2016
Texas Securities Commissioner John Morgan on March 18 entered a Disciplinary Order revoking the registration of James Poe, a Fort Worth investment adviser representative who was found to have engaged in fraudulent practices and sold securities without being properly registered. Jim Poe & Associates Inc., Poe’s investment advisory firm, was also sanctioned for failing to disclose excessive fees.
From 2011 to 2015, James Poe sold life settlement investments, promising investors a 75% return. The life settlements were issued by SRP-LS200 LLC, an entity Poe controlled.
Life settlement contracts are risky, complex financial arrangements in which an investor receives an interest in the death benefits of a third-party. The benefits are paid to the investor when the third party dies.
Investors in the life settlements were informed in writing that their investments would be used to pay “all associated costs.” However, there was no written disclosure specifying the types of associated costs. As it turned out, these costs included a 10% commission paid to Poe and another entity that Poe owned.
While Poe indicated that he verbally disclosed the commission expense, he did not disclose that “associated costs” included payments to another entity, International Alternatives PR LLC, for consulting on life settlement investments. Poe owned International Alternatives, a conflict of interest he intentionally didn’t disclose to investors.
International Alternatives took in 20% of the funds raised from investors.
James Poe’s unregistered activity stemmed from his sales of these life settlements for a commission. Poe was not registered as a dealer when he sold the life settlement investments on behalf of SRP-LS200 between July 2011 and August 2015.
The findings against Jim Poe & Associates relate to three private investment funds managed by the firm and Poe. In 2011, Jim Poe & Associates started charging “non-qualified clients” – those who didn’t meet certain minimum financial requirements – a 10% annual management fee. In other words, once a year, regardless of how the investments in the funds performed, Jim Poe & Associates took one dollar out of every 10 a client had invested with the firm.
In 2013, Jim Poe & Associates lowered the annual management fee charged non-qualified clients to 6% from 10%. The firm continued to charge a 6% management fee until January 2015.
State Securities Board rules require that a registered investment adviser charging 3% or more of a client’s assets under management tell the client that the fee is higher than industry norms and lower fees for the same services can be obtained elsewhere.
In 2013, Jim Poe & Associates did not disclose that its 6% fee was higher than industry norms.
Moreover, because Poe had authority over SRP-LS200’s bank accounts to which investors in the life settlements wired their funds, Jim Poe & Associates is regarded as having had custody of those assets. State Securities Board rules prohibit investment advisers from having custody of client funds unless safeguards are in place to make clients aware of the arrangement and the adviser’s control of client funds.
The disciplinary order also requires Jim Poe & Associates to establish procedures to ensure Poe doesn’t act as dealer, agent, or investment adviser representative. Poe & Associates must also retain an outside compliance consultant to perform reviews of the firm.