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Fiduciary Links: Florida Court Rejects SEC Position on Broker’s ‘Solely Incidental’ Investment Advice Based on Lunar Cycles

Posted by Duane Thompson on December 16, 2013

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>>>That’s right. The headline you just read is not a typo. On December 10th, a federal court in Florida denied summary judgment in the SEC’s claim that a former dually registered broker/adviser rep violated the antifraud provisions of the Investment Advisers Act of 1940 (’40 Act) by allegedly perpetrating a Ponzi scheme on 14 or more investors who suffered approximately $915,000 in losses, more than 90% of the funds raised in the scheme.  The losses came from a private equity fund registered in the state of Florida as White Elephant, LLC, which Gurudeo Sukul “Buddy” Persaud concealed from his broker-dealer, according to the SEC complaint. See, also (SEC v. Persaud, 2013 BL 341268, M.D. Fla., No. 6:12-cv-932-Orl-28GJK, 12/10/13).The court found, however, that the SEC was entitled to summary judgment on other claims for various fraud and securities registration violations under the Securities Act of 1933 and the Securities & Exchange Act of 1934.

Persaud, who the SEC said touted his skills as a certified financial planner and wealth manager, guaranteed returns of up to 18 percent and did not disclose to his clients that he relied on an internet service for approximately 90 percent of his investment decisions. The service predicted the direction of futures and other markets “based on the gravitational pull of the [E]arth and the moon,” according to the SEC. The original SEC complaint attracted widespread publicity in the media, including Forbes.

According to the SEC’s filings, between 2007 and 2010 Persaud lost more than $400,000 based on the “gravitational pull” trading strategy. The SEC elaborated, saying that “Persaud believed that when the moon is positioned so there is a greater gravitational pull on humans, they feel down and are therefore more inclined to sell securities in the markets.” Apparently, Persaud took behavioral investment theory to a new level, albeit a lower one. Another $415,000 was used for personal expenses and the remainder apparently for payments to some of the earlier investors “in typical Ponzi scheme fashion,” according to the SEC.

Since the SEC did not clarify whether the investment advice was solely incidental broker advice or advice provided under the ’40 Act, the judge denied the SEC’s fraud claims under the ’40 Act. Brokers have traditionally relied upon an exclusion under the ’40 Act to avoid fiduciary status in which the “performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” It’s not the first time the Commission has failed to explain solely incidental advice, outside of discretionary trading authority by an adviser.

According to FINRA’s CRD database on Persaud’s disciplinary history, one arbitration claim for $166,000 in damages is pending. Allegations include breach of fiduciary duty, selling away, unsuitable recommendations and theft.  A search of CFP Board’s database turned up Persaud as “not certified.”

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