Adviser’s Multiple Roles Allowed Misappropriation of Client Funds

The SEC commenced proceedings against an investment adviser who allegedly used his position as trustee and executor of his client’s estate and president and co-trustee of the client’s foundation, to misappropriate funds.  According to the SEC, the adviser befriended the elderly widow of a longtime client and convinced her to appoint him as her executor and foundation president.  After she died, he used his position to move money from her foundation to her estate checking account and then transferred funds to his personal accounts.  The SEC asserts that the adviser made more than 200 unauthorized transfers totaling more than $9 Million over a 12-year period.  The Manhattan District Attorney has also brought criminal charges.

OUR TAKE: Whether or not this particular adviser engaged in the alleged illegal activity, one key lesson is that an adviser should never assume multiple conflicting roles as investment adviser, executor of a client’s estate, and president of the foundation.  The appearance of impropriety alone would be hard to defend if an interested family member second-guesses any transaction.