RIA Compliance Blog
On November 17th, the Texas State Securities Board’s Office of Inspections and Compliance charged Mowery Capital Management, LLC (“Mowery Capital”) and one of its investment adviser representatives (collectively “Respondents”) with fraud for failing to disclose certain conflicts of interests, charging excessive fees, plagiarizing advertising material, and other material misrepresentations. The complaint requests that the state Securities Commissioner revoke Respondents’ registration with the state, levy an administrative fine, and issue a cease and desist order prohibiting any further fraudulent behavior.
When registering as a registered investment adviser, a Form ADV must be completed and filed with the appropriate securities authority. Part 2 of the Form ADV, or the “Brochure,” acts as the primary disclosure document for clients and requires the applicant to write in plain English general information about the business (i.e. types of services offered, fee schedule, business and educational background of employees), including any possible conflicts of interest the applicant may have.
The Texas Securities Board alleges that in 2007, Mowery Capital contracted to provide investment services to a brokerage firm in return for compensation and failed to disclose the agreement in Part 2 of its Form ADV and the conflicts of interest it would create. While Mowery Capital recommended the brokerage firm to clients, the complaint alleges that clients were never made aware of the existence of the agreement or how much compensation Mowery Capital was receiving as a result of the agreement. Moreover, the contract between the two parties failed to include a dollar amount or method for calculating how much the brokerage firm would be charged for the services.
In addition to the above-described omitted information, Mowery Capital allegedly made certain material misrepresentations on Part 2 of its Form ADV as well. When discussing its brokerage practices, the Securities Board alleges that Mowery Capital’s assertion that they did not receive any portion of the brokerage’s trading fees constituted a material misrepresentation. In Part 2’s section on asset management, Mowery Capital stated that assets were usually invested through discount brokers. However, the Securities Board contends that Mowery Capital’s recommendation of the brokerage firm, which would charge Mowery Captial’s clients as high as twice the amount it was charging non-Mowery clients, constituted a material misrepresentation because the high costs had no reasonable relation to the services the brokerage firm provided to Mowery Capital’s clients.
The Securities Board also found issues with some of Mowery Capital’s investment advertising and research it provided to the brokerage firm. Mowery Capital’s website contained a letter addressed to clients which focused on macro-economic policies. Significant portions of the letter are alleged to be copied from a similar article written by CNBC’s Larry Kudlow. There were also research documents bearing the registered representative’s name which were sent by Mowery Capital to the brokerage firm. These documents were also allegedly plagiarized from similar reports by Zacks Investment Management, Inc. and The Vanguard Group, Inc.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our attorneys can help assist financial service providers in complying with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.