SEC boots California RIA linked to crypto, private funds

The Securities and Exchange Commission last week revoked the license of Lufkin Advisors of San Mateo, Calif., after charging the firm and its owner, Chauncey Lufkin, with fraudulent conduct involving crypto assets and private funds.

According to the settlement dated June 26, Lufkin agreed to the SEC's order without admitting to or denying its findings in the matter. Lufkin could not be reached Monday morning to comment.

Lufkin Advisors had $115.8 million in client assets, according to its most recent Form ADV and had three pooled investment vehicles, or funds that can have money from multiple investors. Pooled investments are regarded by some in the retail financial advice business as inappropriate for retail investors because the individual investor's money may be more difficult to track and account for in such funds.

The SEC's complaint alleged that Lufkin Advisors and Chauncey Lufkin "engaged in a fraudulent course of conduct that included a loss of control of crypto assets entrusted to them for at least one year without disclosure of that fact to advisory clients, multiple investments with Mr. Lufkin’s spouse’s employer without proper disclosure to private fund investors, and failure to properly account for withdrawals from the private funds."

The SEC's complaint also alleged Lufkin and the firm failed to monitor the value of the investments made by the private funds, and a general derogation of their duty to manage the assets entrusted to them.

According to the SEC, Lufkin Advisors and Chauncey Lufkin did not adhere to many of the statutes and rules applicable to RIAs, including rules concerning the custody of assets, the accuracy of reports filed with the SEC, and the maintenance of required advisor records.

"Nobody knows what’s happening internally in these pooled funds at the retail level," said Scott Silver, a plaintiff's attorney. "How are these firms really managing these types of funds? It's a recipe for disaster."

Meanwhile, the Financial Industry Regulatory Authority Inc. said in January it was adding developments in “crypto assets” to its laundry list of major concerns for the brokerage industry.

Finra has focused on crypto assets, the broad term for digital assets, in past annual lists and reports; in 2023, its report mentioned the crypto-asset market in the context of cybersecurity. But in this year’s report, the “2024 Finra Annual Regulatory Oversight Report,” Finra said it was keeping tabs on salespeople and financial advisors who are involved in the marketing and sale of digital assets.

“Finra has identified associated persons engaged in a range of crypto asset-related activities through [outside business activities] or [private securities transactions,]” according to the report, including “proprietary trading, operating investment funds that invest in crypto assets, selling private placements or crypto asset offerings, and participating in crypto mining operations.”