The Securities and Exchange Commission issued a press release announcing securities fraud charges against a Florida based purported “investment adviser” Arthur F. Jacob (Jacob) and his firm, Innovative Business Solutions LLC (IBS), for allegedly deceiving clients over a period of at least five years. According to the SEC, the unregistered investment adviser had about 30 client households and approximately $18 million under management.
In the SEC order the agency alleges that from at least mid-2009 through July 2014 Jacob and IBS misrepresented the risks and profitability of investments he purchased for advisory clients. The SEC alleged that Jacob was informed of investment risks of certain exchange traded funds but failed to disclose these risks to clients and told them that the investment strategy he was using was safe, carried low or no risk, and would produce predictable profits when in fact it was not.
For instance, the SEC alleged that Jacob bought and held for long term a highly volatile exchange-traded product (ETP) called the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN (VXX). The VXX is designed to provide exposure to stock market volatility through futures contracts on the CBOE Volatility Index. However, importantly the VXX does not track the performance of the VIX Index because of the use of futures causes the investment to drift significantly from its benchmark and is therefore inappropriate for long-term holding. Nonetheless, the SEC alleged that Jacob purchased VXX in clients’ accounts in March 2010, and again in the May through July 2010 time period and held the VXX positions in clients’ accounts for years causing steady declines until the investors lost almost all of their investment.
The SEC also alleged that Jacob concealed his disciplinary history from clients. That history included being disbarred as a lawyer for misappropriating client funds and other forms of professional misconduct. In addition, according to the SEC Jacob and IBS were not registered with the SEC or any state as investment advisers and Jacob falsely told clients that he and IBS were not required to register as an investment adviser. Finally, the SEC found that Jacob gave false information to a brokerage firm about the advisory services he and IBS provided so that he could retain trading authorization over clients’ accounts and continue to receive advisory fees for managing the accounts.
Through this course of conduct the SEC’s alleges that Jacob and IBS willfully violated the antifraud provisions of federal securities laws.
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