SEC Charges Seattle Firm and Owner With Misusing Client Assets for Vacation Home and Vintage Automobile |
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Topics: Mercedes-Benz 300SL
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Securities and Exchange Commission
17 July 2014
FOR IMMEDIATE RELEASE
2014-138
Washington D.C., July 17, 2014 — The Securities and Exchange Commission today charged the owner of a Seattle-based investment advisory firm with fraudulently misusing client assets to make loans to himself to buy a luxury vacation home and refinance a rare vintage automobile.
An SEC investigation found that Dennis H. Daugs Jr. and Lakeside Capital Management LLC used assets from the portfolio of a senior citizen client to fund $3.1 million in personal loans without telling her or obtaining her consent. The loans were not in the best interest of the client and significantly favored Daugs, who provided no collateral, had no set pay-off dates, and paid most of the interest at the prime rate (which banks typically provide their most credit-worthy customers). Daugs also improperly directed an investment fund managed by his firm to make more than $4.5 million in loans and investment purchases to facilitate personal real estate deals and fend off claims from disgruntled Lakeside Capital clients. He diverted more than $500,000 from the fund to pay settlements to disgruntled clients.
Lakeside Capital and Daugs, who eventually paid back the diverted funds and personal loans, agreed to settle the SEC’s charges and pay more than $340,000 in disgorgement and prejudgment interest to the individual client and the investment fund, representing ill-gotten gains that Daugs retained even after he paid back the loans. Daugs and his firm also agreed to pay a $250,000 penalty, and Daugs will be barred from the securities industry for at least five years. Lakeside Capital will wind down its operations with oversight from an independent monitor.
“Investment advisers have a fiduciary duty to act in the best interest of advisory clients and disclose all material conflicts of interests,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office. “Daugs instead took advantage of his clients and misused more than $8 million of their assets for his own personal gain.”
According to the SEC’s order instituting a settled administrative proceeding, the misconduct occurred from 2008 to 2012. Daugs managed a large investment portfolio for the senior citizen client and members of her family, owing her a fiduciary duty to disclose any material conflicts of interest and act in her best interest. Daugs violated that duty in January 2008 when he fraudulently caused Lakeside Capital to liquidate $2.15 million in securities in her portfolio to generate the cash to transfer that amount from her IRA account at a custodian broker-dealer directly to an escrow account he used to purchase his ski vacation home. Daugs similarly misused $950,000 in assets from her portfolio in May 2009 to refinance his purchase of a rare 1955 Mercedes “Gullwing” automobile. Even as he made his regular interest payments into her IRA account, Daugs withheld from the client as well as Lakeside Capital’s chief compliance officer at the time that he was using her investments to loan money to himself for his ski home and auto.
The SEC’s order also finds that Lakeside Capital failed to take required compliance and custody measures to safeguard client assets.
The SEC’s order charges Daugs and Lakeside Capital with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c) thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-2 and 206(4)-7. Daugs and Lakeside Capital agreed to the settlement without admitting or denying the findings.
The SEC’s investigation was conducted by Thomas Eme and supervised by Tracy Davis in the San Francisco office. The preceding examination of Lakeside Capital was conducted by Cindy Tom, Steven Wolz, John Chee, Matthew O’Toole, and Kenneth Schneider in the San Francisco office.