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Regulation and Compliance > Federal Regulation > SEC

SEC Charges Father-Son Team With Defrauding Clients

By Jeff Berman

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SEC Building image from AP (Credit: AP)

The Securities and Exchange Commission has charged a father and son advisor team of fraud after they allegedly concealed from clients that the father wasn’t associated with an RIA and used the services of Charles Schwab without authorization.

In a complaint filed Jan. 15 in the U.S. District Court for the Southern District of California, the SEC claimed Michael and David Sztrom of Rancho Santa Fe, California, and their San Diego company Sztrom Wealth Management (SWM), defrauded clients by creating the false impression that the father, Michael, was associated with La Quinta, California-based RIA Advanced Practice Advisors (APA).

Schwab and APA CEO and founder Paul C. Spitzer declined to comment on Friday. The Sztroms did not immediately respond to requests for comment.

More Details

Michael and his “inexperienced” son, David, who “was in his early 20s at the time and had just passed his securities licensing exam,” contacted APA and Spitzer, seeking to associate with APA, the SEC’s complaint states.

“Because Michael was under investigation and banned from the clearing broker-dealers, Spitzer did not let Michael associate with APA but agreed” that David could serve as an investment advisor representative, the complaint alleges.

The SEC’s complaint alleges that, from November 2015 through March 2018, the Sztroms provided investment advice to clients through SWM and concealed from clients that Michael was not associated with APA or any other RIA and was not subject to compliance oversight by APA or any other firm.

As alleged in the complaint, David, without any disclosure to clients, also allowed his father to use APA’s clearing broker-dealer, Schwab, for client transactions. Michael also allegedly impersonated David on phone calls with Schwab on at least 38 separate occasions, sometimes when David was present, leading that firm to terminate its agreement with APA.

“When Schwab discovered Michael’s deception, it immediately terminated David’s access to its platform and gave all of the APA clients 90 days to either find an investment adviser other than APA or move their brokerage accounts to another brokerage firm,” the complaint states.

“The Sztroms’ and SWM’s deception and multiple failures to disclose breached their fiduciary duties to clients,” the SEC said Tuesday in announcing the complaint.

The complaint also alleged that David allowed Michael to access confidential client information and to use his personal cellphone, instead of APA’s email system, to text advisory clients about their investments.

The complaint alleges that the defendants violated the antifraud provisions of the Investment Advisers Act of 1940 and also charges that David aided and abetted APA’s books and records violations of the Advisers Act. The SEC seeks permanent injunctions and civil money penalties against all defendants.

Client Disputes

In August 2015, Michael resigned from the firm he was with and planned to form his own advisory business, according to the complaint.

“Upon resigning … he learned that he was under a regulatory investigation and that several of the clearing broker-dealers would not allow Michael to use their platform while the investigation was pending, meaning he could no longer execute trades for his clients,” the complaint alleges.

The complaint did not identify the firm Michael was with in 2015, but his report on the Financial Industry Regulatory Authority’s BrokerCheck website states it was UBS.

Michael was with UBS 2010-2015 ; David also was with the firm in 2015, according to his BrokerCheck report. The two are no longer registered as brokers, but are still registered as advisors, according to BrokerCheck.

There were three client disputes against Michael while he was with UBS, in 2014 and 2015. All three were settled.

In two of those disputes, settled for $400,000 and $450,000, respectively, the clients alleged he made excessive and unsuitable trades in their accounts. In the other, settled for $1.7 million, the client alleged that Michael did not accurately disclose the risk of investing in preferred stock.

Michael refuted and denied all allegations and claims against him on BrokerCheck; UBS declined to comment on the matter.

Jeff Berman

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