THIS INVESTMENT ADVISER SHOULD HAVE LISTENED TO GORDON GEKKO
In the initial Wall Street film, financier Gordon Gekko says the now-famous line “greed is good.” In the recently released sequel, Wall Street, Money Never Sleeps, Mr. Gekko repeats the line, noting “now it seems it’s legal.” Later he amplifies citing the old investment saw “bulls make money, bears make money, but pigs get slaughtered.” The Respondents in In the Matter of Valentine Capital Asset Management, Inc., Adm. Proc. File No. 3-14072 (Sept. 29, 2010) could have benefited from this thought. After making $3 million in commissions from their clients, they counseled them to shift their investments to another fund without stating that following the advice would cost them almost $400,000 in fees which would go straight to the Respondents’ pocket. As Mr. Gekko stated, Respondents lost. They lost the fees which were disgorged. They lost more cash paid as a penalty. They lost trust of their clients, each of whom was furnished a copy of the Order documenting their advisers’ fraud.
Valentine Capital is a settled administrative proceeding based on an investment adviser’s failure to inform his clients about conflicts of interest – the additional fees his advice would cost them. Respondents are Valentine Capital, a registered investment adviser and John Valentine, the firm’s president and owner. In addition to the fund, Mr. Valentine also managed about $400 million in assets as a registered representative with an independent broker dealer. The broker executed Fund transactions and paid commissions to Mr. Valentine.
Valentine Capital is a managed futures fund and commodity pool. It has Series A and B limited partnership units. These two series are essentially the same. Series A invests 20% of its assets in commodities future and 80% in cash. Series B invests 30% with the balance in cash. Each has a 4% annual commission capped at 10%. Once the cap is reached, additional commissions paid are rebated to the investor in additional units.
In December 2007, Mr. Valentine began advising his clients to switch from Series A to Series B. At the time, about 450 of Valentine Capital’s 700 clients had invested approximately $40 million in Series A. Mr. Valentine had earned about $3 million in commissions from those transactions.
Between December 2007 and May 2008, approximately 140 of Mr. Valentine’s clients followed his advice and switched from Series A to Series B. Mr. Valentine did not advise his clients that this switch would increase their fees and his earnings. The switch garnered almost $400,000 in fees for Mr. Valentine.
As an investment adviser, Mr. Valentine had a fiduciary obligation to properly advise his clients and make full disclosure. Yet here, he failed to disclose his self-interested conflict to his clients in breach of this duty. Accordingly, the Order charges the Respondents with violations of Section 206(2) of the Investment Advisers Act.
To resolve the matter, the Respondents each consented to the entry of a cease and desist order from further violations of Section 206(2). Both were censured. In addition, Valentine Capital agreed to disgorge $394,710.82 in commissions along with prejudgment interest. Mr. Valentine also agreed to pay a civil penalty of $70,000. As part of the settlement Respondents undertook to post the summary portion of the Order on the Fund’s website and distribute it to clients. Clearly, the Respondents here would have benefited from considering the old investment adage recited by Mr. Gekko.
Program: Fifth Annual Securities Fraud National Institute, October 7-8, 2010 in New Orleans. For further information on this excellent program please click here: http://www.abanet.org/cle/programs/securitiesfraud/