The Securities and Exchange Commission is pursuing securities fraud charges against Family Endowment Partners LP and owner Lee Dana Weiss. The regulator claims that the registered investment adviser persuaded clients to invest over $40M in illiquid securities without disclosing that Weiss possessed an ownership stake in the entities that issued the securities. The regulator said that these entities made payments to Weiss.
According to the SEC, between ’10, and ‘12 FEP and Weiss caused two hedge funds and recommended that 11 clients invest over $40M in securities that were issued by a French company. The firm and Weiss did not purportedly disclose that there were conflicts of interest, including that he had a financial stake in the company or that he and entities under his control received over $600,000 payments from the company after the investments were made.
In ‘11, Weiss allegedly recommended that one client invest $2.55 million in subsidiaries of the French company despite knowing that the funds would go toward paying other clients’ delinquent interest. Also that year, he and his firm suggested that clients put $5 million in a consumer loan portfolio. The transaction was set up so that part of the proceeds of over $300,000 would go to a third-party manager, which was actually an inactive real estate company controlled by Weiss’s friend. The friend would then move the payments to Weiss and others.
Then, between ’12 and ’14, the investment adviser and Weiss allegedly suggested to five clients that they invest about $8.25 million in notes or shares of companies belonging to him. At least once, Weiss and his firm did not disclose to a client that the note was for a company that belonged to him. Another time, they purportedly did not disclose that investor money would pay for FEB’s financial duties rather than serve the companies into which investors had placed their funds. That there was significant risk that the notes would not be paid back, considering the companies’ financial state, was not disclosed. The SEC said that Weiss and his investment adviser firm violated federal securities laws and SEC antifraud rules.
It is important that investment advisory firms act in the best interests of clients. Failure to do so can be detrimental to an investor, potentially resulting in substantial and unnecessary losses.
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Read the SEC Complaint (PDF)