantially overstated.”

Navellier & Associates did not immediatley respond to a request for comment — directing calls to the voice mailbox of former chief compliance officer, Tanya Alexander, who resigned in February to “pursue outside business interests,” according to regulatory filings.

'PROFITING HANDSOMELY'
The strategies were originally obtained from the now-defunct model manager F-Squared Investments, according to the complaint, but when Navellier realized that the marketing material had been fabricated, the firm decided to sell the strategies anyway.

“Instead of truthfully informing their clients about their prior misrepresentations and telling clients the truth about the performance track record, Navellier [and his firm] arranged to sell the Vireo line of business directly to F-Squared — profiting handsomely while keeping the fraud hidden,” says the SEC.

Navellier sold the strategies to F-Squared for $14 million in 2013, according to the complaint.

“As Mr. Navellier and his firm realized their misrepresentations could get them in legal trouble, they allegedly sold the Vireo line of business in August 2013 for $14 million, rather than correcting their prior misrepresentations to their clients or informing their clients about their conflicts of interest in selling the Vireo business,” the SEC says.

In August 2016, 13 other investment advisory firms paid up to $500,000 each to settle similar SEC allegations relating to false promotional claims about the F-Squared strategies.

DAY IN COURT
The Reno, Nevada-based firm employs six advisors serving 2,270 clients and managing more than $1 billion in client assets, according to the firm’s latest Form ADV filed in March.

Navellier had been involved in two prior legal proceedings: one, a regulatory order involving unlicensed investment activities in California in 1988; and the other, a civil dispute in 1987, per BrokerCheck records.

In an interview with Reuters, Navellier defended his disclosures, adding no investors were harmed by his actions.

“We really look forward to our odds in district court,” Navellier told Reuters.

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Sean Allocca

Sean Allocca is an associate editor of Financial Planning, On Wall Street and Bank Investment Consultant.