RIA Compliance Blog
The Securities Exchange Commission (“SEC”) recently filed suit against a North Carolina investment adviser for allegedly defrauding investors in the sale of certain real estate-related investments in unregistered pooled investment vehicles. The adviser, Richard W. Davis Jr., solicited investors primarily from the Charlotte, North Carolina region and was able to raise approximately $11.5 million from 85 investors, the majority of which were individuals with retirement accounts. However, he allegedly failed to disclose to clients that the money in the funds was being steered towards several other entities beneficially owned by himself.
Davis allegedly told investors in one of his funds that the fund’s capital would be invested in short term fully secured loans to real estate developers. He allegedly failed to mention, however, that many of the real estate developers receiving these loans were companies owned and operated by himself, creating an inherent conflict of interest. Furthermore, the companies never repaid the loans in full and Davis allegedly failed to inform his investors of this or reappraise the value of the fund’s investment. Instead, Davis allegedly misrepresented the value of the pooled fund by repeatedly stating that it had not lost any value.
Davis allegedly commingled the funds of another pooled investment fund by transferring a large portion into bank accounts owned by several of his entities and using them for unrelated business expenses or personal expenses. Ultimately he transferred and spent approximately $7.7 million in investor funds. Under the offering documents of the pooled funds Davis was entitled to a management fee of only 0.125% of assets under management; however, Davis allegedly never assessed or withdrew this fee according to the required procedures. The SEC determined that had he done so, he would have only been entitled to $150,000 in management fees over the time he managed the fund. Despite these failings, Davis allegedly told his investors that their investments were growing steadily. He allegedly based his statements on speculative valuations of the fund’s underlying investments instead of the true net asset value of the fund.
The SEC charged Davis with various violations of federal securities law, including sale of unregistered securities, fraud in the offer or sale of securities, fraud in connection with the purchase or sale of securities, and investment adviser fraud. Without admitting or denying the allegations, Davis agreed to a partial settlement, subject to court approval, which bars him from the further sale of securities in a pooled investment vehicle. In addition, he will be barred from further violations of the antifraud and securities registration provisions if the settlement is approved.
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