A Pennsylvania grand jury found an investment adviser guilty of breaching his fiduciary duties to his clients by investing funds in particular investment funds with higher fees when more affordable options were available, according to the Securities and Exchange Commission.
The Commission first charged Dean McDermott and his company McDermott Investment Advisors in September 2019, alleging that the company had illegally invested its clients’ money in certain UITs with “significant” transaction fees. SEC Enforcement Division Director Gurbir S. Grewal said the commission was “satisfied” with the jury’s verdict.
“This verdict underscores the fundamental principle that investment advisers must uphold their fiduciary duties to act in the best interests of their clients, to seek the best execution of client transactions, and to fully and fairly disclose all material facts relating to conflicts of interest,” he said. .
McDermott resided in both Pennsylvania and Florida and was the principal and sole owner of the advisory firm and McDermott Investment Services, its affiliate broker/dealer. MIA was founded in 2004 with headquarters in Fort Myers, Florida, and offices in Pennsylvania, New Jersey and Maine. The company was registered with the SEC from 2006 to 2012, and from 2014, with assets under management reaching $165 million and up to 350 clients.
The two firms had “significant commonalities and overlaps,” with most MIA advisers also working as registered representatives at MIS, according to the SEC complaint. The company offered investments in UITs, in which the sponsor selected securities to be placed in a trust for a predefined period of time. McDermott’s company offered two versions of the UIT, including a paid version for consulting clients and a “standard” version for b/d clients paying per transaction.
But investors who purchased the standard version were hit with an additional “transactional sales charge” (90% of which went to the broker making the transaction), making it more expensive than the paid option. As of March 2013, the company purchased hundreds of thousands of standard UIT units for over $5.7 million across more than 160 consulting accounts, often purchasing the same UIT for many customers the same day.
McDermott ensured that the company always purchased the standard UIT version (rather than the paid version). This meant that about 90% of the roughly $160,000 in transactional sales fees went to MIS, and since McDermott owned both the consulting firm and the broker/dealer, he took all the profits, according to the commission.
“McDermott, MIA and MIS were duplicating themselves by receiving both the advisory fees and the fees generated by the more expensive titles,” reads the complaint.
Instead, the company should have put its paying customers’ funds into paid UITs to avoid the sales charge, the SEC argued. The company also did not disclose that such additional charges existed, that most of the profits from the charge would accrue to the MIS, and that more affordable versions of UITs were available. According to the SEC, McDermott admitted that he intentionally selected standard ITUs for clients to increase b/d revenue.
“Defendants could have chosen paid ITUs, but chose not to”[b]because MIS has overhead” and since McDermott and MIS did not charge advisory clients commissions for stock trades, “we have[d] to offset revenue somewhere,” the complaint read.
Representatives for McDermott did not respond to a request for comment.
The SEC was seeking a permanent injunction, as well as restitution and prejudgment interest, as well as civil penalties and any other relief the court deemed “just and appropriate,” according to the complaint.