Doug Elstun had an investment idea for his wealthiest clients, many of them professional athletes, including former LA Lakers forward Rick Fox and retired Philadelphia Eagles running back Darren Sproles.
In the four years since the 2008-09 financial crisis, the stock market had roared back. Elstun, a gregarious financial advisor who parlayed his Division 1 college basketball years into a wealth management career in Kansas City, Missouri, spied an opportunity: Make his clients richer by putting them into complicated, highly risky funds that use derivatives to magnify the returns of indexes they track.
Around March 2013, he invested most of his customers, including seven retired couples and individuals, in two of the exchange traded funds, according to a
But by October 2013, some clients began asking him a question: Why were they losing millions of dollars?
On Sept. 7, when Wall Street’s regulators
On paper, the two funds he pushed — known as a leveraged fund and inverse fund — could potentially double the gains of an esoteric benchmark, the S&P 500 VIX Short-Term Futures Index. But historically, they went the opposite way, doubling losses or wiping out the original stake.
Fees tied to value of personal cars, home equity, bank cash
Intended for ultra-sophisticated traders who grasped the minutiae of daily market movements, the funds were designed to be held for at most a day, as their prospectuses detailed. Over time, their value was automatically wired to wither to almost nothing. For investors with a long-term focus — Elstun’s clients — the funds were the opposite of a hedge or insurance against market downturns.
Still, Elstun, the investment manager and chief compliance officer of his now-defunct independent advisory firm, Crossroads Financial Management, kept his clients in the hold-for-a-day funds for months at a stretch, sometimes several years. Four clients lost at least $4.8 million on one fund alone. While the lawsuit didn’t specify the total losses for clients from both of the funds, they appear to have been millions more.
His clients paid in other ways as well.
In the fall of 2015, Elstun began secretly charging four athletes an annual management fee of 1.25%, not the 1% he agreed to. He calculated the higher fee, pulled automatically out of client’s accounts each quarter, not just on their investment portfolios, but also on the values of their bank accounts, home equity and personal cars, which he was “managing.”
The next April, he had his assistant — one of a handful of employees, including himself — create fake agreements purporting to officially document the bogus fee. The four athletes, one of whom had investments totaling $15 million, were ultimately ripped off by $360,000 in bogus fees.
‘Constant contact with Wall Street traders’
Elstun picked up an
Professional athletes (along with singers and musicians) typically come into wealth suddenly. They also tend to lack financial literacy and blindly trust their financial advisors. Intensely focused on their playing seasons and careers, not quarterly investment statements, Elstun’s elite clients gave him sole power to manage their portfolios. At least six clients never received their bank or brokerage statements, which went straight to Elstun, the sole designated recipient, the SEC lawsuit said.
His case illustrates the fraud and compliance issues plaguing the wealth management industry, including when advisors cater to affinity groups (like athletes) or have confidential settlements brokered through private arbitrators, outside of FINRA.
Kevin Donohue, a CFP at Legacy Planning in West Chester, Pennsylvania, who advises several NFL players, said that professional athletes are generally financially uneducated. “Physically, these guys are thoroughly tested; financially, they are not tested at all,” he said.
Elstun presented himself as an advisor who "
In April 2015, when one client asked why one of the funds went down when the market went either up or down, Elstun emailed to say, “I’m in constant contact with the company and Wall Street traders who are all in this as well. We all know this market is artificial right now, and it is a matter of time. … In the big scheme, we have bought cheap and will get out with good gains.”
Hard wired to lose money over time
Four years before Elstun’s ill-fated advice, Wall Street’s regulators had warned investors about the investments he pushed: highly speculative leveraged funds, which use borrowed money to try to double or triple returns, and inverse funds, which let investors profit from the opposite direction of an index’s move.
Both hold-for-a-day products, the Securities and Exchange Commission and Financial Industry Regulatory Authority
In other words,
The agency will consider whether to require affluent taxpayers to pay tax on transfers to trusts made under higher exemptions that expire come 2026.
By last January, one of the funds, ProShares Ultra VIX Short-Term Futures ETF, with a ticker of UVXY, had
“A no brainer layup”
Still, Elstun told a skeptical athlete client in December 2014 that the UVXY was “a no brainer layup. We’ll be just fine on this one.”
Elstun “was trying to please his clients and trying to do more tasks than was contemplated in the written agreements,” his lawyer, Picerno, told a trade publication last April, right after the SEC sued Elstun in a Missouri federal district court. “Professional athletes are used to having everything done for them. And
In 2019, Picerno, a solo practitioner, was banned from serving as a public defender and
‘A very aggressive advisor-broker’
Elstun’s athlete clients included Minnesota Timberwolves small forward Brandon Rush, according to a 2016
Elstun was on the board of Shields'
Elstun made a cameo appearance in a 2001
That self-avowed prudence doesn’t ring true, according to Dianne Nygaard, a securities lawyer in Kansas City and a former president of the Public Investors Arbitration Bar Association, or PIABA. Nygaard, who has negotiated settlements for clients of Elstun that don’t appear on his FINRA BrokerCheck record, said that “Doug became very aggressive in high-tech stocks starting in the late '90s. He’s always been a very aggressive advisor-broker.”
The
Almost immediately after graduating with an economics degree, he moved to
In 2002, Elstun moved to the Lenexa, Kansas, outpost of Sigma Financial Advisors, an Ann Arbor, Michigan-based broker-dealer that’s
‘One of our city’s best’
Around 2013, Elstun went to work at William Larmer & Associates, an investment management firm in Overland Park, Kansas, whose head, Larmer, catered to professional athletes. Larmer, who
Elstun took over Larmer’s firm around 2007 and ran it out of his home in Lenexa,
Elstun renamed the firm Crossroads Financial Management. In 2018, he
Regulatory Compliance Watch, a trade publication, wrote last April that
From 2015 through 2018, Elstun’s firm had custody of client assets in brokerage accounts at Charles Schwab. But by late 2018, Schwab grew suspicious of his use of the volatile ETFs.
By October 2018, Schwab pulled the plug on Elstun, leading him to scramble for a new custodian.
Asked why it waited more than three years to act upon Elstun’s inappropriate use of the hold-for-a-day funds, Schwab spokeswoman Mayura Hooper declined to comment.
Nygaard and Joe Wojciechowski, a securities fraud attorney at Stoltmann Law in Chicago who also represented several of Elstun’s clients in confidential settlements, both said they were barred from disclosing what tipped regulators off to Elstun. But at least several months before Schwab pulled the plug, the SEC was already suspicious, and in May 2018 demanded copies of three of Elstun’s client agreements.
Elstun gave the agency the faked documents, complete with forged signature stamps of the athletes. Wojciechowski said that Elstun was no longer a registered investment advisor when the claims resulting in settlements arose. Elstun’s registration with Crossroads
When Schwab broke ties with Crossroads, Elstun lied to his clients about what had happened. “We felt that we had settled for mediocre service, which is not good enough,” he wrote in one email. In another, he said, “please do not be surprised if someone from Schwab “reaches out to you making a case for you to keep your assets where they are. It is in THEIR best interests to keep your investments under their management, not yours.”
In December 2018, according to the SEC’s lawsuit, Elstun’s firm Crossroads had
But the advisor had begun to bleed clients, and rapidly.
By the time Crossroads filed
By August 2019, Crossroads was out of business. Elstun
Elstun credits his college basketball years as fueling his desire for a career in wealth management. That experience, he says on
The charity for orphans and homeless kids
When
Clarke said he had known Elstun socially for around 20 years but not seen him in three years. Elstun, he added, never managed any money for KU. “I’m pretty shocked,” Clarke said when Financial Planning told him of the SEC’s censure. “This is the first time I’m hearing of this.”
The Drumm Farm Center’s roots date to 1919, when a Kansas City businessman established
UVXY, she added, was “for traders who step out of the office to go to lunch and want to be protected if the markets suddenly go crazy,” not for a charity whose endowment is its lifeline and whose board members are versed in social welfare, not investing.
Not on FINRA BrokerCheck
Nygaard represented the Center in an arbitration claim against Elstun over the risky funds. The case settled confidentially, with Elstun’s broker-liability insurance paying the claim, she said, declining to provide further details.
The matter doesn’t show up on Elstun’s FINRA BrokerCheck record.
Neither do other settlements that Nygaard says Elstun reached with some of his clients, including athletes, in recent years.
In 2017, client Cristina Serafyn
Like elderly people, pro athletes can be vulnerable investors. With seven-figure paychecks when they’re typically in their 20s, “too many people often want to get in their pocket,” CFP Donohoe said. That means athletes “often get involved in so-called deals they do not understand, when they should be in basic investments with their long-term well being in mind.”
