The Securities and Exchange Commission (SEC) brought civil charges against a former advisor who sold his practice to an alleged fraudster in Jacksonville, Florida.
According to the SEC, James Blake Daughtry breached his fiduciary duties to his clients by selling his advisory business to another broker in 2019 for "substantial" compensation.
Daughtry sold his business to Jared D. Eakes, who allegedly stole more than $2.6 million through his defunct Jacksonville, Florida-based registered investment advisory firm, GraySail Advisors.
According to the SEC's civil complaint, Daughtry was unaware of Eakes' fraud. However, Daughtry conducted "very limited due diligence and failed to act in his client's best interests" when he was presented with client complaints and other red flags regarding Eakes' conduct.
Additionally, Daughtry stopped monitoring clients' accounts or reviewing proposed investments, despite his promises to do so to his clients upon the sale, and never informed them he was no longer conducting those reviews at GraySail.
Through acquiring Daughtry's business, Eakes gained about 47 clients and $8.6 million in assets under management (AUM). According to the SEC, Eakes misappropriated at least $2.6 million from the clients by selling fake promissory notes purportedly issued by Small World Capital, LLC. Eakes used funds to pay off business and student loans and spent at least $116,000 at a Las Vegas casino, according to AdvisorHub.
This matter is newsworthy and raises significant issues for advisors selling their practices: 1) what level of pre-sale due diligence is required; 2) what monitoring post-sale is required; and 3) what should clients be told or promised as to the sale and as to the seller's continuing obligations. Qualified legal counsel should be retained to navigate those issues.
Financial Advisor Transitions consults advisors nationwide to explore employment transition options and to preserve and protect their practice in any transition that they make.
