Investment Adviser Loots Advisory
Investment advisers are among the most regulated securities professionals. The reason is straight forward – the advisory is where the client funds are often kept. Frequently, the advisor has discretion over those assets and the investments giving him or her virtually total control over investor money. The safeguards range from the fiduciary obligations to compliance programs and inspections. Despite those safeguards and more, at times advisors misuse client assets as the Commission’s latest case in this area illustrates. SEC v. Coleman, Civil Action No. 23-cv-459 (E.D. Pa. Filed February 6, 2023).
Defendant Joshua W. Coleman formed Vesta Advisors in April 2018. Over a two year period following the formation of the advisory, he served as an adviser representative. Defendant also held the position of Chief Compliance Officer and was responsible for the compliance program and its implementation.
Over a four-year period, beginning in December 2018, Defendant Coleman executed a two-step scheme to defraud the advisory of over $200 million in illicit loan proceeds from a series of lenders. The initial part of the scheme focused on cumulatively pledging over $160 million in client assets as collateral for personal loans. But, the clients did not consent to the loans; the clients had no knowledge of the loans. Ultimately one loan defaulted. About $20 million in pledged client assets were seized.
Defendant Coleman targeted two private lenders in crafting a scheme to repay the lost funds. Defendant misrepresented the use of the loan proceeds and misrepresented the proposed use of the proceeds. Ultimately, he defaulted on the loans. The losses totaled over $50 million. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 206(4).
Defendant settled, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to the entry of an officer/director bar and a penny stock bar. In addition, he will pay disgorgement and a penalty as determined by the Court in the future.