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SEC: Father and Son Duo Misled Investors

The charges against Michael and David Sztrom were filed late last week and are one of two complaints against advisors related to a California-based RIA.

Michael Sztrom, a California-based advisor who was banned by broker/dealers from making investment recommendations, continued doing business anyway, using his son’s registered advisory firm as a front, and even impersonating his son on calls, according to a complaint filed by the Securities and Exchange Commission.

The charge comes on the heels of another against a financial advisor, Arizona-based advisor Jacob Glick, who is charged by the commission with making concentrated stock bets with elderly clients’ funds without revealing the risks involved. The SEC is seeking permanent injunctions, disgorgement and civil penalties against the defendants.

In both cases, the advisors worked with California-based RIA Advanced Practice Advisors (APA), which “offers integrated, cloud-based back-office services” for independent advisors, according to the firm’s LinkedIn page. On Dec. 15, 2020, APA filed a request in order to terminate its California registration as an investment advisor, according to a recent SEC settlement order, and could not be reached for comment.

In Aug. 2015, the elder Michael Sztrom left his role at an independent advisory firm in order to start his own business, but learned that he was under FINRA investigation and that he would not be allowed to make client trades through several clearing broker/dealers, according to the complaint filed by the commission in California federal court.

Michael and his son David Sztrom contacted Advanced Practice Advisors to see if they could work there, but CEO Paul Spitzer told them that the elder Sztrom could not join because of the investigation. The firm agreed to work with David, who’d only recently passed his securities licensing exam.

The son established an unregistered investment advisor called Sztrom Wealth Management (SWM), working with a group of APA clients who’d originally been clients of his father.

“Despite being told he could not associate with APA and despite being banned from the clearing broker/dealers, Michael continued to serve as an investment adviser to clients and used the services of APA’s broker/dealer Charles Schwab & Co. (“Schwab”) by impersonating David on at least 38 separate telephone calls, sometimes when David was present,” the complaint read. 

During this period, the elder Sztrom was directly making portfolio recommendations to clients, helped his son rebalance securities portfolios, drafted emails his son could send to clients and reviewed business records while having access to his son’s “computer, files, passwords, and Sztrom client information, as well as SWM account balances and APA client portfolios.”

Though he often spoke to clients, Michael Sztrom never said he was not associated with APA or could not execute trades, according to the complaint.

In May of 2016, Schwab allegedly reached out to Spitzer to tell him that Michael Sztrom had impersonated his son on calls with Schwab, and a month later, the broker/dealer ended its relationship with APA, giving the firm 90 days to find a new broker.

Schwab sent a letter to all of APA’s clients who were using their platform, alerting them that it was terminating the relationship and informing them that they would need to find a different investment advisor should they want Schwab to continue to be their accounts’ custodian; if they wanted to retain APA, the letter stated they would need to find a new brokerage firm, according to the complaint.

“After learning that Schwab had terminated its relationship with APA, at least four Sztrom clients terminated their relationship with Defendants,” the complaint read. “APA also lost several clients advised by (investment advisory representatives) other than Defendants, including Spitzer’s largest client.”

Spitzer and APA were the subject of their own SEC settlement offer related to Michael and David Sztrom’s alleged misdeeds; according to the offer that was filed the day before the complaint against father and son, APA and Spitzer knew that David (who is not named in the settlement) had no real experience, and that his father had wanted to continue working with his clients.

“Spitzer, and therefore APA, knew or should have known that the Adviser Representative’s father was advising APA clients under the guise of his inexperienced son’s association with APA,” the complaint read. “APA and Spitzer failed to disclose to advisory clients that the Adviser Representative’s father was not formally associated with APA. Additionally, APA failed to implement certain compliance policies and procedures, including those designed to prevent clients from being misled.”

The complaint against the father and son is unrelated to one against Glick, beyond the association with APA. According to the SEC complaint, Glick mis-invested client funds, making a big bet on Rite Aid stock without revealing to clients the risks involved.

Glick joined APA in Sept. 2015, with many of his previous clients following him. Most typically had low or medium tolerances for risk, and they were not sophisticated investors, and many were seniors or retirees with modest incomes and assets, according to the complaint.

Shortly after joining APA, Glick began selling his clients’ conservative securities for riskier choices, including stock options. He focused on Rite Aid after reading that the company was planning a merger or acquisition, according to the SEC. Glick’s strategy impacted numerous clients, including an unnamed Arizona-based widow in her mid-70s. According to the SEC, her portfolio primarily consisted of low-risk securities, but by Feb. 2017, Glick invested more than half of her account balance in Rite Aid stock, selling many of her low-risk securities to fund those purchases. 

Glick acted in a similar way with a number of other unnamed clients, investing more than half of one investor’s funds in Rite Aid stock and making trades that resulted in losses of more than $122,000 from an unnamed married couple, the SEC charged; according to the complaint, this loss represented a large portion of their life savings. Additionally, the rumors about Rite Aid’s acquisition failed to pan out, leading the stock to plummet. 

“By the end of 2017, the Glick clients had collectively incurred realized and unrealized losses that totaled over $1 million dollars by investing in (Rite Aid) securities,” the complaint read. “Glick failed to perform due diligence as necessary to provide the Glick clients with a reasonable basis for recommending (Rite Aid) securities and he failed to disclose to them the risks of investing in (Rite Aid) stock and options.”

APA’s chief compliance officer noticed Glick’s tendency to invest client securities in high-risk, low-performing investments in Jan. 2017, along with the abundance of Rite Aid investments in his client’s portfolios. Both the CCO and Spitzer demanded that Glick liquidate the Rite Aid purchases in his client’s accounts; instead, Glick purchased more options for the unnamed married couple. At this point, Spitzer fired Glick, according to the commission.

Five months after his termination, Glick received a check for “IGA Holdings” (a company formed by Glick) from the unnamed widow for $675,000, and he told her he would invest her money in a “real estate venture.” Around the same time he received the check, Glick opened a bank account for “IGA Holdings” and deposited the investor’s funds into it, and he also moved $35,000 of her funds into a separate account, and later wrote himself a check for $10,000 from the second account, according to the complaint.

He continued to withdraw cash from this account, eventually putting the entirety of the widow’s remaining funds into the second account, the SEC stated. 

According to the complaint, he used the funds to pay back other clients’ principal investments, and also used some of the money to pay down his own credit card bill, to repay a loan and to make a down payment on a commercial building in Laurel, Miss. At one point, “Client A” suffered a stroke, and her brother took over as power of attorney. In an April 2019 meeting, Glick allegedly claimed he’d stopped advising his sister when he’d been let go from APA. 

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