The Securities and Exchange Commission has charged a San Ramon-based investment adviser for not disclosing a conflict of interest to investors that resulted in the receipt of $400,000 in excess commissions.
In an investigation conducted by the SEC's San Francisco Regional Office, Valentine Capital Asset Management (VCAM) and its principal John Leo Valentine, 48, allegedly violated securities law for "switching his clients between two related investments without informing them that the switch would boost the commissions they had to pay." VCAM is said to have more than 500 clients and about $211 million in assets under management.
Valentine responded to the charges saying, "The investment was suitable, very timely and profitable to the clients in 2008, a year in which the market was down heavy."
"B shares were up 46 percent in 2008 and A shares up only 30 percent," he said. "The exchange to the B shares proved profitable to the clients. And the clients were happy with the exchange."
In 2005, Valentine allegedly advised his clients to invest in Series A of a managed futures fund where they would pay a 4 percent annual commission that would end in about 2-1/2 years when commissions reached 10 percent. The SEC reports that Valentine advised about 140 clients who had or were about to reach the 10 percent threshold to exchange some of Series A holdings for Series B of the same fund that was similar but with a higher leverage. Valentine reportedly didn't make clear that the switch would result in restarting the commission payments.
"Investors are entitled to understand the fees they are being charged by their advisers and whether any conflicts of interest might be influencing the investment advice they are receiving," Marc Fagel, director of the SEC's San Francisco Regional Office, said in a statement. "Despite knowing that switching between funds would increase the costs to their clients, VCAM and Valentine did not fully disclose their conflicts in recommending the investment strategy."
The investigation didn't come about by client complaints, Valentino said.
"Our clients are very happy with it," he said, adding that they had received many notes of gratitude from clients for the maneuver. "We can hold our head up high because our clients are happy with the return."
In a statement released by the SEC, VCAM and Valentine were said to have settled the case without admitting or denying the findings and will return more than $400,000 in excess commissions to the clients and pay a $70,000 penalty.
"I'm glad that the issue is behind us," Valentino said, "and we are looking forward to working hard for our clients."