The Securities and Exchange Commission charged a Foxboro, Mass.-based advisor and his registered investment advisory firm for failing to disclose conflicts of interest related to Aequitas Capital Management, which was providing his firm with a $1.5 million loan and access to a $2 million line of credit. Kristofor R. Behn, founder of Fieldstone Financial Management Group, recommended clients invest in securities issued by Aequitas Commercial Finance, a subsidiary of the Lake Oswego, Ore.-based alternative investments firm that made a bad bet on student loans, according to the SEC.
Behn touted Aequitas’ issued securities as an attractive investment possibility. During the next two years, nearly 40 of Behn’s clients at Fieldstone invested more than $7 million in securities issued by Aequitas, the SEC says.
However, Behn allegedly did not disclose that he was discussing the details of a loan from Aequitas to Fieldstone totaling $1.5 million to help him pay down personal debt. Additionally, Fieldstone secured a line of credit from Aequitas, with the agreement structured in such a way that it would increase as more Fieldstone clients invested in Aequitas securities. The order notes Behn never drew on the line of credit. Fieldstone’s Form ADVs also failed to disclose the conflicts of interest, the SEC alleged.
“Behn flagrantly disregarded his most basic duties as an investment adviser by concealing the significant financial incentives he and his firm would receive by recommending investments in Aequitas,” said Erin E. Schneider, the director of the SEC’s San Francisco Regional Office.
The SEC also claimed that Behn fraudulently got a $1 million investment from a Fieldstone client, intending to use the money to pay down debt and other expenses; the client was also invested in Aequitas securities. Behn framed the funds as a 10% ownership interest in Fieldstone that would strengthen the firm’s business. According to the SEC, within 10 days of receiving the money, Behn had spent $500,000, including paying down $300,000 in personal taxes.
Fieldstone and Behn did not admit nor deny the SEC’s findings. The SEC censured Fieldstone and ordered them to pay disgorgement and prejudgment interest of $1,047,971 and a penalty of $275,000 which will be distributed among investors who were impacted. Behn was also barred from associating with any brokers or investment advisors.
In 2016, the SEC also charged Aequitas with hiding its fragile financial state while simultaneously raising more than $350 million from more than 1,500 investors throughout the country.
“We allege that Aequitas had severe and persistent cash flow shortages and top executives knew they weren’t using money raised from investors like they said they would,” Jina L. Choi, the director of the SEC’s San Francisco office said at the time. “But they refused to disclose the true financial condition, continued to draw lucrative salaries, and roped even more unknowing investors into a losing venture.”
In February, Chicago-based FourStar Wealth Advisors purchased Fieldstone’s assets with the assistance of Succession Resource Group.