SEC Charges Navellier and Owner with Fraud
The Securities and Exchange Commission on Thursday charged Reno, Nevada-based registered investment adviser Navellier & Associates with fraud for “profiting handsomely” by marketing a discredited performance track record of its Vireo Alpha Sector ETF strategies and by failing to inform clients about conflicts of interest associated with its sale of the Vireo business.
Navellier, whose funds populate dozens of separately managed account programs offered by broker-dealers, marketed an investment strategy pushed by F-Squared Investments between 2010 and 2013 even after it learned that the strategies were based on false performance metrics, the regulator charged in federal court in Boston.
The complaint, which also names chief executive Louis Navellier, 59, seeks disgorgement of “ill-gotten” gains and unspecified civil penalties.
Calls to the CEO were directed to Tonya Alexander, the firm’s chief compliance officer, who did not respond to a request for comment. Navellier reported in its March ADV regulatory filing that Alexander had resigned the previous month “to pursue outside business interests.”
Navellier and his firm, which manages about $1.0 billion of assets across 2,270 mostly discretionary accounts, ignored and concealed red flags about the F-Squared model strategies marketed under its Vireo ETF suite trademark, the SEC charged. At one time in 2013, it managed as much as $3.5 billion of customer assets, according to the complaint.
At least 17 other RIAs and broker-dealers have reached settlements of as much as $500,000 with the SEC for marketing F-Squared performance claims without validating them, but Navellier and his firm went beyond mere due diligence errors, the SEC alleged.
The adviser and his firm compounded their fiduciary breach by allegedly selling the Vireo line of business to F-Squared in August 2013 for about $14 million as they “realized their misrepresentations could get them in legal trouble” rather than correcting their prior misrepresentations or disclosing their conflicts of interest in selling the business, the SEC said in its litigation release.
F-Squared had claimed that the strategies from April 2001 to September 2008 had significantly outperformed the S&P 500 Index from April 2001 to September 2008, when in fact, no client assets had tracked the strategy in that period and, “even as a back-test the claimed performance was substantially overstated,” the SEC said.
Despite the problems Navellier uncovered in its due diligence process, it proceeded with a “Marketing Battle Plan” for the newly minted Vireo product aimed at “firms we know well, who are leaders in the retirement and annuity channels” as well as at Navellier’s database of individual investors, the SEC complaint said, quoting the internal document.
Massachusetts-based F-Squared filed for Chapter 11 bankruptcy in July 2015 after paying a $35 million fine to settle SEC charges in December 2014 that the stellar performance advertised for its model portfolios was misleading.
Navellier, which has called itself “one of the charter firms in the retail wrap business,” offers some 30 strategy portfolios directly and through dozens of brokerage firms including Morgan Stanley, Charles Schwab, Wells Fargo, Robert J. Baird, Stifel Nicolaus, Cetera, Benjamin F Edwards and Oppenheimer, according to its promotional literature. RIA custodians such as Schwab, TD Ameritrade, Fidelity and RBC Correspondent Services also offer Navellier-managed funds to other registered investment advisers.
-Jed Horowitz contributed to this story.