An investment advisor who specialized in working with pro athletes overcharged some of those clients and failed to disclose the risks of investing in certain exchange traded funds, costing his investors millions in the process, according to the SEC.
The commission charged Douglas Elstun for “repeatedly defrauding and breaching his fiduciary duty” to his clients as the owner of RIA Crossroads Financial Management, which was registered with the SEC until August 2019. Elstun's niche was working with pro athletes, having played college basketball himself, according to the complaint.
Though his athlete clients are not named, Elstun claimed to represent at least 14 current or retired athletes in a 2016 interview with The Kansas City Star, including former Kansas City Chiefs guard Will Shields, retired Golden State Warriors power forward David West, and Paul George, an all-star forward for the Los Angeles Clippers.
Starting in March 2013, Elstun began investing most of his clients in daily leveraged and inverse ETFs. Such funds try to get investors big returns by delivering multiples of the short-term performance of the underlying index, typically intended for use by short-term active traders; FINRA argued in a previous notice that the funds aren’t suitable for investors who’d want to hold them for longer than a single trading session. But Elstun began purchasing and holding these ETFs in client accounts for years, in some cases, according to the SEC.
“Elstun reviewed the ETF prospectuses and should have known that the ETFs are risky investments, that holding the ETFs longer than a single day significantly increased the risk of loss, and that investors should not expect the investments to retain any appreciation in value over extended periods of time,” the complaint read.
To explain purchasing the risky ETFs, Elstun told clients that his strategy was to buy the funds as an “insurance” or “hedge” against what he called an “inevitable market downturn,” according to the SEC’s complaint. He also allegedly told some clients that he would not hold the instruments. The SEC claimed that Crossroads’ broker ended its relationship with the firm partly because of the high-risk ETF trading, but Elstun misled investors by concealing the reason for the split.
Some of his clients included individuals who were nearing or were in retirement, where the high-risk strategy he employed was particularly unsuitable, and he also invested outside his clients’ stated tolerance for risk, even though in most cases he did not document just what those risk tolerances were, according to the SEC.
“Of the handful of clients for whom Elstun did have documents setting forth investment objectives and risk tolerances, at least five of those clients had listed investment objectives and risk tolerances that were inconsistent with Elstun’s unsuitable and risky investments in the leveraged and/or inverse ETFs,” the complaint read.
Additionally, in October 2015, Crossroads began overcharging four unnamed pro athletes with a higher advisory fee percentage than their original agreements, according to the complaint. For some of these unnamed clients, Elstun allegedly directed a firm staff member to create new asset management agreements falsely stating they’d agreed to higher fees, and “signed” them using client signature stamps he had in the office, used so the firm could sign documents for clients after getting their oral approval.
According to the complaint, Elstun also charged clients on assets not held in advisory accounts, including bank accounts, equity in real estate and vehicles.
Elstun’s attorney, John Picerno, told The Kansas City Star that Elstun had made a mistake when trying to “please too many people and wear too many different hats” in order to help clients, and said Elstun intended to pay as much as he could back to affected clients.
The SEC asked for a jury trial in Missouri federal court for Elstun, and is seeking a permanent injunction, as well as disgorgement with prejudgment interest and civil penalties.
