A former investment advisor is being sanctioned by the U.S. Securities and Exchange Commission (SEC) for breaching his fiduciary duties to his former clients after he sold his book to another firm that ended up defrauding them.
A U.S. district court in Alabama entered a final consent judgment against James Blake Daughtry for allegedly violating his fiduciary duties to former clients in connection with the sale of his advisory business.
The SEC alleged that Daughtry sold his book to another advisor, Jared Eakes, and recruited clients to move to the new firm, GraySail Advisers LLC. At the time, Daughtry allegedly told his clients that he would continue to monitor their accounts and review proposed investments.
However, the regulator said that Daughtry failed to live up to those promises, exposing his former clients to an investment fraud perpetrated by the new firm.
The SEC alleged that, in 2019, Eakes misappropriated approximately US$2.6 million from his advisory clients, including US$2 million from Daughtry’s former clients, after they were sold fake promissory notes purportedly issued by a company called Small World Capital, LLC.
In its complaint, the SEC alleged that Daughtry failed to tell his former clients that he was paid for selling his advisory and brokerage business and moving his clients to GraySail, and that he failed to live up to his promises to oversee their accounts at the new firm.
“Daughtry’s failure to exercise the requisite care for his clients, once their accounts were at GraySail, enabled Eakes to defraud these clients,” the SEC alleged in its complaint.
Without admitting or denying the regulator’s allegations, Daughtry consented to the entry of the final judgment imposed permanent injunctions against him and ordered a US$50,000 penalty.
The SEC’s litigation against Eakes is ongoing, and the allegations against him have not been proven.
However, last September, Eakes pleaded guilty to wire fraud and bank fraud charges in Florida — stemming from both the scheme to defrauded investors and a separate scheme to defraud the U.S. government of US$4.7 million in pandemic relief funds.
As part of that plea, he agreed to forfeit the proceeds of both schemes and to make full restitution to his victims.