An RIA and its owner charged clients $780,000 in undisclosed markups on syndicate offerings and 12b-1 fees on mutual funds, according to the SEC.

Christopher E. McClure, the principal of Westport Capital Markets, failed to tell clients about the firm's conflicts of interest in Class A shares of mutual funds and investment bank offerings for three years, investigators say. The SEC charged McClure and the Westport, Connecticut-based firm this week with securities fraud.

Westport Capital's SEC case

Mutual-fund fees and revenue-sharing agreements have come under regulatory scrutiny in recent years, according to experts. Westport, as a selling dealer in initial or secondary offerings, received undisclosed commissions on risky investments that have lost clients about $1.2 million to date, the SEC says.

“Westport and McClure obtained standing authority to make investment decisions in client accounts, and misused that authority when they repeatedly purchased securities in client accounts that generated undisclosed markups and fees for themselves,” according to the SEC’s complaint.

The security offerings in question “were risky and caused substantial losses for clients, including for at least one client who had told McClure to invest his accounts conservatively,” the complaint says.

McClure referred questions about the case to his lawyer, Richard Levan, who declined to comment. While the case covers March 2012 to June 2015, the firm’s most recent Form ADV discloses both the 12b-1 fees and the selling concessions, which the firm says require written consent from clients.

The SEC did not describe in the complaint how the alleged conduct came to its attention, and representatives for the regulator did not respond to a request to know whether or not the firm self-reported the undisclosed fees.

McClure does not face criminal charges in connection with the case. Tom Carson, a spokesman for the Connecticut U.S. Attorney’s Office, declined to comment on whether federal prosecutors have opened an investigation, pointing to a policy against commenting on such investigations or plans for them.

Westport’s selling concessions came from the difference in price between its discounted purchases of the securities and the higher prices paid by its clients, according to the SEC complaint. The markups, which were on top of other advisory fees, amounted to 2% or 3% of the investments, investigators say.

The markups in some clients’ accounts represented 70% or more of their total advisory fees, and at least two client accounts generated more revenue from markups for Westport than any advisory fees, according to the complaint. The 12b-1 fees on the mutual funds usually ran around 25 basis points.

Westport and McClure made false and misleading representations to one client who asked the firm’s advisors to err on the side of not losing money, according to the complaint. Over three years, his two discretionary advisory accounts made 145 investments in offerings including oil and gas exploration companies, a penny-stock Greek shipping firm and a closed-end fund with a speculative investing strategy marked by junk bonds, according to investigators.

They made up as much as a quarter of the client’s account at one time, investigators say. The false and misleading representations stemmed from the firm’s lack of disclosure of the fees and conflicts, including in its Form ADV and Part 2 filings for several years, the SEC alleges. The firm’s policies also called for full disclosure of investments costs and client consent, according to the regulator.

The client lost about $245,000 on the syndicated offerings and removed his accounts from Westport in 2015 after “a financial professional at another firm alerted the client” to the riskiness of the investments, the document shows.

The SEC, which is seeking an injunction and full disgorgement, charged Westport and McClure with two counts of securities fraud and one count of material misstatements. The regulator also charged the firm with a third count of securities fraud and McClure with aiding and abetting it.

Westport opened as a broker-dealer in 1996 and launched its RIA, which has $258.6 million in assets under management, a year later. McClure, the sole or majority owner for the past 10 years, serves as president, CEO, CFO and chief compliance officer.

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