A federal court delivered its final judgment earlier this week against a Connecticut-based investment advisory and broker/dealer, Westport Capital Markets, and its owner, Christopher E. McClure, who was ordered to pay more than $1.5 million in combined penalties and disgorgement. The judgment follows a verdict last March that found McClure and his firm defrauded clients by making unauthorized securities purchases and enriching himself through additional fees.
The Securities and Exchange Commission originally filed a complaint against McClure in December 2017, accusing him of breaking his fiduciary duty to clients by purchasing securities with undisclosed markups and fees that were in addition to the fees already known to (and being paid by) his clients. The complaint argued that these risky investments produced losses of more than $1 million for those clients.
According to the complaint, Westport’s client base included “retirees and elderly persons” relying on their investments with the firm for income. Starting in 2011, the firm began entering into partnerships with investment banks that offered underwriters in securities offerings, which Westport would then purchase shares of in its own brokerage account at a discount before reselling them to clients at the full public offering price.
“By doing so, Westport pocketed a ‘markup’ equal to the difference between the discounted offering price that it paid for the shares at the full offering price at which Westport sold the shares to its clients,” the complaint read.
The firm continued doing so from March 2012 through June 2015; it also charged advisory fees based on clients’ investments. In total, the firm raised more than $500,000 in markups during the time period in question, and raised about $1.7 million in advisory fees between 2012 and 2015. In total, clients invested in these offerings lost about $1.2 million to date, with about $890,000 in realized losses, but Westport and McClure never disclosed to clients that they were benefiting financially from this arrangement.
The firm and McClure also defrauded one unnamed client by acting against his own objectives, after he told the advisor he wanted his accounts to be “invested conservatively.” Instead, McClure invested heavily in the risky securities offerings with the markups. This led to about $245,000 in losses on the part of the client.
Additionally, Westport invested client assets in mutual fund share classes that included 12b-1 fees, even when more affordable options with parallel objectives were available for clients, though it did not disclose those fees to clients, according to the complaint. The SEC has pursued several cases and settlements against firms failing to disclose 12b-1 fees in the past year after it finished settling cases emanating from its self-reporting initiative concerning mutual fund share class conflicts.
In total, the federal court ordered that Westport and McClure must jointly pay disgorgement of $632,954 and $187,807 in prejudgment interest, for a total amount of $820,761. Additionally, Westport must pay a $500,000 civil penalty, while McClure is required to pay a penalty of $200,000.
McClure could not be immediately reached for comment.