Louis Martin Blazer III (Blazer) founded and operated a capital management firm (Blazer Capital) and investment advisory firm (Blazer Advisors) that targeted professional athletes and other high net worth individuals. The nature of the services provided by Blazer Capital and Blazer Advisors consisted of personal services, i.e., paying bills and managing other aspects of their personal lives and financial commitments, and performing traditional advisor services.
While in his role as investment advisor, the Securities and Exchange Commission alleges Blazer took approximately $2,350,000 from five clients in a series of unauthorized transactions.
How did he do it?
Blazer pitched two movies in which he had an undisclosed financial interest to his clients. When he was unable to raise enough funding for the movies, the SEC alleges Blazer took $550,000 from one client’s account to purchase interests in two movies (even after that client said no). To accomplish this transfer, Blazer forged documents and submitted them to this client’s brokerage firm to effect a wire transfer.
Once the client found out about this unauthorized transfer, the client threatened legal action and demanded repayment. The repayment was made through a Ponzi-like scheme, however. Through this scheme, Blazer took $650,000 from another client, using a similar unauthorized transfer process to make the repayment. Blazer allegedly took the remaining $100,000 and invested in a music venture on behalf of his own Blazer Capital without informing the second client.
What are some of the claims against Blazer?
In total, here’s a breakdown of the claims the SEC has lined up against Blazer:
Misappropriation of funds
Falsification of document
Wire fraud
Forgery
Failure to disclose
False statements to the SEC
Failure to register as a broker
How can you prevent this from happening to you?
Due to the forgeries and false documents, this alleged investment fraud can take a while to discover, and by then, the money may already be gone. The SEC alleges Blazer hid the information clients would be able to use to determine if there is evidence of fraud. For example, the SEC states Blazer created fake documents that hid account statement information.
There are a few ways to keep an eye on your brokers and advisors to make sure your funds are being used with your permission.
1. Use BrokerCheck
Financial Industry Regulatory Authority (FINRA) offers a helpful tool that will allow you to run a professional background check on your broker or investment advisor. This tool is called BrokerCheck. If they are not registered, be extremely cautious of working with him or her. In addition to telling you if your broker or advisor is registered, BrokerCheck also allows you to review your broker's and/or advisor's professional background. Have they been suspended? Have they paid fines for improper behavior? You can find this information and more through BrokerCheck. To check one of your advisors or brokers, simply click here to be taken to FINRA's website.
2. Related Party Transactions
An investment advisor taking client funds to invest in projects in which the advisor has a financial interest is a clear ethical violation and is strictly prohibited by the Securities and Exchange Commission.
It's fair to assume your advisor or broker isn't padding his or her pocket with your funds (because he/she shouldn't be), but it will never hurt to ask questions to at least get verbal or written confirmation they are not, especially for investment opportunities not available to the general public. Private investment opportunities generally carry more risk, due to less regulatory oversight, and allow parties involved to hide details from potential investors.
Let's walk through an example.
Example: Advisor A organizes a limited liability company (LLC) for the purposes of investing in rental properties. Advisor A is a member of this LLC, as detailed by the LLC's articles of organization that were filed in Advisor A's state. To raise funding for this LLC, Advisor A approaches clients with a "hot" new opportunity to invest in a LLC that will "take advantage of an increase in housing demands." The clients are not told about Advisor A's ownership interest in this LLC.
How do clients find out about Advisor A's conflict of interest?
The clients can ask the following, "Do you have an ownership interest in this LLC you are promoting?" Asking this, however, can be uncomfortable, as it implies the advisor is not being honest.
Fortunately, there's another way to check. Simply search the LLC's articles of organization that were filed with Advisor A's state's secretary of state. For most states, LLC members must be disclosed in the articles of organization, so if your advisor is involved as a member, he or she will be listed in the articles of organization.
If your advisor or broker is not listed, you can also ask if he/she has any management agreements or service agreements with the LLC. Management/service agreements are tools frequently used to get benefits of an LLC without actually being a member to it.
3. Monitor Your Bank Accounts
If you opt for personal services where you have an advisor cut checks or wire funds on your behalf, either review your bank and brokerage accounts regularly or hire a third party with no ties to your advisor to review your statements for you.
Ideally, this other third party will be a CPA with some audit experience. A CPA with an audit background should be able to spot unusual payments and coach you on how to bring questions about suspicious payments up with your advisor.
Additionally, do not rely on your advisor giving you account statements from a third party brokerage account. Periodically, pull your account statements directly from your brokerage firm and review the activity.
If you think you may need to have some of your documents reviewed, reach out for a free consultation by contacting McCauley here .
Disclaimer: The U.S. Securities and Exchange Commission alleges the claims stated above in this blog. Blazer may not be found liable for any of the claims alleged in the SEC complaint. Source: U.S. SEC v. Louis Martin Blazer III No.16-CV-03384 (S.D.N.Y. May 6, 2016)