In a December 2017 filing in a Connecticut federal court, the US Securities and Exchange Commission (SEC) sued Westport Capital Markets LLC and its owner, Christopher McClure, for defrauding the firm’s advisory clients.
The SEC alleged that the dually-registered broker-dealer and investment adviser bought discounted shares in securities offerings from investment banks that had underwritten these same shares. Westport Capital would then sell these shares to advisory client accounts at a higher price and keep the markup—2% to 3% of each share sold—for itself and hidden from clients. According to the SEC, these shares were risky and resulted in significant losses for clients.
The agency also alleged that the firm and its owner never disclosed that they were receiving thousands of dollars from 12b-1 fees, which had been charged directly to clients with Class A mutual fund shares in their portfolios. These charges led to tens of thousands of dollars of additional, undisclosed earnings for the fund and further losses for its clients.
The SEC retained Marti P. Murray, a principal at The Brattle Group, to opine on industry custom and practice for investment advisers, and to analyze certain aspects of Westport Capital’s transactions on behalf of advisory clients. Ms. Murray and the Brattle team, provided an expert report that evaluated the firm’s principal trades, the earnings that it received as a result of its mark-up on these trades, and its purchases of 12b-1 fee-paying share classes in mutual funds. Ms. Murray also testified on behalf of the SEC.
The federal court jury found in favor of the SEC on this matter, finding Westport Capital and its owner guilty of intentionally, knowingly, and recklessly defrauding its clients under the Advisor’s Act. This judgment builds on an earlier summary judgment that the firm failed to disclose its conflicts of interest and that it made unauthorized principal transactions.
Ms. Murray was supported in this matter by Associates Mohnish Zaveri and Julia Zhu, and Litigation Specialist Gara Paulson.