58-year-old Arthur Lamar Adams pled guilty on May 9, 2018, to one count of wire fraud for his role in defrauding hundreds of investors in a Ponzi scheme involving more than $100 million, spanning a period of at least seven years, and involving residents of at least 14 states.
Adams entered into fraudulent investment contracts with investors on behalf of Madison Timber Properties in the form of promissory notes that guaranteed investors an interest rate of 12-13 percent.
Instead of investing his clients' money in timber deeds (as promised), Adams used the invested funds for his own personal benefit and to pay dividends to other investors, which made up the Ponzi scheme.
The fraudulent activity continued when Adams reportedly created false timber deeds for the purpose of convincing investors that sufficient collateral existed to secure their investment capital in case of a default.
Adams has pled guilty to wire and bank fraud charges and, as a result of the guilty plea, was the recipient of permanent injunctions, an asset freeze, and expedited discovery. Adams also could be sentenced to up to 70 years in prison and fined up to $1.5 million.
Failures in Due Diligence Could Implicate Investment Advisers
Adams is cooperating with federal prosecutors, but it's still unknown whether Adams has given evidence to implicate anyone else in the criminal activity.
The criminal charges against Adams allege he paid commissions to financial professionals in an effort to convince them to invest in Madison Timber Properties on behalf of their clients.
The amounts of these commissions vary, but the criminal charge against Adams says he paid commissions to recruiters, with one unnamed recruiter purported to have received as much as $2.4 million in 2017 alone, and another as much as $1.6 million.
It's unclear if the recruiters could face criminal charges. The possibility exists that the promise of high profits and commissions, in addition to the appearance of sufficient collateral, may have led financial professionals into a situation where they failed to adequately perform their fiduciary duty of due diligence.
Understanding Your Fiduciary Duty and Due Diligence - We Can Help
Due diligence is the level of prudence, judgment and care a reasonable person exercises prior to entering into an agreement or transaction in order to avoid harm.1 Simply put, advisers are fiduciaries to their clients, which means that they are required to perform due diligence on third-parties they engage, as well as on investments being made on behalf of clients - a serious obligation with far reaching implications if not performed adequately.
At Jacko Law Group, PC, we have extensive experience helping advisers with questions regarding their fiduciary duty and due diligence efforts. If you need help ensuring your due diligence policies and procedures are sufficient to protect your firm and your investors - contact us for assistance.
Add a comment
- Starting Out: Mergers & Acquisitions – Term Sheets and Due Diligence
- Four P Words to Remember During the Breakaway and Transition Process
- Proactive Risk Mitigation
- How a Popular Index’s Lack of Risk Disclosures Resulted in a Recent $9 Million SEC Fine: Lessons Learned
- The Importance of Having a Successful Succession Plan
- Why Advisors Should Seek Specialized Counsel When Making a Business Transition
- Protecting Your Firm Through Risk Management
- A Financial Advisory Firm’s Simple, but Costly Lesson in the Need for Adequate Fee Disclosure
- Five Investor Protections to Remember When Finalizing FINRA Pre-dispute Arbitration Agreements
- Compliance Steps Fiduciaries Should Take Now to Help Ensure Continued Adherence with the DOL’s New ERISA Exemption
- Securities and Exchange Commission (SEC)
- Transition Services
- Investment Advisers
- Policies and Procedures
- Due Diligence
- Regulatory Examinations
- Social Media Marketing
- California Consumer Privacy Act (CCPA)
- Aging Clients
- Advisers Act
- Virtual Currency
- Dodd-Frank Act
- Ponzi Scheme
- Office of Compliance Inspections and Examinations (OCIE)
- Securities Law
- Broker Protocol
- Form U5
- Private Equity
- Private Funds
- Hedge Funds
- Regulation Best Interest
- Personally Identifiable Information (PII)
- Government Shutdown
- Risk Alert
- Exchange-Traded Funds (ETFs)
- Investment Company Act
- Rule 6c
- Wells Fargo