Financial adviser Jonathan Dax Cooke and Keystone found guilty

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A consulting practice accused of fraudulently selling $40 million in variable annuities to federal employees has lost to the SEC in court and also faces an ongoing civil lawsuit in the case.

Former LPL Financial registered representative Jonathan Dax Cooke and the firm he co-founded, Keystone Capital Partners, which operated as federal employee benefits advisers, are facing court hearings over proposed remedies — including restitution for ill-gotten gains — after the jury in federal court in Atlanta. found them guilty on March 21 of securities fraud. Cooke’s practice earned approximately $1.7 million in commissions on sales of about 200 variable annuities between March 2012 and November 2014, according to investigators.

Cooke and Keystone tricked federal employees into thinking the expensive products they were selling to them as rollovers from their Thrift Savings Plan accounts were government-approved or even affiliated with it, according to the SEC. Misrepresentations to customers are just below undisclosed conflicts of interest as the most common allegations in SEC enforcement cases, according to Thomas Gorman, a partner at the law firm Dorsey & Whitney, a former chief enforcement officer with the regulator and author of “SEC actions“Blogging.

“You really have to understand what the product is set up to do and how they put it together,” he said. “While disclosures will tell you that if you spend the time to read them and if you can understand them – which can be difficult no matter how sophisticated you are – it’s always good to sit down with whoever’s selling it to you. and have it walk you through.”

By the time the SEC announcement his case against Keystone in July 2017, an attorney for two of the first four defendants told CNN Money that the allegations were “shockingly false and misleading”. Three other former brokers in the practice later settled the SEC’s case against them, with two of them being called by the regulator to testify at trial, according to court records. Lawyers representing Cooke and Keystone did not respond to requests for comment.

LPL fired Cooke and two of the other ex-advisers in December 2014 while citing “concerns” about their client communications, according to their FINRA BrokerCheck records. Company representatives did not respond to a request for comment on the jury’s verdict.

In a separate civil suit, the counseling practice, Cooke and former Supervisory Court Office director Christopher S. Laws face allegations of “material breach of representations and warranties” in a 2016 sale of their business. financial planning. The buyer, Pinnacle Peak Private Client Group, based in Scottsdale, Arizona, accuses Keystone and the ex-brokers of failing to disclose the matter to the SEC despite provisions in their agreements stating that the practice did not l subject “of any claim, action, suit, proceeding or investigation”. Pinnacle is seeking damages of at least $2 million.

Lawyers for the parties to the case did not respond to requests for comment. Under a January ruling that Pinnacle is currently appealing, an Atlanta judge ruled that the case should be remanded to federal court in Phoenix on two counts and to Macon District Court, in Georgia, for the third count.

“Certainly, the parties in this case did not draft their contracts in such a way as to avoid ad hoc disputes or to promote judicial economy. Instead, the parties have agreed to resolve certain disputes by [the] the claimant’s state of origin and other disputes in [the] the state of origin of the defendants,” Judge JP Boulee wrote in the ruling. “When [the] plaintiff entered into several contracts containing different choice of court clauses, he knew that he could face litigation in several different districts, depending on the contract breached. »

The underlying allegations in the SEC case revolve around how the regulator says Keystone and Cooke sold the expensive products to customers. The “doing business” name of federal benefits advisers, an eagle logo for the practice resembling the official seal of federal agencies, misleading comparisons to a life annuity already offered through the TSP, and the use of parts of actual TSP forms in their rollover documents created “the false impression that their investment was affiliated with or approved by the TSP,” the SEC said.

“In truth, the variable annuities that defendants offered and sold were privately issued, separately from the TSP and the federal government, and had much higher costs than the alternatives available through the TSP,” the complaint states. “Furthermore, the representatives had no affiliation with, nor were they endorsed or controlled by, the federal government.”

In terms of cost, the products Keystone sold had mortality, expense and administration fees of 1.3% and rider fees of between 125 and 130 basis points, as well as a redemption fee of 8.5% for withdrawing everything in the first seven years. , according to the SEC.

The verdict holds Cooke and company “responsible for fraudulently selling variable annuities to hundreds of federal employees who were at or near retirement age by misrepresenting themselves and their company like advisors hired by the federal government to educate federal employees about their retirement benefits, and convince them to defer funds from their retirement accounts to fund the purchase of higher-fee variable annuity products,” the official said. SEC Chief Enforcement Officer Gurbir Grewal in a declaration. “This verdict underscores our continued efforts to protect investors, especially those approaching retirement.”

Members of the jury unanimously found Keystone and Cooke guilty of violations of anti-fraud laws, including a charge that Cooke aided and abetted violations of exchange law by LPL. After a conference call on March 23, the SEC has 45 days to file its motion and opening brief on sanction in the case. Defendants will then have 30 days to respond to that filing, with another two weeks for the SEC to respond.

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