A former Ameriprise financial advisor concealed his arrangement with a fraudster who called himself the “Kryp+0 K!ng” and cost his clients hundreds of thousands of dollars, the SEC says.
At least six clients of Arthur S. Hoffman lost a combined $610,000 on their investments into fraudulent cryptocurrency membership units issued by Zima Global Ventures when federal agents
On the same day that the SEC filed the case, Hoffman and prosecutors filed a joint motion seeking a permanent injunction that would include disgorgement and a resolution of the SEC’s case. It’s not immediately clear how he came into contact with the
“This matter involves an investment adviser who, in violation of his fiduciary duties, deceived his clients about his financial conflicts of interest and perpetuated this deception by taking steps to conceal his misconduct from the SEC registered investment adviser with whom he was associated,” according to the SEC’s complaint against Hoffman.
The regulator alleges Hoffman received low-interest loans from Zima totaling $170,000 in exchange for soliciting investors to invest in the products without disclosing the compensation to clients. “Hoffman also engaged in extensive efforts to conceal his recommendations from Ameriprise and thwart its efforts to supervise his conduct with clients,” according to the document.
Responses to the allegations
No attorney was listed as representing Hoffman in the SEC proceeding, and he didn’t respond to emails sent to addresses he included in state business registration documents for a corporation where he’s a member. His agreement to the permanent injunction from the SEC doesn’t include any admission or denial of the allegations, or preclude a criminal case.
Esther Winne, a spokeswoman for the U.S. Attorney’s Office for the District of Arizona, said the federal prosecutors are unable to comment on whether Hoffman may face criminal charges. Caruso and Salter have pleaded not guilty to 17 counts of conspiracy, wire fraud and money laundering in connection with Zima. With their case moving toward jury selection, an attorney for Caruso didn’t respond to a request for comment on the matter or Hoffman’s case.
"Mr. Salter has denied the charges and will proceed to trial," his attorney, Dave Eisenberg, said in an email.
For its part, Ameriprise has paid one settlement of $49,500 to clients who invested in Zima’s funds, and other clients are seeking a combined $458,184 in damages based on their losses, according to BrokerCheck. Another firm that employed Hoffman during his 21-year career, Wedbush Securities, paid $234,500 under an October 2018 settlement based on separate complaints of fraud, the file shows. Hoffman paid $95,000 under that settlement and filed for bankruptcy protection just before he got fired and barred in May 2020, BrokerCheck shows.
Hoffman sold $640,000 worth of Zima’s membership units to eight clients between May 2019 and December 2019 when he was a representative of Ameriprise, where he spent nearly four years, according to investigators.
“The advisor was terminated for direct violations of our clear policies related to outside business activities and private securities transactions,” Ameriprise spokeswoman Kathleen McClung said in a statement.
Crypto concerns
Advisors and regulators alike are warning against the
“They should have someone that understands the regulations internally that could nip things in the bud,” Jean-Pierre said of social media networks. “I don't think you should let things get bad before you fix them.”
Many investors buy into the wrong products without understanding all that’s involved with the sales and recommendations process, according to Nicole Iannarone, an assistant professor at Drexel University’s Thomas R. Kline School of Law.
“New opportunities can be really attractive,” Iannarone said. “It’s important to ask questions of the advisor, why they're making the recommendation they're making and how they're getting paid.”
Indeed, Hoffman is accused of hiding his compensation from the clients and his recommendations of Zima from Ameriprise. He used text messages and his non-Ameriprise email address to discuss Zima with clients, made false claims in his disclosures to the company about his outside business activities and misled the corporate compliance team about wire transfers to the issuer from his customers’ accounts, according to the complaint. In one case, he managed to convince a client to tell Ameriprise he didn’t solicit them even though he brought the Zima units to their attention and recommended them for six months, according to investigators.
In another instance, Hoffman claimed he would receive a commission of only 1% on the investments because of Ameriprise’s policies, the document states. In fact, the low-interest loans from Zima represented more than 25% of their investments, according to investigators. Hoffman and Zima had agreed in May 2019 for the issuer to provide up to $1.5 million in loans in exchange for selling the firm’s products, according to investigators. In one text message to clients, he told them Zima was “offering to guarantee” returns of 18.5% in their first year of investing, the complaint states.
Issuer principals face fraud charges
In its March 2019 offering of up to $25 million in membership units, Zima proposed to use pooled investor funds to trade cryptocurrency and other digital assets, the SEC complaint states. The offering memos promised a two-phase approach to distributions with investors: a return of initial investments plus profits of 20% in the first year and a profit split with Zima’s principals for any additional gains, according to investigators.
Despite a barrage of news articles lauding the accomplishments of the 20-something entrepreneurs behind Zima, it’s not clear whether they made any investments into crypto assets or anything else, according to the criminal case against Kryp+o K!ng and Salter.
Their list of victims include former Major League Baseball players and their families, as well as older investors aged 76 and 86 who invested tens and even hundreds of thousands of dollars, the complaint states. Before he became the Kryp+o K!ng, Caruso had “an extensive criminal history regarding fraud and financial crimes,” according to the document.
A Secret Service agent who led the investigation into Zima’s principals noted that a 2014 probation report connected to one of Caruso’s prior cases cited his father’s
Investigators’ analysis showed that the spending was “directly tied to investor funds,” the complaint states.
