In the initial Wall Street film, financier Gordon
Gekko says the now-famous line "greed is good." In the recently released
sequel, Wall Street, Money Never Sleeps, Mr. Gekko repeats the line,
noting "now it seems it's legal." Later he amplifies citing the old investment
saw "bulls make money, bears make money, but pigs get slaughtered." The
Respondents in In
the Matter of Valentine Capital Asset Management, Inc., Adm. Proc. File
No. 3-14072 (Sept. 29, 2010) could have benefited from this thought. After
making $3 million in commissions from their clients, they counseled them to
shift their investments to another fund without stating that following the
advice would cost them almost $400,000 in fees which would go straight to the
Respondents' pocket. As Mr. Gekko stated, Respondents lost. They lost the fees
which were disgorged. They lost more cash paid as a penalty. They lost trust of
their clients, each of whom was furnished a copy of the Order documenting their
Valentine Capital is
a settled administrative proceeding based on an investment adviser's failure to
inform his clients about conflicts of interest - the additional fees his advice
would cost them. Respondents are Valentine Capital, a registered investment
adviser and John Valentine, the firm's president and owner. In addition to the
fund, Mr. Valentine also managed about $400 million in assets as a registered
representative with an independent broker dealer. The broker executed Fund
transactions and paid commissions to Mr. Valentine.
Valentine Capital is a managed futures fund and commodity
pool. It has Series A and B limited partnership units. These two series are
essentially the same. Series A invests 20% of its assets in commodities future and
80% in cash. Series B invests 30% with the balance in cash. Each has a 4%
annual commission capped at 10%. Once the cap is reached, additional
commissions paid are rebated to the investor in additional units.
In December 2007, Mr. Valentine began advising his
clients to switch from Series A to Series B. At the time, about 450 of
Valentine Capital's 700 clients had invested approximately $40 million in
Series A. Mr. Valentine had earned about $3 million in commissions from those
Between December 2007 and May 2008, approximately 140 of
Mr. Valentine's clients followed his advice and switched from Series A to
Series B. Mr. Valentine did not advise his clients that this switch would
increase their fees and his earnings. The switch garnered almost $400,000 in
fees for Mr. Valentine.
As an investment adviser, Mr. Valentine had a fiduciary
obligation to properly advise his clients and make full disclosure. Yet here,
he failed to disclose his self-interested conflict to his clients in breach of
this duty. Accordingly, the Order charges the Respondents with violations of
Section 206(2) of the Investment Advisers Act.
To resolve the matter, the Respondents each consented to
the entry of a cease and desist order from further violations of Section 206(2).
Both were censured. In addition, Valentine Capital agreed to disgorge
$394,710.82 in commissions along with prejudgment interest. Mr. Valentine also
agreed to pay a civil penalty of $70,000. As part of the settlement Respondents
undertook to post the summary portion of the Order on the Fund's website and
distribute it to clients. Clearly, the Respondents here would have benefited
from considering the old investment adage recited by Mr. Gekko.
Program: Fifth Annual
Securities Fraud National Institute, October 7-8, 2010 in New Orleans. For
further information on this excellent program please click here: http://www.abanet.org/cle/programs/securitiesfraud/
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.