The Securities and Exchange Commission accused Arete Wealth’s broker/dealer and advisory firm (along with its chief compliance officer) of trying to cover over “allegedly fraudulent conduct” by some of its registered reps.
The complaint against Arete Wealth Management and Arete Wealth Advisors, CCO Bob Chung and several of the firm’s reps is one of the final enforcement actions announced during Chair Gary Gensler’s tenure.
According to the complaint filed Friday in Illinois federal court, Arete-affiliated advisors Joey Miller and brothers Jeff and Randy Larson were introduced in 2018 to potentially sell securities for Zona, which purported to hold certain leasehold mineral rights in an “oil-and-natural-gas-rich” region in West Texas. The SEC claimed that while Arete hadn’t approved Zona securities to sell to clients, the three reps nevertheless sold more than $8 million in Zona shares; the practice of reps selling to customers without the approval of their b/d firm is called “selling away,” which is prohibited.
According to the SEC, instead of receiving commissions through Arete, Miller and Jeff Larson agreed to solicit clients in exchange for getting discounted shares of Zona stock (Randy Larson also decided to raise capital for Zona). Miller told Arete his Zona share was a “personal investment” with no compensation (and no soliciting customers), while the Larsons didn’t disclose anything to Arete.
The reps began soliciting customers to buy Zona stock, though they tried to hide this from Arete, according to the commission. They repeatedly told Zona representatives and clients not to email them to their Arete email addresses; on March 27, 2019, Miller responded to a client who asked about Zona, writing, “I don’t know what ZONA is!! Call me on that one, plz (sic).”
However, Zona had a problem; it was a sham, according to the Justice Department.
From early 2018 through late 2020, Richard Sterrit and associates raised more than $16 million from over 300 investors through a “private placement” of Zona common stock.
Sterritt had previously been convicted of securities fraud and used the alias “Richard Richman” to hide the fact from clients. Still, he misappropriated nearly all the money raised, using it for luxury goods, including a Bentley and cash gifts for family, friends and girlfriends. He later pleaded guilty to his role in the Zona scheme (along with several co-defendants) and is awaiting sentencing.
The SEC claimed that during an on-site examination of the Larsons’ branch office in 2019, FINRA investigators uncovered evidence about their involvement in soliciting Zona stock. According to the commission, Arete CCO Chung followed up and later put them on “heightened supervision” after discovering they’d pitched the security despite Arete barring them from doing so.
In January 2020, an anonymous email to the reps (as well as other Zona investors) revealed Sterrit’s true identity and prior convictions. Jeff Larson allegedly contacted Sterrit and said he needed to “get ahead” of the allegations and “fight fire with fire.”
According to the commission, after Sterrit was charged, Chung was tasked with overseeing the settlement agreements to remove Arete from liability. In April 2021, Arete CEO Joshua Rogers (referred to only by his title in the complaint) set up a call with the three reps, their counsel, Chung and other members of Arete management.
“Addressing the Arete representatives, Arete’s CEO chastised them on the call for involving Arete customers and clients with Zona and told them: ‘You came into my living room and took a giant [expletive] on my rug,’” according to the complaint.
However, according to the commission, many of the Arete clients’ settlement agreements allegedly included “false and misleading statements” and a broad (and illegal) liability waiver that could make clients think they’d waived non-waivable causes of action against Arete.
“This language purported to broadly limit Arete Advisors’ liability by representing that the client was waiving ‘any and all’ claims—not just those related to Zona—including claims arising out of gross negligence, willful misconduct, and even fraud on the investment adviser’s part,” the complaint reads. “This language also purported to relieve Arete Advisors of ‘any past, present or future duties,’ including an adviser’s fiduciary duties to its clients.”
According to the commission, over 100 Arete clients signed the document, many for less than $5,000 in return for compensation. According to the commission, Chung claimed he had not read the agreements. None of the three reps are still registered with Arete, according to their BrokerCheck profiles.
Representatives from Arete did not respond to a request for comment prior to publication, and the reps could not be reached for comment as of press time.