The SEC found that the 'wirehouse lite' company was light on truth about its AUM and made it pay

August 4, 2016 — 10:09 PM UTC by Irwin Stein

0 Comments

Brooke’s Note: As journalists, we struggle with assigning accurate assets under management to the RIAs we write about. We all know that high AUM unto itself is a flawed indicator, both of an RIA’s quality and of the competency and trustworthiness of its owner. Yet that metric has an irresistible pull because it is about as tangible as it gets in an abstract world of defining the indefinable. As such, AUM representations are the playground of RIAs that might choose to mislead. Its temptations are total as a means of self-representation due to their simplicity and effectiveness. The Dawn Bennett case that we covered earlier this week revolved around alleged misrepresentation of AUM. See: In exclusive RIABiz interview, Dawn Bennett tells how she’s striking back at SEC after a $4-million legal drubbing has left her 30-year career in shambles. Felipe Luna and his company, CONCERT, were also, according to the SEC, loose with the AUM truth — as well as a few other things like revenue totals. But like Bennett, Luna is not taking this setback lying down and is doubling down with new asset totals that are ever more spectacular. This time, $1.7 billion of these $3.7 billion assets are being called AUA, or assets under administration, and $2 billion are being called AUM.

Clarification: We changed the word “defrauded” to “misled”.

Felipe Luna, CEO of CONCERT Wealth Management Inc., has always called his firm a “wirehouse lite.” But federal regulators are saying that Luna has repeatedly gone light on the truth when it comes to his business dealings, even as CONCERT has announced signing on 14 new advisors onto its CRM technology platform.

In July, the Securities and Exchange Commission concluded that Luna, CONCERT Global and CONCERT Wealth Management misled 21 investors — including 12 of his firm’s own advisory clients — by overstating the firm’s assets under management revenues and profits — by a mile. See: With LPL as its new BFF, CONCERT seeks bigger game and more RIAs.

CONCERT Global Group Ltd of San Jose, Calif. bills itself as a technology firm for financial advisors. It owns CONCERT Wealth Management, an RIA that aggregates other advisors and brings them onto its turnkey RIA platform.

Specifically, the SEC found that CONCERT Global Group, CONCERT Wealth Management, Luna and Dennis Navarra, who served as chief financial officer of CONCERT Global until August 2013, solicited approximately $2.2 million in unregistered offerings using materially misleading private placement memoranda.

CONCERT was founded in 2005. In 2012, RIABiz notched Luna on its top-10 list of people to watch in the RIA business. We wrote, “under the leadership of Felipe Luna, [CONCERT] has been flying under the radar, targeting smaller breakaways with around $100 million in assets who want to turn independent but don’t want to start a business from scratch — and really don’t half-mind the wirehouse model.”

'Corporate governance issue’

Fast-forward to 2016. On July 21, the SEC issued a press release announcing the settlement of a regulatory action against CONCERT. One day later, CONCERT fired off a press release its own. The release did not mention the SEC’s charges or the settlement. Rather, it touted the company’s growth, its recent signing of 14 independent advisors and its ability “to attract over 130 advisors and an expected $1.7 billion in assets under administration to back-office and RIA platforms in the first two quarters of 2016.”

In an interview with RIABIz, however, Luna added a caveat: He said the newly acquired advisors and their combined $1.7 billion of assets are part of an outsource offering of back-office services, such as software and compliance, and will not be counted as part of CONCERT’s AUM.

Still, CONCERT’s chief operating officer, Keith Krueger, told RIABiz that CONCERT’s latest form ADV, dated May 2016, which reflects just over $2 billion of AUM, is accurate and that the firm has more than 110 advisors on board.

Keith Kruger: We thought it best to put it to bed, settle with the SEC and move on. Keith Kruger: We thought it best
to put it to bed, settle
with the SEC and move on.

Krueger attributed the SEC action to a “corporate governance issue” that had long been resolved.

“We thought it best to put it to bed, settle with the SEC and move on,” he says.

At odds

But at least one advisor — one who joined CONCERT in 2009 and left in 2010 — says the SEC sanctions of CONCERT regarding looseness with numbers jibe with his experience at the firm.
,
“I had to constantly review the billings and reconciliations,” says Paul Spitzer, founding member of Advanced Practice Advisors. The Del Mar, Calif. firm has $150 million of AUM, according to its latest ADV.

“There were constant errors, always in Luna’s favor. If I had not caught them, my money would have stayed in his pocket.”

When reached via phone, Luna responded to Spitzer’s comments with the proviso that he was on vacation and did not have immediate access to documents. Luna says he didn’t recall any such problem with Spitzer, adding that he does recall Spitzer bringing up that issue when Spitzer had one foot out the door to form his own firm.

Capital with a twist

Since the SEC action, Luna has been actively engaged in damage control and assuring advisors the firm’s problems are in the past.

The price or moving on, however, came with a stiff price tag.

CONCERT Wealth Advisors and its parent, CONCERT Global, agreed to pay a $120,000 fine and signed a cease-and-desist order prohibiting the company from similar conduct in the future.

Luna agreed to a cease-and-desist order and a $40,000 fine. CONCERT Wealth and Luna were also censured as part of the settlement.

CONCERT’s problems lie at the heart of its business model. It is billed as place where advisors serve in a fiduciary capacity as RIAs but also get the kind of support that full-service brokers have come to expect — hence the term, “wirehouse lite.” See: How CONCERT is leveraging a full-service alternatives platform to boost its carriage trade clientele.

But the approach of offering more full service than, for instance, an independent broker-dealer, proved to be capital-intensive. CONCERT needed ready cash to negotiate and secure leases for advisors and loaned them upfront money to help get them started. Advisors typically borrowed $20,000 to $30,000 from CONCERT with the understanding that they were to pay back the loans within a year or two.

Like many roll-up leaders, Luna raised money to feed his company’s need for capital; in Luna’s case, he solicited investments totaling $2 million between 2010 and 2013.

But instead of using banks and private equity firms — the usual source of capital for startups — Luna made a private equity offering to the market, raising funds for the parent company, CONCERT Global.

Inflated AUM

That’s where CONCERT’s problems with the SEC began. According to the regulatory agency, Luna overstated CONCERT’s AUM by about $1 billion in the offering memorandum and claimed the company was profitable when it was actually losing money, according to SEC disclosure documents filed as part of the settlement.

The SEC found that CONCERT used some of the proceeds of the private placement “to repay the loans previously issued to Luna-affiliated companies and to pay dividends on Luna’s preferred stock.” What made the dividends inappropriate was that the company was losing money.

During the period in question, Luna talked up his company to the media. In September 2011, Luna told RIABiz the firm had $2 billion in AUM and projected that figure to grow to $6 billion within a year.” See: CONCERT Wealth Management nabbed 12 wirehouse teams in the last 12 months and this wirehouse-lite is just getting started

The actual AUM was less than $1 billion, according to the SEC.

At the time, CONCERT was targeting smaller breakaways with around $100 million in assets — teams that wanted to turn independent, but did not want to start a business from scratch. To provide those services, CONCERT offered coddling that went beyond what most IBDs and RIA custodians generally provide. See: How CONCERT is leveraging a full-service alternatives platform to boost its carriage trade clientele.

Schwab referral

Advanced Practice Advisors was typical of the breakaways Luna was seeking to attract.

“I started with AG Edwards in 1989 and was looking for a change after the Wells Fargo merger in 2009,” Spitzer says. “I had a small book and Luna was recommended to me by people at Charles Schwab as someone who could help me get set up.”

In retrospect, Spitzer says, “I was a little naive …. Within a year I felt that Luna was one of the most ethically challenged people that I had ever met.”

In addition to constantly reviewing what he says were often inaccurate billings and reconciliations, Spitzer had a bigger issue with Luna.

“More troubling was the fact that I was hired [by Luna] to handle business development in San Diego. I would bring in a firm to work under me, and Luna would step in between us, take on the firm directly and cut me out.”

Luna responds that CONCERT’s actions, in Spitzer’s case, arose from a variation on CONCERT’s usual business model that both parties had agreed to try.

“Paul was hired to try something new. He had rented office space with extra offices. We placed several advisors — 8 to 10 — in those offices with him. Paul brought none of them to the table and took most of them with him when he left.”

Question of honor

Paul Spitzer: I had to constantly review the billings and reconciliations. Paul Spitzer: I had to constantly
review the billings and reconciliations.

Spitzer’s biggest gripe with Luna, however, concerns an alleged deception that didn’t involve money but which, in a military town like San Diego, carries a high degree of censure.

“I think what troubled me most was that Luna at first told me that he had been a Navy SEAL,” Spitzer said. “Later on he told me that he had gone through SEAL training, but had not completed it because his knee blew up.”

Luna denies the allegation. “I never had a conversation with Paul about my service in the Navy other than to say that I am an Annapolis graduate. I don’t discuss my service with anyone. I certainly never told him that I was a SEAL. “

When asked in the RIABiz interview what he did in the Navy, Luna responded, “This and that.”

Aequitas connection

Spitzer says CONCERT may not be out of the woods with the SEC given its involvement with SEC-embattled Aequitas Capital Management of Lake Oswego, Ore.

Spitzer says he spoke to “about a dozen” CONCERT advisors, all of whom sold Aequitas notes.

According to Spitzer, “CONCERT told them that they loved the product, and that it offered a good return for their clients.”

Aequitas, however, had its own SEC comeuppance. The SEC placed the company into receivership in March 2016 based on allegations that it was raising funds from investors without disclosing that it was insolvent. See: The unbelievable series of missteps that sent Aequitas, its RIA clients and their investors, reeling.

In an October 2014 article in Financial Planning written by Charles Paikert, Luna praised Aequitas notes as a way to attract high-net-worth investors.

It contains this quote from Luna: “Products like private promissory notes are appealing because RIAs could use more tools to attract high net – worth clients who would otherwise go to a trust company or a larger firm.”

Krueger would not comment on the Aequitas matter other than to say that it’s in the hands of attorneys and would likely not be resolved quickly.


Mentioned in this article:

Omniscient Enterprise Advisor
CRM Software
Top Executive: Felipe Luna

Advanced Practice Advisors
Advisory Firm
Top Executive: Paul Spitzer



Share your thoughts and opinions with the author or other readers.

Submit your comments: