Monthly Archives: March 2020

On March 16, 2020 jurors in a Connecticut federal court returned a verdict in favor of the SEC and finding Westport Capital Markets, LLC and Christopher McClure guilty of fraud.  According to the complaint, Westport and McClure had a fiduciary duty to their investment advisory clients and were obligated to manage their clients’ portfolios in the clients’ best interests.  Instead, they violated their fiduciary duty and defrauded their clients.   The complaint stated that Westport and McClure received undisclosed mark-ups when Westport, acting as principal, sold securities from its proprietary brokerage account to client accounts but failed to disclose its financial conflict of interest to clients.  Westport Capital Markets, LLC is a Westport, Connecticut registered investment adviser and broker dealer.  It has been registered since 1996.  It provided services to a variety of clients, including retirees and elderly persons who relied on investments in their Westport advisory accounts for income.  Christopher McClure is Westport’s President, Chief Financial Officer and Chief Compliance Officer.  Since 2007, McClure controlled Westport and has been the sole or majority owner of the firm.  

Since 2011, Westport entered into a Selling Dealer arrangement with investment banks.  As a selling dealer, Westport purchased shares of offerings in its own brokerage account at a discount.  Then, it sold those securities to its advisory clients’ accounts at the full public offering prices, obtaining mark-ups.   Westport and McClure obtained standing authority, from entrusting clients, to make investments decisions that were consistent with their clients’ investment objectives and best interest, but they misused that authority when they repeatedly purchased risky securities in clients’ accounts that not only generated undisclosed mark-ups and other fees but these accounts already paid a significant advisory fee to Westport to manage their investments.  They were also required to disclose all conflicts of interest, however they failed to inform clients that Westport and McClure benefited financially from the investment decisions that were made in these discretionary accounts.

During the relevant period, Westport received a total of $650,000 in mark-ups from advisory client accounts and the firm received $1.7 million in advisory fees.  The complaint stated that for some clients, the amount of undisclosed mark-ups equaled 70 percent or more of the amount of advisory fees paid by that account.  At least two clients’ accounts generated more in mark-ups that in advisory fees.  Cumulatively, their advisory clients’ accounts have lost approximately $1.2 million to date as a result of these unsuitable investments, with approximately $890,000 in realized losses.  

The SEC announced today that Denis Georgiyevich Sotnikov, a Russian national, who resides in Hallandale Beach, Florida, is involved in an ongoing fraudulent scheme in which US investors, many of whom are older and using their retirement savings, are lured into buying fictitious Certificates of Deposit (CDs) at above market rates.  The Complaint stated that Sotnikov targeted investors who were searching for CDs with high rates.  These ads included links to phony and spoofed websites which falsely claimed that the firms offering the CDs were members of FINRA and the FDIC.  The spoofed websites use domain names similar to the actual sites of legitimate financial institutions. 

As a result of the intricate scheme, unsuspecting investors see advertising for the spoofed websites at the top of their search results when searching for CDs with attractive rates.  After the potential investors visit the spoofed websites, they are directed to call a number to speak with an account executive impersonating a real registered representative, who instructs investors to wire funds to so-called clearing partners.  In reality, these clearing partners are entities used by Sotnikov to launder and misappropriate investor funds. 

According to the SEC, from November 2014 through March 2020, there were at least 24 websites spoofing actual financial firms and 8 fictitious financial firms that resulted in over $26 million in known investor losses.  The investigation found that Sotnikov’s participation was essential to the fraudulent scheme.  He organized and controlled all the entities involved as supposed clearing or offering firms which were created by Sotnikov to serve as conduits to receive wire transfers from duped investors in advancement of the fraudulent scheme.  

The SEC’s complaint filed in federal court charged Sotnikov and the entities he controlled with violating the antifraud provisions of the federal securities laws and Sotnikov with aiding and abetting those violations.  The SEC is looking for permanent injunctive relief and the return of allegedly ill-gotten gains with prejudgment interest and penalties.   In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced related criminal charges and are pursuing asset seizures.