Case Study: Investment Adviser Defrauds Pro Athlete and His Wife

A Fraud Lasting Six Years

On Tuesday, the SEC charged a registered investment adviser, Jeremy Joseph Drake (“Drake”) employed by HCR Wealth Advisors, with defrauding an unnamed professional athlete and his wife by deceiving them of the fees they were paying. The athlete was noted to have placed $35 million under Drake’s management.

 

The 15-page complaint alleged that the advisor promised the advisory fees would be a “VIP rate” of between 0.15% and 0.20% of assets under management when they were actually being charged 1%. This resulted in the pro athlete and his wife paying $1.2 million more than they were promised and Drake pocketing a cool $900,000.

 

Just last week I wrote a blog post detailing the stark differences in the standard of care between brokers and investment advisors. I pointed out the advantages of having a registered investment advisor handle your financial advising because he/she has to act solely in your best interest as a fiduciary. The rub, of course, is when any financial advisor - broker or investment advisor - commits fraud, he’s thrown that standard of care out the window.

 

The astounding part of this alleged fraud is the wife (referred in the complaint as “Ms. A”) questioned these fees for six years, a time frame that included three separate assistants/interpreters of the wife and an accountant asking questions. The advisor consistently provided them “false and misleading emails, deceptive management fee reports, and a number of fabricated documents to corroborate his lies.”

 

The advisor even had an accomplice pose as a compliance officer to squash the questions being posed. These are the lengths people will go to cover up a fraud.

 

Although many warning signs were addressed by the athlete’s wife, the fraud may have been identified earlier if certain steps were taken. The following are a few lessons to learn from this eye-opening case detailed in the SEC’s complaint.

Lesson 1 - Account Statement Is King

Paragraphs 16 - 28 of the complaint summarized:

 

From 2010 to 2016, Drake told Ms. A and her assistants that a 1% fee was being charged on their accounts statements but then money was credited back later which resulted in a net fee of around 0.15%. Drake provided “management fee reports” he created from 2010, 2011, and 2012 to support his claim.

 

By 2014, Drake began providing fabricated account statements which included “Advisor Fee Credit” entries that did not exist on the originals. Through 2016, Drake continued to provide fake account statements with “fee credits” on them and even switched his story to tell a third assistant that the credits “primarily came from bond interest paid by Schwab.” He then said the clients did not need to worry about tax implications because these credits were paid from tax-free bonds.

 

When I was a regulator, I was awash in documents and data from firms which I had to parse through to understand. If I was unsure if the data was reliable, I would refer back to account statements to ensure the data was accurate. Account statements are typically created and distributed by the custodians (quickly defined as where your securities and money are held and where trades and money movement occur) of the investment adviser or broker/dealer. Custodians are usually large institutions separate from your advisor creating a bit of a separation between church and state, so to speak.

 

If you’re having issues with your advisor over fees or investments, do not rely on account statements that he provides you. Go directly to the source. In this case, Charles Schwab was the custodian so you could log-on to your online account and access your statement without your advisor’s intervention.

 

If this was done, Ms. A might have identified that there was no “Advisor Fee Credit” or “fee credits” on the original account statements yet those entries magically appeared on the ones Drake provided her.

 

Go to the source.

Lesson 2 - Custodians Can Help

Paragraphs 35 - 36 of the complaint verbatim:

 

35. In early June 2016, Ms. A asked Drake to provide a contact person at Schwab who could explain the fee credits. She expressed frustration that she and her assistants and accountant were still unable to understand the credits after so much time, and that she wanted a clear explanation of everything immediately. 

 

In response, Drake created a false persona named “Ron Stenson” whom he held out as an employee of “Charles Schwab Advisor Services” who could help explain the fee- credit system. He then created a misleading “Ron Stenson” email address, rstenson.scas@gmail.com, from which he sent Ms. A, the third assistant, and the accountant a number of false and misleading emails and attachments, including fabricated documents bearing a “Charles Schwab Advisory Services” logo.

 

At times, Drake participated in email communications with them as both Ron Stenson and himself, using a personal email address when emailing as himself, and using the rstenson.scas@gmail.com address when emailing as Ron Stenson. Drake sent more than a dozen “Ron Stenson” emails to Ms. A and her representatives in June 2016.

 

36. Drake also licensed a telephone number from an Internet telephone provider, which he gave to Ms. A and her representatives as a number to use to call Ron Stenson, and for which he set up a voicemail box to receive calls. Drake then connected Ms. A’s accountant with a confederate who posed as Ron Stenson in two or three telephone calls with the accountant and purported to corroborate Drake’s explanation of the fees and credits.

 

Ms. A definitely had the right idea about wanting to speak to a representative at Schwab who could explain the fee issue. However, Ms. A should have done this years earlier and directly contacted Schwab without going through her advisor. By the end of June 2016, Ms. A finally had enough of Drake’s explanations and contacted Schwab directly. This prompted Schwab to contact HCR Wealth Advisors about Drake which led to this fraud being uncovered and the SEC taking its action.

 

When your fees appear awry, as they did here for six years, and your advisor is unable to provide an explanation that jives with your account statements or even makes sense, leverage the resources of the custodian (in this case, Schwab) to try to get clarity on your fees.

 

Additionally, Ron Stenson’s @gmail.com domain should have also raised alarm bells for Ms. A and her representatives, particularly her accountant, since it was not a Charles Schwab email address. Typically and as a general rule of thumb, all business-related emails in finance should come from a business email domain and not a gmail account.   

Lesson 3 - Is Anyone Else Home?

The complaint mentioned (Paragraph 12) that Drake was the sole contact for the athlete and his wife during their eight years at HCR Wealth Advisors. This is not unusual, but I would suggest the following:  When you are talking with an advisor (preferably before you begin the relationship but even during the relationship if you haven’t asked), ask him how many people are employed at his firm, how many compliance officers the firm has, how seriously the firm takes compliance, and who the Chief Compliance Officer is.

 

What this does is immediately set an expectation that you understand and acknowledge the need for compliance and oversight. It will also give you some insight into the advisor depending on how he answers these questions. For example, if he says you don’t need to worry about compliance because he’s such a great advisor, that’s a red flag. Compliant advisors should welcome oversight because it helps justify their work and give credibility.

 

If Ms. A had asked who HCR’s Chief Compliance Officer was, she would have learned Steve Weinberger (per SEC’s Form ADV) was the CCO since 2004. If Ms. A had reviewed Mr. Weinberger’s BrokerCheck profile (CRD# 3221929), she would have identified that he also acts as a dually registered investment advisor/broker and had three claims for damages back in 2009 and 2010 for over $2,000,000, alleging breach of fiduciary duty, negligent misrepresentation, and unsuitable recommendations. One of these customer disputes went to arbitration and the client was granted damages of $125,666.67, and the other two were settled for a total of $196,000.

 

I don’t know if this would have swayed Ms. A form investing with Drake given the athlete and her knew Drake from his time at Morgan Stanley1, but it would have been good information to know that HCR’s CCO also acted as an advisor had this type of history.

Conclusion - Be Proactive When Things Smell Fishy

Drake tangled himself in so many lies that he continued to fabricate new stuff in order to keep the fraud going. There were a number of red flags that should have been investigated outside of Mr. Drake’s purview. Drake kept providing fake documents, emails, statements and even a fake person! I do not blame Ms. A because not only was English her second language, but finance is very complicated, and many of these lessons are not ingrained in most people.

 

Sometimes you have to get answers from other sources to substantiate the claims made by those entrusted with your money. If someone is defrauding you, they will lie to you to perpetuate the fraud and hope you stop asking questions. In this case, it took years and years to be uncovered.

 

If you are in a situation like this and do not feel like you know what to do, contact BrightLights.

 

Footnote

1 - Although the complaint doesn’t name Morgan Stanley, it just states “another investment adviser,” his BrokerCheck identifies that was the previous position.