Case Study: Jake Peavy, Mark Sanchez, and Roy Oswalt Defrauded $30 Million by Financial Advisor


 “When you've known people your whole life and career and they let you down and they're not who you thought you were, it's devastating.”

- Jake Peavy, MLB All-Star, Cy Young winner, and 2x World Champion, as told to ESPN

Imagine you’re a professional athlete, and you’re looking for a financial advisor. You’re in the locker room and some teammates tell you this guy, Ash Narayan, is a great financial advisor and has taken good care of them. You meet Mr. Narayan and decide he’s going to be your financial advisor.

 

One thing you make crystal clear to him is you are a conservative investor. You do not want to receive big gains because those huge gains typically come with big risks; instead, you want a low-risk strategy where your principal (the amount of money initially put into an investment) is protected and your gains modest. You explain that your low risk tolerance is due to the fact that you’re still on your first MLB contract and your earning potential will only last a short period of your life. Naryan agrees to pursue to this low-risk strategy.

 

Naryan is what’s referred to as an investment advisor (as opposed to a broker), which means he is required to act in his client’s best interest, always above his own. He is required to provide suitable investment advice to each client in light of the client’s financial situation, investment experience, and investment objectives. So in this scenario, given what you’ve requested, he is required to invest in low-risk investments.

 

Now imagine you’ve had this financial advisor for over a decade. He’s earned your trust. You haven’t been reviewing your account statements nearly as close in years and assume the investments are suitable for you. Then you get a phone call that goes something like this:

 

Caller: “Hello, is this Jake Peavy?”

Peavy: “Yes, who is this?”

Caller: “Mr. Peavy, I’m with the Securities Exchange Commission, and we have an ongoing review into some activity by your financial advisor, Ash Narayan, and would like to ask you a couple questions. Would you be willing answer a couple questions?

Peavy: “Happy to help, but you’re scaring me a bit.”

Caller: “Mr. Peavy, did you authorize $15 million to be taken from your account over several years to invest in a private company called The Ticket Reserve?”

Peavy: “No. Of course not, what are you talking about? There’s no way I’d ever invest that much in something.”

Caller: “Mr. Peavy, this may take a while…”

 

Not only did Narayan allegedly defraud Jake Peavy out of $15 million, but it turns out that he defrauded two other high-profile athletes, NFL quarterback Mark Sanchez and MLB pitcher Roy Oswalt, out of $15 million more. In all, Narayan invested over $33 million of his customers money in The Ticket Reserve, a private company that Narayan owned million of shares and sat on the Board of Directors. Narayan also received a total of $1.8 million in finder’s fees in exchange for directing his client’s money to The Ticket Reserve.

How Could This Happen?

In the aftermath of these egregious frauds costing millions of dollars, the victims are left shellshocked and devastated, wondering how this fraud could have happened. The SEC’s 24 page complaint against Ash Narayan is an eye-opening expose into a number of red flags common in frauds against pro athletes and entertainers.

 

These common red flags of fraud include:

  • The player’s trust is earned over time and turns into a blind trust with little oversight which creates an opportunity for the financial advisor to defraud.
  • Pressures in the financial advisor’s business or personal life that the athlete is unaware of lead him to defraud his clients.
  • The financial advisor fails to disclose conflicts of interest and material information about an investment to his/her clients.
  • Due to his connections with athletes, the financial advisor is relied upon by a private company to obtain funding for the poorly performing private investment.

Lessons Learned

The following are facts from the complaint and lessons you can learn to help prevent fraud from occurring.

 

1. Narayan Built A Relationship of Trust with Oswalt, Peavy, and Sanchez

 

I’m a broken record on this one: Trust but verify. Naryan was Oswalt and Peavy’s financial advisor for over a decade. It’s easy to let trust and time overcome any checks and balances, but that leaves a wide open opportunity for you to be taken advantage of. At all times, you or an independent monitor like BrightLights needs to maintain oversight of your finances.

 

Review your inflows/outflows of your cash on a monthly basis. Anything that looks unordinary - like a $500,000 investment in a private company that you did not authorize - should be flagged and addressed.

 

If all three athletes reviewed the outflows of their cash on their monthly account statements, they would have noticed that over time, millions and millions of dollars were being withdrawn from their accounts and sent to The Ticket Reserve. Instead, they failed to verify that their advisor was acting in their best interest, and it took years for the fraud to be caught.

 

2. Narayan had 80% of Oswalt’s Salary, a “Significant Portion” of Peavy’s Salary, and All of Sanchez’s Paychecks Directly Deposited to Their Brokerage Accounts Managed by Narayan

 

The fact that the majority of their money was going to their financial advisor is by no means out of the ordinary. People want to earn a return on the money they’ve earned, and that return will typically be higher by investing than sitting in cash.

 

However, when you’re putting the majority of your money in one place, you have to understand your risk level has increased because, as they say, all your eggs are in one basket. You need to make sure that basket is well protected.

One of the first questions I will ask an athlete is how often do you review your investment account statements? Monthly? Quarterly? Yearly? Most times, the athlete reviews the activity with his advisor but does not review it on his own. So what does your advisor say during a review when he’s withdrawn millions of your money without authorization? He’s probably going to skip over that activity in his review and talk more about your investments that show on the account statement.

 

Remember, many private investments like The Ticket Reserve will not show up on your account statement. So if you don’t see the payments being made during specific months and don’t account for the decrease in value, your investments on your account statement will look the same.

 

Narayan was also required to notify his firm if he engaged in any outside business activity and had any conflicts of interest from that business. Well, he never told his firm about The Ticket Reserve, so the firm did not fully understand his level of involvement. Nonetheless, I’m still dumbfounded how Narayan’s firm did not catch these unauthorized withdrawals for his customers because the dollar amount was so large.

 

3a. Roy Oswalt and Mark Sanchez Initially Agreed To Invest in The Ticket Reserve...Later Narayan Made Investments Using Signatures That Were Forged, Faked, or Copied without Consent.

 

One interesting nugget with this whole fraud was that Oswalt and Sanchez initially agreed to make small investments in The Ticket Reserve. Roy Oswalt agreed to invest no more than $300,000, and Sanchez agreed to no more than $100,000. Although the amounts agreed upon were very small compared to their total account values, any investment in a private company is not low-risk, and I wonder how Narayan convinced them to invest.

 

Oswalt and Sanchez’s signed legal agreements to invest in The Ticket Reserve for $300k and $100k were later forged and faked for additional investments they did not authorize. In the end, Narayan directed over $7 million of Oswalt’s money without his consent and another $7 million of Sanchez’s money without his consent.

 

Jake Peavy never authorized a single investment in The Ticket Reserve, but he had $15 million withdrawn from his account to invest in The Ticket Reserve. It boggles my mind how this much money becomes unaccounted for by the players, but it points to an extreme gap in their oversight of their finances.

 

Peavy later spoke about the fraud to ESPN,

 

"It turned my whole world upside-down. For the first time ever, it was hard to give my 150 percent focus, time and energy to baseball. It was such a tough year, because everything I have built and played for was jeopardized to some degree...

 

“It turned me into a person I never wanted to be. People would text me and I'd say, 'What does this person want from me? What's their motive?' I had numerous relationships for 10-15 years with people who let me and my family down in a huge way. You put the blame on yourself in these situations, but I can't even tell you the mindset I was in from the start of spring training through the season."

 

3b. Narayan Failed To Disclose Conflicts of Interest, Finders Fees, and Material Facts about The Ticket Reserve

 

One thing we do know is Narayan failed to mention all the risks of the investment. He failed to mention his massive conflicts of interest, which included that he was on the Board of Directors, and he owned 3 million shares of the Ticket Reserve. He failed to disclose a material fact that he would be compensated directly for these sales. After the $30 million was taken from these three pro athletes, Narayan also made $1.8 million in finder’s fees from these investments.

 

Narayan also failed to tell his investors The Ticket Reserve was a disaster waiting to happen and in financial distress. Does this look like a company you want to invest in?

The lesson for these last two red flags is to do your own research (including reviewing the offering documents which should list the risks of the investment) on any private investment and demand to see the advisor’s due diligence, the financials of the company, the financial projections, the names of all management and board of directors, and all audits conducted. Ask your advisor to put in writing that he has no conflicts of interest with this investment and will not be compensated (or if he will, how much), and do your own searches to see if you can find anything to the contrary.

 

4. Only Narayan’s Ability To Keep Injecting Investor Funds into The Ticket Reserve Kept It Afloat…

 

Narayan was The Ticket Reserve’s chief fundraiser, bringing in 90% of its investment capital.  If your advisor gets you involved in a private investment, ask enough questions to be comfortable that he’s presenting you an opportunity because he believes it’s a good investment and not because he’s deeply involved and/or the company needs the money.

 

A very similar fraud occurred with Tim Duncan. He had the same advisor for over a decade, and this advisor was involved in a private company where he was the Chairman of the Board of Directors and a majority shareholder (owning 42% of the company). The private company was failing and needed millions of dollars, so the company turned to the advisor to get Duncan to invest. Duncan’s advisor promised him things that were not true to entice his investment, and took $7.5 million of Duncan’s money on these false pretenses.

 

In Narayan’s case, he turned to three professional athletes to take the majority of money that The Ticket Reserve needed. There were other customers involved in Narayan’s fraud, but the astonishing fact is that $30 million of the $33 million defrauded was taken from just these three pro athletes. They were targeted because 1) Narayan, after years of advising these guys, understood that they did not independently review their statements, and 2) they lacked meaningful financial or investment expertise.

 

Desperate people do desperate things. The scary part is you will not know when an advisor gets himself into a desperate situation. This is why it is so important to monitor your investments and activity in your accounts while understanding what you’re investing in.

 

5. Narayan Falsely Claimed He Was a CPA (Certified Public Accountant)

 

Narayan did this to increase his credibility and appear more trustworthy and capable of money management. It’s shocking that 1) the firm he worked for did not verify his credentials and 2) that such a blatant fabrication wasn’t identified by any customers.

 

The lesson here is to do a quick background search on your advisor’s credentials. The first step is to ensure your financial advisor is licensed to act as a financial advisor. You can find this information on FINRA’s BrokerCheck or the SEC’s Investment Advisor Public Disclosure, and you can conduct a CPA search at CPAverify.org.

Final Thoughts

You, or a company like BrightLights that acts as your financial watchdog, must ensure that your investment activity is being reviewed. One of the services BrightLights provides is periodic monitoring of your account statements to identify activity that is not in line with your goals.

 

Do you think Narayan would have attempted to steal money if he knew Peavy, Oswalt, or Sanchez, or his independent financial advocate, BrightLights, was reviewing his account statements every month? Highly unlikely given the deterrent that such oversight would create. Narayan would move on to an easier target, someone he knew was not reviewing their activity.

 

BrightLight would have understood that Jake Peavy was a conservative investor, and his first investment in The Ticket Reserve was never authorized. This investment would have been questioned and would have stopped any additional unauthorized withdrawals. In Oswalt and Sanchez’s cases, BrightLights could have initially helped them ask the right questions before they invested and then identify the unauthorized withdrawals thereafter.

 

The point of this whole case - as is the point of so many others I’ve written about - is a professional athlete has to proactively review and understand his investment activity. If he/she does not have the time, you should not blindly trust another person with no oversight. There are too many situations in life - investments, gambling, drugs, divorce - that create pressure for a trusted advisor to take advantage of someone. You’ll never know these pressures are influencing your advisor until it’s too late.

 

Contact BrightLights for a free discussion of your financial risks, and methods to mitigate those risks from fraud.  


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