SEC Charges Advisor For Using Client Funds To Buy A Ski Home

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The Securities and Exchange Commission (SEC) charged Seattle-based investment advisor Dennis H. Daugs Jr. of Lakeside Capital Management LLC with fraudulently misusing client assets to make loans to himself, which he used to buy a ski home and a vintage car, and to settle with other disgruntled clients. Lakeside Capital and Daugs have agreed to pay $340,000 in disgorgement and prejudgment interest to make up for the benefits he got in misusing those funds plus a $250,000 penalty, Daugs is barred from the securities industry for five years, and an independent manager will be brought in to wind down Lakeside Capital.

SEC Director: Daugs used client funds to give himself low interest loans

“Investment advisers have a fiduciary duty to act in the best interest of advisory clients and disclose all material conflicts of interests,” said Jina L. Choi, director of the SEC’s San Francisco Regional Office.  “Daugs instead took advantage of his clients and misused more than $8 million of their assets for his own personal gain.”

The SEC discovered that in 2008 Daugs liquidated $2.15 million in securities from one of his client’s portfolios and then sent the money from her IRA to an escrow account that he used to buy real estate, and then in 2009 misused another $950,000 to purchase a 1955 Mercedes Gullwing. Altogether, Daugs effectively lent himself $3.1 million from the client’s portfolio without her knowledge or consent on extremely favorable terms: no pay-off date, no collateral, and a prime interest rate. He also made a similar $4.5 million loan from one of Lakeside Capital’s funds, and hid these actions from Lakeside Capital’s compliance officer.

Daugs repaid his ‘loans,’ but that doesn’t excuse the fraud

While Daugs was able to pay back these loans, the SEC found that he still defrauded his client and violated his responsibility to act in her best interest. Besides, there are plenty of cases where investment advisors have misdirected funds believing they could make up the difference down the line only to leave their clients high and dry when the money doesn’t turn up.

Ironically, some of the $4.5 million was used to settle claims with disgruntled clients, so it seem that Daugs has a history of troubled client relations, and even when his five years are up it will take a particularly trusting client to park money with him in the future.

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