The SEC has barred an investment advisor for allegedly misleading clients and dramatically understating a fund’s risks while its underlying value shrank to near zero.
Ultimately, the Biltmore Capital fund was dissolved at an almost complete loss, but not before Caleb Overton raised $2.2 million from 10 investors, the majority of whom were over 60 and provided money from their retirement savings.
Disclosure failures are at the heart of the SEC's case against Overton and his firm, Biltmore Wealth Management, which is based in Santa Barbara, California. The commission found that Overton pursued an undisclosed options strategy with the fund and offered a false assurance that a stop-loss feature would cap losses in the 7% to 8% range, while Overton told investors he was aiming "to lock in gains in 20% to 25% range."
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Five fired and barred former registered reps stole more than $1 million from clients over a four-year period, according to the regulator.
August 15 -
The advisor persuaded the customer to liquidate his IRA and invest the money in a risky and costly options trading strategy the advisor managed, FINRA alleged.
February 20 -
Here's what I've realized since I penned my original missive to the commission.
August 17
"We are aiming to have a 3-to-1 profit-loss ratio," Overton wrote in a private placement memorandum distributed to investors he was courting for the fund, according to the SEC.
Ultimately, the fund posted a loss of $1.89 million over an 11-month period from 2014 to 2015, driven down by an options trading strategy involving stocks and, particularly, the SPDR S&P 500 ETF. Following a rapid stretch of especially heavy losses, Overton shut down the fund in November 2015 and distributed the money that was left to investors.
Overton did not immediately respond to a request for comment on the matter.
Biltmore Wealth Management is registered with the state of California and custodies with Charles Schwab. The SEC reports that the firm has about 190 clients with $30 million in assets under management. On its website, Biltmore advertises that it services individual investors, businesses, families, trusts and foundations with a minimum of $100,000 in assets.
The commission cited fraudulent claims Overton made in the memo outlining his fund, as well as in face-to-face meetings with investors and in a PowerPoint presentation.
Of the 10 investors who bought shares of the Biltmore fund, eight were already clients of Overton's advisory business. Seven were 60 years or older, and six bought into the fund using their retirement savings, according to the SEC. Four were unaccredited.
In his presentation to clients, Overton played up the fund's focus on investing in growth stocks while not mentioning the options strategy.
But under the hood, options trading became the prevailing feature of the fund Overton managed. The undisclosed options trading accounted for the entirety of the fund's losses, and elevated the fund's risk profile well above what was presented to investors, according to the SEC.
Overton represented to clients that the fund's use of leverage would not exceed 130% of the underlying net asset value. "In fact, Biltmore’s average option-adjusted long leverage position was 614% of NAV, and Biltmore exceeded the disclosed 130% limitation on 79% of the days it was in operation," the SEC says.
"The high-risk nature of the fund's options trading was not theoretical," the SEC says, citing four trading days in August 2015 when Overton made a sequence of losing SPY options trades that "decimated the fund."
"As a result of this undisclosed high-risk trading strategy, the fund lost over 98% of its value, leaving it with approximately $34,000 at the end of August 2015," the SEC says in its settlement order.
That conduct amounted to a violation of the anti-fraud provisions in the 1940 Investment Advisers Act, as well as the SEC's rule barring advisors from misrepresenting material facts regarding a pooled investment vehicle.
In settling the matter with the SEC, Overton consented to a censure and a ban from any association with a broker or investment advisor. He also agreed to repay investors the fees he collected through the fund, as well as a $160,000 fine to be paid to the commission. Overton will be eligible to reapply for reentry into the industry in five years.
