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Advisor Who Pled Guilty to Wire Fraud Has Sentencing Postponed, But Could Face 20 Years

By Miriam Rozen January 2, 2019

A federal court postponed until February the sentencing of Jeremy Drake, a former registered representative who worked for UBS and Morgan Stanley and who previously pleaded guilty to one count of wire fraud.

The criminal case against Drake grew out of allegations from a seven-year time period when, after he left the wirehouses, he worked as a financial advisor at HCR Wealth Advisors in Los Angeles. The firm, which has more than $1 billion in assets under management, terminated Drake in 2016. Drake’s case provides a stark cautionary tale about financial advisors’ misrepresenting management fees to clients.

According to prosecutors’ allegations, Drake overcharged two clients — “a high-profile professional athlete” who is not identified in the court documents by name, and the athlete's wife. Drake told the clients he was charging roughly $300,000 in management fees and instead charged them $1.5 million, according to a civil complaint related to the criminal allegations filed by the SEC.

Drake attempted to conceal the overcharges by creating false documents and statements, and a false persona, representing the materials as coming from Charles Schwab & Co., the institution that kept custody of the couple’s invested assets, the same complaint states.

“Jeremy has accepted full responsibility for overcharging a client who placed trust in him. He has done so with deep sincerity, the heartwarming support of a young family and hope for the future. Out of respect for all involved, he cannot comment on the pending court proceedings with which he has fully cooperated,” Jonathan Shapiro, a law partner in the San Francisco office of Baker Botts, who represents Drake, told FA-IQ.

In February, the court could sentence Drake to up to 20 years in prison and fine him twice the amount he gained by his offence. The U.S. Probation Office has filed a presentencing report recommending Drake pay $1.2 million in restitution to his former clients — $600,000 of that amount immediately upon his sentencing.

But the court could also issue a sentence requiring significantly less prison time if Drake’s lawyers persuade the presiding judge that Drake’s misdeeds lacked sophistication. Indeed, Drake’s attempts to conceal his overcharges were hardly complex. Given that Schwab also sent the clients account statements that showed the actual amounts of management fees Drake was charging, it was unlikely that he could have forestalled indefinitely his clients' discovering his own misrepresentations.

According to his profile on Finra’s BrokerCheck, Drake is not currently working as a financial advisor and he’s no longer registered with Finra or the SEC. But he is employed part-time as a managing director for two Los Angeles-based restaurant business enterprises.

At HCR, Drake managed $50 million in assets for 20 clients, according to the SEC’s complaint. A significant portion of Drake’s personal compensation at HCR came from the AUM fees he charged clients, according to the same complaint. From 2009 to 2012 HCR compensated Drake by paying him $60,000 in annual salary and then 40% to 50% of his clients’ AUM fees, according to the SEC complaint. In 2013, Drake initiated a change in his compensation plan, asking HCR to stop his salary and give him instead 60% of his clients’ AUM fees, a plan to which the firm agreed, the SEC complaint states.

According to the same complaint, Drake met the professional athlete and his wife in 2008, when the BrokerCheck report shows he was working for Morgan Stanley. The couple placed $35 million of their assets under Drake’s management. In 2009, the wife signed an investment advisory agreement with HCR, which showed she would pay 1% in management fees. The wife believed, however, that the 2009 agreement would expire in one year if she didn’t renew it, so she also understood after 2009 that she and her husband had only an oral pact with Drake. After 2009, Drake “repeatedly and expressly represented” to the wife that she and her husband were being charged less than 1% in AUM fees.

Also according to the SEC complaint, English was not the wife’s first language, so she always brought an assistant to serve as an interpreter for her meetings with Drake. Drake told the wife that the couple was paying a special “VIP” rate of between 0.15% and 0.2% of their AUMs for management fees. Specifically, Drake told the wife that he charged an initial fee of 1% but then the couple, as part of a tax-efficiency strategy, received “credits” in their brokerage accounts so their total fees would be the lower percentages. Ultimately, Drake emailed the wife’s assistants “fabricated” HCR statements and “doctored Schwab statements” showing credits, which were not actually being paid. In June 2016, when the wife kept pressing him for more answers and explanations, and asked to speak to a Schwab representative, Drake created a fake persona. Drake eventually even established emails for the fictitious Schwab representative “Ron Stenson,” set up a phone line and arranged for “a confederate” to pose as Stenson.

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It was in July 2016, after the wife contacted Schwab directly and confronted Drake with his lies that Drake admitted that she and her husband had paid the higher AUM management fees, according to the SEC complaint.

Drake then “pleaded” with the wife to help him keep his securities license by “asking her to lie about the source of the fabricated documents,” the SEC complaint states.

Drake also warned the wife that an escalation of her complaints about him to his firm could spur “bad publicity” for her husband, the well-known athlete, the SEC complaint alleges.

Drake has not yet disclosed the names of the athlete and his wife.

In their request to postpone Drake’s sentencing, his lawyers told the court that their client sought the delay — putting off any time he must serve in prison — at least until his wife gives birth to a second child, which the couple was expecting in December 2018.