Barred financial advisors charged in $72 million criminal enterprise

Two barred former financial advisors face a combined 76 felony charges after investigators said they sold 200 clients on underperforming private placements while pocketing extra fees. 

Doug S. Miller and Gary L. Rathbun, along with six other defendants associated with a Toledo, Ohio-based alternative commercial finance company called Northwest Capital, carried out a criminal enterprise that cheated investors out of $72 million over a 10-year span, according to an indictment unsealed earlier this month in state court. The group's 204 felony charges came seven years after Miller and Rathbun were banned from the industry.

"The scope of this operation was extensive, in alleged victims, damages, and organizers," regulatory expert Louis Straney of Arbitration Insight said in an email, noting that the types of investments pitched by Miller and Rathbun fell "outside the controls and oversight of traditional financial regulatory protocols." 

"This means that the checks and balances associated with these non-traditional investments  are often obscured, or missing altogether," Straney said. "Investors do not benefit from the guardrails of the SEC and FINRA, and in many cases are forced to fend for themselves through a Byzantine structure of confusing information sources."

Lawyers for Miller, Rathbun and the six other defendants, who all pleaded not guilty to the charges at their arraignments on April 16, didn't respond to an email seeking comment. Representatives for Advisor Group's Triad Advisors, which permitted Miller and Rathbun to resign in 2014 during a review of potential violations of the firm's private securities transactions policies, declined to comment.

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Alternatives need scrutiny
With private trades and other outside business activities a constant focus for regulators and industry compliance officials, the case displays why experts like Straney say that alternative investments merit as much scrutiny as possible. He compared the 741 investments that investigators say Miller and Rathbun sold into a series of struggling businesses to pitching stakes in coins, precious metals or other people's life insurance policies. State regulators' offices can assist any investors who get solicited for such complex investments, Straney noted.

The investments sold by Miller and Rathbun went to companies related under common ownership interest with Northwest Capital that provided bridge financing for businesses' account receivables, asset-based loans and the backing for motor sports teams, according to investigators in the Ohio Department of Commerce's Division of Securities and the Ohio Attorney General's Bureau of Criminal Investigation. Another defendant, Northwest Director of Development James DelVerne, had prepared spreadsheets tracking the investments that showed the portfolio didn't have sufficient cash to meet its obligations, investigators said.  

Besides collecting advisory fees through their registered investment advisory firm, Private Wealth Consultants, Miller and Rathbun illegally engaged in what the industry calls "double-dipping" by tacking on "monitoring fees" of $500 per hour to perform diligence on the products, investigators said. The group racked up $1.3 million in those fees between 2011 and 2021, with Rathbun's wife Nancy getting more than a fifth of the total haul, the indictment stated. 

None of the group fully disclosed the conflict of interest or "the poor financial condition" of the companies underlying the investments, according to investigators.

"Rathbun and Miller did not protect or preserve [Private Wealth] client assets," the indictment stated. "Had they performed even a perfunctory due diligence review of the [Northwest] issuing portfolio companies prior to recommending them to firm clients, Rathbun and Miller would have discovered that certain [Northwest] deals contained material falsehoods."

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Each of the advisors had spent at least 25 years in the industry prior to leaving Triad in 2014, according to FINRA BrokerCheck. In its last SEC Form ADV disclosure from 2018, Private Wealth listed 10 employees, 1,725 accounts and $246.8 million in assets under management. It included information about the firm's due diligence procedures in the investments and conflicts of interest from monitoring fees, but the company listed that language as a material change from a prior version of its Form ADV brochure.

"You should be aware that the receipt of additional compensation by Private Wealth Consultants and its management persons or employees creates a conflict of interest that may impair the objectivity of our firm and these individuals when making advisory recommendations," the brochure stated. "Private Wealth Consultants endeavors at all times to put the interest of its clients first as part of our fiduciary duty as a registered investment advisor."

The indictment charged the eight defendants with a pattern of corrupt activity, unlawful securities practices, telecommunications fraud, aggravated theft, perjury and money laundering, among other violations of the law. Last year, three of Miller and Rathbun's former clients filed arbitration cases seeking a combined $5 million in damages dating to their time with Triad, according to their BrokerCheck files. The judge in the criminal case scheduled a pretrial session for July, with a trial date slated for next February, Lucas County court records showed.