Skip to main content

Claims: Money Advisor Who Lost Clients Millions Sold ‘Unsuitable’ Investments in at Least Four Businesses

The Tribune

Attorneys for some investors who lost millions in an equity fund recommended by Jeffrey Forrest of WealthWise LLC in San Luis Obispo claim he also sold investments in at least four businesses that were unsuitable.

Putting investors in unsuitable investments is evidence of wrongful conduct, according to financial regulators.

Two of those companies are San Luis Trust Bank and Kennedy Club Fitness, a local health and fitness business.

Unsuitability does not reflect on the quality of the investments or their business practices.

Rather, it’s a subjective analysis based on individual clients’ needs. The law requires that an adviser know his clients – their investment goals, financial objectives and risk tolerance – as well as understand the products or the investments he recommends.

The additional investments referenced by the attorneys are being used to strengthen their contention that Forrest did not act in the best interest of his clients.

“What we have here is a one-size-fits- all sales practice. Young or old, rich or poor, sophisticated or unsophisticated, the investors were all put into the same deals without any concern for their investment objectives,” said Philip Aidikoff of Beverly Hills-based Aidikoff, Uhl & Bakhtiari, the lawyer representing the investors in the arbitration cases.

Forrest declined to answer questions for this story.

Multiple cases have already been filed against Forrest, including two arbitration cases and one civil suit. The litigation centers on an investment in the APEX Equity Options Fund, a $46 million equity fund that was wiped out in August.

The first arbitration case filed in mid-October with the Financial Industry Regulatory Authority is in the process of being amended to include the four additional investments.

Local investments

In addition to APEX, the four investments that Forrest allegedly recommended are San Luis Trust Bank; Kennedy Club Fitness; Florida Capital Real Estate, a private real estate partnership; and BOOMj, an online social networking site for baby boomers. A fifth investment – in another business based in San Luis Obispo County-is also being considered for inclusion, Aidikoff said.

At the core of the allegations is that Forrest advised his clients to make investments in “unsuitable securities in unsuitable concentrations,” according to the initial claim.

Investors are not protected from a decline in the value of the securities they purchased unless the recommendation was clearly unsuitable to begin with, Aidikoff said.

“There were other investments that are not being included in the cases that lost money for our clients, but they were not unsuitable,” he said. “In some cases, clients had a need for liquidity while others had a more conservative risk tolerance. Some did not know what they were buying. It’s a case-by-case analysis. He had an obligation to only recommend investments that were suitable for them.”

Three of the four investments being added to the arbitration case are in private companies or partnerships and offer little to no liquidity; only San Luis Trust Bank shares are publicly traded. About 7,000 shares traded daily on average over the past three months.

Private, illiquid investments are not inherently bad, said Bob Wacker, president of R.E. Wacker Associates of San Luis Obispo. He is nationally recognized as a leading financial adviser.

“They (private investments) may, in fact, offer a premium return and, even more importantly, may be a good way to diversify the risk of being completely subject to the vagaries of the public markets under the right circumstances,” said Wacker, who is not involved in the case.

But Wacker offers a strong warning.

“It’s important to make sure that it’s appropriate for a given client given their investment profile, that it’s a minor enough portion of the client’s portfolio so that the degree of illiquidity does not pose a problem for the client and that the client fully understands the illiquid nature and risks of the investment,” Wacker said.

Doing due diligence

One of the allegations in the arbitration cases is that Forrest and Associated Securities, the broker-dealer that Forrest was registered with until this year, “failed to adequately perform due diligence.” The claim is alleged for several investments, including BOOMj. The claim does not specify the basis of the allegation.

However, an Internet search by The Tribune yielded numerous hits on Robert J. McNulty, BOOMj’s chairman listed in the February 2007 private placement memorandum. A 1995 Securities and Exchange Commission enforcement action was taken against McNulty, who was charged “with orchestrating a complex scheme to defraud investors.”

It’s “critical that the adviser has performed adequate due diligence … for the character of the manager of a private placement is paramount,” Wacker said.

Another allegation in the amended claim is that Forrest “failed to disclose … the conflict of interest” he had with San Luis Trust Bank. Again, no supporting details are provided. However, public records show that Forrest and his wife had borrowed at least $2.8 million from San Luis Trust Bank between April 2001 and July 2005.

“There is nothing wrong with suggesting the stock of your lender, but it is a disclosure issue as it is material to the investor,” Aidikoff said.