RIA Compliance Blog
On May 24, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint against an options trading instructor and unregistered investment adviser, Gustavo A. Guzman (“Guzman”). The complaint alleges that Guzman obtained more than $2.1 million from investors, assuring them that their funds would be invested in equity options and real estate. However, evidence showed that Guzman misappropriated a third of the funds “and lost the remainder through his options trading while misleading existing or prospective investors.”
Guzman was not registered as an investment adviser with the SEC or any state authority. However, he was tasked with managing investments in two private funds specializing in options trading and one real estate hedge fund. He also received management fees for managing these funds. As a result, Guzman met the definition of an investment adviser in the Investment Advisers Act of 1940 (“Advisers Act”) and was subject to its anti-fraud provisions.
The SEC’s complaint alleges that from about April 2010 to about August 2015, Guzman obtained an excess of $2.1 million from investors living in North Carolina, South Carolina, Illinois, Washington, and California. He told prospective investors that their funds would be used in options trading through a private fund and in real estate through a real estate hedge fund. The SEC alleged that in 2011, Guzman used about $130,000 of the approximately $2.1 million to pay personal expenses. The SEC also alleged that by the end of 2012, Guzman “had used at least $235,000 to pay himself, pay his personal expenses, and made approximately $36,000 in Ponzi payments.” Any money that was not used to pay personal expenses or Ponzi payments was lost through trading and other business-related expenses.
The SEC also alleged that Guzman made various omissions and misrepresentations about the funds’ investment performance. In April 2012, for example, Guzman sent emails to one investor claiming that this investor had obtained an investment gain of about 19% in 2011. In reality, however, the investor had suffered an 82.09% loss. In March 2013, Guzman sent this same investor a K-1 that claimed that the investor’s investment in one of the private funds had obtained a gain of $59,139, or 18.6%, in 2012. In reality, however, the investment performance of the private fund resulted in a loss of 9.42%. Guzman’s statements to the investors also did not disclose that he was allegedly misappropriating funds from them.
The SEC’s complaint requests that Guzman be permanently enjoined from further violating the Advisers Act and that the court order Guzman to disgorge all of the ill-gotten gains he received. The complaint also requests that the court order Guzman to pay civil money penalties.
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