SEC Charges Investment Advisers for Failing to Disclose Conflicts of Interest

Strategic Planning Group (“SPG”) agreed to settle charges with The Securities and Exchange Commission (“SEC”) for failing to disclose a conflict of interest by consenting to a cease-and-desist order, censure, and civil penalties of $200,000. Its principals, David A. Rourke and Jarrod A. Sherman also agreed to civil penalties of $75,000 each.

SEC Charges Investment Advisers for Failing to Disclose Conflicts of Interest

Conflict of Interest

Sherman and Rourke provided business, sales, marketing, and financial services for Ecoark Holdings from May 2013 to May 2016. Each received 100,000 shares of the company’s common stock as compensation for their consulting work. After a reverse stock split, they each received 50,000 shares. In addition to the shares received as compensation, Rourke personally invested $750,000 and Sherman invested $350,000 to purchase shares both before and after the company became publicly traded. They both continued to hold all of their shares.

SPG is a retirement firm that manages assets for approximately 300 client families, most ranging in age from 55 to 70 years old. The firm had almost exclusively invested its client assets in mutual and exchange-traded funds; however, in August 2016, it began purchasing shares of Ecoark stock for its clients. Ecoark is the only publicly traded stock in which SPG has invested client funds, and its clients collectively purchased approximately 4.5 million shares.

Sherman and Rourke failed to disclose to investors their relationship with Ecoark and the fact that some of the shares they received were part of compensation for consulting services they provided. By failing to disclose conflicts of interest, SPG, and its principals, negligently breached their fiduciary duty to its clients. Because Rourke and Sherman stood to benefit from an increase in Ecoark’s stock price, and therefore their clients’ purchase of the stock, they were obligated to fully and fairly disclose either in the Form Brochure or through other means, their consulting relationship and the compensation they received.

Unaware of the conflict, its clients were unable to either provide SPG with informed consent or to reject the proposed stock purchase. This is a violation of Section 206(2) of the Advisers Act, which makes it unlawful for an adviser to engage in any transaction, practice or course of business that operates as a fraud or deceit upon any client or prospective client.

As a result of the settlement, SPG is required to distribute the order to each of its existing and former clients for whose account SPG purchased Ecoark publicly traded stock. Additionally, they will provide a copy of the order to all new or existing clients before purchasing Ecoark stock for their accounts.

Read the full Press Release Here.

Identify, Eliminate and Mitigate Conflicts Within Your Firm

Core Compliance and Legal Services, Inc. can help educate your firm to identify conflicts of interest, advise on disclosures, provide guidance on annual updates to FORM ADV, and assist the firm in providing transparency around any existing conflicts of interests. 

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