SEC Goes After Disbarred Lawyer For Investment Advisory Activity

October 9, 2015

According to the Securities and Exchange Commission's ("SEC's") Division of Enforcement ("Enforcement"), Arthur Jacobs, 56, Orlando, FL is a State of Maryland licensed CPA and with his wife co-owns Innovative Business Solutions, LLC. All in all, not too much to get worked up over - but, hold on, cause there's more . . . way more. We got allegations of securities fraud involving some $18 million. Not exactly chump change.

Case In Point

In the Matter of Arthur F. Jacob, CPA and Innovative Business Solutions, LLC, Respondents ('34 Act Rel. 76079; Invst. Adv. Act Rel. 4215; Invst. Co. Act Rel 31859; Admin. Proc. 3-16883 (Order Instituting Administrative Proceedings and Notice of Hearing; SEC / October 5, 2015); the OIP offers this "Summary" of Enforcement's case:

1. These proceedings involve violations of the anti-fraud provisions of the federal securities laws by Respondent Arthur F. Jacob and his company, Respondent Innovative Business Solutions, LLC, unregistered investment advisers to about 30 client households with approximately $18 million under management.

2. From approximately mid-2009 through at least July 2014, Jacob and IBS, which Jacob owns and controls, engaged in a fraudulent scheme involving material misrepresentations and omissions and other deceptive devices and practices. Jacob engaged in this scheme in order to obtain and retain investment advisory clients and thereby collect advisory fees.

3. For at least five years, Jacob (alone and acting through IBS) routinely made false statements and omissions to current clients, prospective clients, and others, where he:

  • concealed his 2003 disbarment by the State of Maryland for misappropriating client funds, making false statements under oath, making numerous false statements to Bar Counsel, filing false tax returns on behalf of a client, willfully violating a court order, and charging unreasonable fees, as well as his 2005 suspension from practicing or appearing before the Internal Revenue Service ("IRS");
  • misstated to clients the risks and profitability of their investments, including in investment newsletters Jacob drafted and distributed;
  • falsely informed clients that he was not required to register as an investment adviser and failed to disclose that in fact, he and IBS were required to be registered as investment advisers with several states; and
  • provided false information about the advisory services they provided in order to retain trading authority in clients' accounts.

4. Jacob's and IBS's false statements and failure to disclose material information was a breach of their duties as investment advisers to the clients.

5. As a result of their scheme, Jacob and IBS collected over $517,000 in investment advisory fees from their clients.

6. Jacob asserted his Fifth Amendment privilege against self-incrimination in testimony taken by the Commission during the Division's investigation of this matter.

Note: Respondents in SEC administrative proceedings are presumed innocent unless and until found guilty by a preponderance of the evidence.

Yes, I Quit Practicing Law But . . .

By way of a taste of what's in the OIP, consider this section:

Jacob Concealed and Misrepresented His Disciplinary History and Touted His Credentials as an Attorney in Furtherance of His Scheme.

28. Jacob was an attorney licensed to practice law in the State of Maryland from December 1989 until July 2003, when he was disbarred. In connection with his disbarment, the Circuit Court of Baltimore County, Maryland held a five-day evidentiary hearing and issued a 32-page decision finding that Jacob had violated multiple rules of professional conduct. Specifically, the Court found that Jacob misappropriated at least $30,000 in client funds, charged excessive fees, made numerous false statements under oath, knowingly prepared and filed false tax returns on behalf of a client, and willfully violated a court order.

29. Faced with the Court's detailed factual and legal findings, and in lieu of an appeal, Jacob signed an affidavit acknowledging the Court's findings and consenting to  6 his disbarment.

30. During the relevant period, despite his disbarment, Jacob described himself as an attorney when extolling his abilities as an investment adviser to several clients and prospective clients; and he did so without disclosing his disbarment or the misconduct leading to it.

31. For example, on April 30, 2009, Jacob touted his qualifications in an email to a retired doctor who later became an advisory client of IBS and stated, "In my case, I know the results when I ‘buy' and not when I am forced to ‘sell'-which is what happens when a defense attorney trained as an auditor manages money-I ask no question I don't already know the answer to and I've hedged the bet on both sides of the balance sheet." Jacob forwarded this email to two other clients.

32. Also, on October 3, 2009, Jacob described himself to a prospective client as having "20-years experience as a tax/defense lawyer," and as rendering advice in the areas of "tax/financial/transition/estate planning, asset protection, and legal matters" to clients. On October 13, 2009, Jacob followed-up with the prospective client and sent an email describing the benefits of his services as follows: "Available 24/7, having investment advisers who understand, and work with the tax, pension, and legal issues and having a CPA legal consultant (who can also serve as the [third party agent]) who knows the investment world is a stellar advantage."

33. In addition, on March 31, 2013, Jacob sent a solicitation email in which he wrote, "By way of introduction, I am both [sic] a Certified Public Accountant, an Attorney-at-Law (now retired and non-practicing), and an Accredited Tax Adviser. While I must make the distinction between the public accounting practice and the performance of legal services, on a day-to-day basis there's no real difference."

34. On at least one occasion, when specifically confronted about his reasons for leaving the practice of law, Jacob lied. In an August 2013 email to his clients, following a report that he had had been disbarred, Jacob wrote:

Yes, I quit practicing law. In mid-2002, I decided to no longer actively practice; it was becoming too time consuming, too expensive to maintain a dual-practice, and it was not enjoyable. My skills were better allocated to the financial, accounting, and tax areas, where [my wife] and I shined. In 2004, knowing I would be departing Maryland and never doing legal work there again, I resigned from the Maryland Bar - it was knowing and voluntary, it was my decision, and under Maryland Law it's called a "Consent to Disbarment." In short, at that time, I wanted no part of the b.s. of being a lawyer.

35. Jacob failed to disclose to clients that a court found he had engaged in  7 sustained misconduct, during his performance of client services that are strikingly similar to those he provided for investment advisory clients during the relevant period. As a fiduciary and as the manager of their retirement assets, such information regarding prior misconduct clearly would have been material to Jacob and IBS's clients and prospective clients.

36. In addition, Jacob provided tax advice to his investment advisory clients without disclosing to them that in March 2005, he was suspended indefinitely from practicing before the IRS based on his prior disbarment from the Maryland bar. Under the IRS suspension, Jacob was prohibited from, among other things, participating in presentations to the IRS relating to a taxpayer's rights, privileges or liabilities, including preparing documents and communicating with the IRS on behalf of a taxpayer.1  Jacob failed to disclose this suspension to his advisory clients. Indeed, in violation of the suspension order, Jacob continued to engage in activities in which he represented advisory clients before the IRS. 

Bill Singer's Comment

If you are an industry participant or a serious investor, I urge you to read the Jacob OIP, which you will find somewhat entertaining (in the perverted way that such allegations about fraud and the machinations of scams are). The lesson to be learned from this case is that investors need to do more due diligence when choosing investment advisors -- even the unregistered and disbarred kind.  

A final thought . . . I respect that Jacob "wanted no part of the b.s. of being a lawyer."   Disbarment has a way of cultivating that unhappiness. Wouldn't it be nice for the SEC and FINRA and all of Wall Street's regulators and all of those future victims of securities fraud if certain unsavory stockbrokers, investment advisors, and promoters awoke one morning and, in keeping with Jacob's sentiments, "wanted no part of the b.s. of being a stockbroker, advisor, or promoter?"  Ah yes, wouldn't it be nice! You know it seems the more we talk about it,  it only makes it worse to live without it; but lets talk about it . . . Wouldn't it be nice