A collaborative investigation by the Securities and Exchange Commission and Massachusetts Secretary of the Commonwealth William Galvin’s office resulted in penalties levied on a pair of Massachusetts-based investment advisors for allegedly invest their clients in a company without disclosing that they each held thousands of shares in that corporation’s stock.
David Alexander Rourke and Jarrod Andrew Sherman, the co-principals of Strategic Planning Group, submitted offers of settlement to both the SEC and the Massachusetts Commonwealth Secretary’s office. SPG primarily offered retirement planning for clients, without about 300 families and about $214 million in assets under management as of March of this year, according to the SEC.
Rourke and Sherman had discretionary authority over clients’ funds, and starting in August 2016, they began investing those funds in stock for Ecoark, a holding company headquartered in Rogers, Ark. According to the SEC order, Ecoark was the only publicly-traded stock in which SPG invested client assets, and the Massachusetts Commonwealth order stated that SPG representatives advised that their clients invest up to 5% of their portfolio in the firm. Additionally, SPG’s owners and employees also all invested in Ecoark, according to the SEC order.
But Rourke and Sherman had a consulting agreement with Ecoark, offering “business, sales and marketing and financial services to the company” from May 2013 to May 22, 2016, according to the SEC order. In return for their work, Rourke and Sherman were compensated with 50,000 shares of Ecoark common stock; to date, Rourke has about $800,000 and Sherman has approximately $300,000 invested in the company, according to the Massachusetts Commonwealth Secretary’s office (Ecoark went public in April 2016, a month before the consulting agreement ended).
However, the SEC order indicated that Sherman and Rourke failed to disclose their connections to Ecoark to a compliance consultant they’d hired, and did not put any information about their “connections to Ecoark, the consulting agreements, the stock granted to them under the agreements, or their other holdings of Ecoark securities” on their ‘Form ADV’ which is required to be filed with the SEC on an annual basis; the form is intended to provide information of advisor disclosures for current and potential clients, according to the SEC. The order also indicated the duo failed to adequately disclose its Ecoark holdings “through other means.”
“As a result, SPG clients were not aware of the resulting conflicts of interest, were not able to understand the extent of those conflicts, and were not able to provide SPG with informed consent to the conflicts of interest (that is, to agree to the purchases of Ecoark stock) or reject them (that is, to refuse to purchase Ecoark stock),” the SEC order read.
The Massachusetts order censured the firm and its co-principals, whidh must pay the state a total of $225,000, while the SEC mandated that Rourke and Sherman each pay a fine of $75,000 (SPG itself was levied with a penalty of $200,000 in total).
According to the Massachusetts Commonwealth Secretary’s order, “nearly all of SPG’s clients who have purchased Ecoark stock have reported losses on their investment.”