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U.S. SEC bans Seattle adviser who borrowed $8 mln in client funds
July 17, 2014 / 8:41 PM / 3 years ago

U.S. SEC bans Seattle adviser who borrowed $8 mln in client funds

July 17 (Reuters) - The U.S. Securities and Exchange Commission has barred a Seattle investment adviser from the industry for using $8 million of investors’ funds to make loans to himself, including one for a rare Mercedes-Benz model.

Dennis Daugs, Jr., founder of Lakeside Capital Management LLC, used assets from an elderly client’s portfolio to fund $3.1 million in personal loans without her permission. The loans included $2.1 million from her individual retirement account to structure a loan so he could buy a ski home, the SEC said on Thursday.

The conduct, which occurred between 2008 through 2012, violated Daugs’ responsibility to act as a fiduciary, or in clients’ best interests, the SEC said.

He engaged in self-dealing by using client money to facilitate loans to himself, and on terms that were unfavorable to the client, the SEC added.

Daugs, 51, agreed to the ban in a settlement with the SEC. He neither admitted nor denied the findings, according to the settlement. Daugs can apply for readmission to the industry in five years. Neither he nor his lawyer returned calls requesting comment.

A spokesman for Daugs and Lakeside declined comment, other than to direct Reuters to a letter he said Daugs sent to clients.

“It is important for you to know that any investments you have with Lakeside are intact, and not at any risk from the issues raised by the SEC,” Daugs wrote in the letter.

Lakeside which managed about $150 million in assets, must hire a monitor to supervise the winding down of its operations, the SEC said. Daugs was the firm’s sole owner, portfolio manager and chief compliance officer between 2010 and 2012.

Daugs did not disclose millions of dollars in loans to his elderly client before he borrowed the money in 2008 and 2009, the SEC said. He repaid the balance when he disclosed them to the client in 2010. The client left Daugs’ firm and threatened to sue, but later settled with him.

Daugs also made “extensive, undisclosed personal use” of a private real estate fund his firm managed, which had about $19 million in assets during the period. He borrowed roughly $5.2 million to buy real estate and pay more than $500,000 to disgruntled clients who had threatened to sue him, according to the SEC settlement. In one instance, he returned the money only after outside accountants discovered it was missing.

The loans Daugs orchestrated were unfavorable to the investors, the SEC said. They had no pay-off dates and paid low interest rates. What is more, he provided no collateral.

The SEC found, among other things, that Daugs and Lakeside violated a rule for holding money. He was supposed to maintain separate accounts for each client at a type of brokerage firm that holds clients’ funds for advisers. Instead, he routinely held cash for his various private fund clients in three bank accounts established in the names of law firms he employed, the SEC added. (Reporting by Suzanne Barlyn. Editing by Andre Grenon)

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