Dozens of local investors – clients of Jeffrey Forrest of WealthWise LLC in San Luis Obispo-have lost millions of dollars in a equity fund valued at more than $46 million that was wiped out in August, according to legal documents filed in recent weeks.
The clients-among them a quadriplegic man, a retired nurse, a stay-at-home mom, a software consultant, a retired telecom technician and practicing physicians-had invested their savings, in some cases borrowing against the value of their homes. The investors allege that Forrest repeatedly assured them that the principal invested was safe in a money market account.
On Aug. 16, the fund “experienced a near-total loss,” according to a letter sent to investors from the fund’s manager in Utah.
Forrest said in an interview Thursday that he also believed the principal was placed in a money market fund, but the fund manager “strayed 100 percent from what they told us … and put a lot of people in harm.”
He said he had invested – and has lost-his own personal money, though he declined to say how much.
“The money,” Forrest said, “appears to be gone.”
Earlier this month, Forrest was named as a defendant in two cases: a civil filing in a federal district court in Santa Ana and an arbitration case filed with the Financial Industry Regulatory Authority, known commonly as FINRA. A second arbitration case is expected to be filed with FINRA on Monday, and a third claim is in the works.
It is too early to know how many local investors were involved, how much money was lost or where the money went. Forrest declined to say how many of his clients were invested in the fund. Investors and investment advisers familiar with the situation estimate as many as 40 local households were involved. The investors who have come forward seeking legal representation have collectively lost about $20 million.
These are not the first claims brought against Forrest. According to the FINRA broker check report available online to the public, three parties have brought cases against Forrest since 2003. The allegations were that assets were mismanaged or stock investments were unsuitable. All of the claims were settled for between $80,000 and $475,000.
‘Rare’ opportunity cited
Forrest said that he first learned of the APEX Equity Options Funds L.P., managed by Thompson Consulting Group of Utah, in April 2005 through an acquaintance. Over the next 60 to 90 days, he said, he did his research, which included reviewing the fund manager’s private investments, doing background checks, gathering character references and making on-site visits.
Beginning in the summer of 2005, Forrest began encouraging his clients to consider investing in APEX. In multiple written communications with clients provided to The Tribune by former APEX investors, Forrest described the investment as having “liquidity, safety of principal and above-average growth potential.” Investors were invited to a dinner presentation in September 2005 to meet the fund managers.
Forrest explained in e-mails and letters during the summer and fall of 2005 that the principal would be used as collateral for a complex trading strategy. He estimated a monthly rate of return of 3 percent. Forrest labeled APEX a “rare” opportunity.
“From time to time in my career I’ve come across a handful of significant investment opportunities, which I feel have superior risk-reward ratios. … I would not give this summary to you if I didn’t feel that it too would be suitable, in some fashion, within your investment portfolios,” Forrest wrote in one letter sent to numerous clients during the summer and fall of 2005.
Over the next two years that they were invested in APEX, WealthWise clients received quarterly statements about the fund’s performance as well as regular updates from Forrest. An account statement dated June 30, 2007, shows a total account value of more than $46 million in the APEX Equity Options Fund. Everyone who spoke to The Tribune echoed that there were no red flags then.
According to the June 30 statement, the APEX Equity Options Fund had an annualized total return of 24.9 percent in 2005 (after six months of trading), 12.87 percent in 2006 and 27.6 percent in 2007 through the end of June. Since inception on June 1, 2005, through June 30, 2007, the fund had a total return of 45 percent. During that same period, the S&P 500 was up more than 25 percent.
In a letter to investors dated Aug. 13, Forrest said he contacted APEX fund managers to inquire about the fund’s performance after being contacted by several of his clients. Forrest wrote then that “by the end of the third quarter, we may see results even higher than we did during the second quarter.”
But a letter dated Aug. 22 by Kyle Thompson, president of Thompson Consulting, told a different story. In the three-paragraph letter, the manager said that the fund had lost nearly all of the money on Aug. 16.
Thompson explained that the firm’s trading positions in the Chicago Board Options Exchange Volatility Index “were severely impacted by recent dramatic events, including the subprime credit crisis, banking liquidity issues and worldwide market conditions.”
“They (Thompson Consulting) failed to follow their own program,” Forrest said. “Ninety-seven percent (of the money) was in uncovered VIX (volatility index) positions.” An uncovered position means that the seller has not made an off-setting trading position to hedge his risk.
Forrest said that he flew to Salt Lake City the day after receiving the letter to confront the principals at Thompson Consulting for an explanation. Forrest said he has also reached out to the U.S. Securities and Exchange Commission and the Utah Division of Securities, the state’s regulatory agency.
Thomas Melton, a Utahbased attorney for the Securities and Exchange Commission, would not confirm nor deny whether enforcement action is being pursued against Thompson Consulting and its principals. Calls by The Tribune to Thompson Consulting were not returned.
“We will pursue legal action once enforcement action is taken,” Forrest said.
But many former Wealth-Wise clients and APEX investors are not waiting.
In early October, Richard Kelter, a Huntington Beach-based property developer who invested $4 million in APEX, filed a civil suit against Forrest, WealthWise, APEX Equity Options Fund, Thompson Consulting and the Utahbased principals at the fund manager.
According to the federal district court filing, the defendants “knew, or reasonably should have known, that investor principal was not protected.” Kelter alleges that Forrest breached his fiduciary duty and trust-meaning that Forrest did not act in Kelter’s best interest – and “failed to do the due diligence that he affirmatively represented was done.”
The civil suit is also alleging racketeering charges, claiming that the defendants are all members of an ongoing enterprise to tout the “sale, selling and then mismanaging the APEX Fund.” Racketeering charges carry stiff fines and prison terms.
Civil suits represent only one side of the dispute.
Several investors who spoke to The Tribune on the condition that they not be identified said that they did not know that WealthWise benefited when new investments were made in APEX. According to a publicly available disclosure form by Thompson Consulting, the firm “has arrangements with WealthWise LLC” that entails sharing “a portion of fees.” Forrest told The Tribune that these facts were disclosed to investors.
Other investors are pursuing arbitration with FINRA instead of a civil case. That’s because they believe Associated Securities Corp., the El Segundo-based broker-dealer that WealthWise was registered with from 1989 through the start of 2007, has the “deep pockets,” said Philip Aidikoff of Beverly Hills-based Aidikoff, Uhl & Bakhtiari, a lawyer representing investors in the cases filed with FINRA. Clients of broker-dealers must typically agree to binding arbitration instead of jury trials in dispute cases.
Founded in 1982, Associated Securities is a broker-dealer with 180 branch offices. The firm had revenues of more than $68 million in 2006. Calls to Associated Securities were not returned. (Forrest is no longer registered with Associated Securities, or any broker-dealer, which means he cannot sell securities. He is a registered investment adviser with the SEC. He said he made the switch this year from being FINRA-registered because the business had evolved from a commission business to a fee-based business.)
“Somebody with Associated was responsible for supervising Forrest. They were responsible for ensuring that the obligations that a broker-dealer has to the regulator are fulfilled,” said Aidikoff, a former president of the Public Investors Arbitration Bar Association and the current chairman of the National Arbitration and Mediation Committee of FINRA.
The first arbitration case was filed with FINRA on Oct. 16 and named Associated Securities and Forrest as the defendants. At press time, Forrest had not yet been served by FINRA with the claim. It involves seven San Luis Obispo County households that collectively invested more than $5 million in APEX, according to the claim.
The investors allege that Associated Securities and Forrest breached their fiduciary duty by “failing to recommend suitable securities; failing to use proper asset allocation; failing to conduct proper due diligence … (and) failing to monitor the true value and volatility of APEX.” The case also alleges charges of fraud and failure to supervise and control.
A second arbitration case is expected to be filed with FINRA on Monday involving 14 households that have collectively lost more than $10 million, Aidikoff said. He also confirmed that a third case may follow, with as many as 10 to 12 households involved. Once the defendants receive the FINRA claims, they have 45 days to file an answer. A hearing normally takes place about a year from filing, Aidikoff said.