When a Florida advisory firm lost the password to a
That's just one of the charges leveled in a Securities and Exchange Commission case filed on Sept. 19 against Lufkin Advisors of Riviera Beach, Florida, and its founder and CEO, Chauncey Forbush Lufkin III. According to the SEC, Lufkin took the better part of a year to inform investors it had lost access to a cryptocurrency wallet — essentially an account holding digital assets — containing their money. And at least one of the clients didn't learn that news through Lufkin but rather through the firm's accountant.
The SEC is now accusing Lufkin and his firm of not being forthcoming about losing the password despite saying their crypto accounts would be regularly monitored. Separately, the SEC alleges Lufkin and Lufkin Advisors placed investors' money in private funds managed by a separate company, Hutt Capital Funds, which employed his wife.
Lufkin's wife, Sandra Familet, eventually became chief operating officer of Hutt Capital. That conflict, according to the SEC, was not disclosed.
Regulators say Lufkin and his firm failed to properly report withdrawals from those funds and failed to monitor the value of those investments. Attempts to reach Lufkin Advisors and Lufkin were unsuccessful.
Though cryptocurrencies continue to figure prominently in public discussion, digital assets like bitcoin and ethereum have yet to be embraced by most financial planners. A
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The SEC's latest case is proceeding in the federal district for Southern Florida. Lufkin testified before SEC officials on Aug. 18 that he had been unable to find a password or key for an account held at the crypto exchange KuCoin for more than a year but less than two years. He said he didn't know exactly how much was in the wallet but estimated it was around $10 million.
Lufkin said the situation had been "elevated" to the chief information officer of KuCoin and that he then expected to regain access to the account within a week. An email to KuCoin's media team went unanswered Tuesday.
"That one we have — we're going through the process of getting it unfrozen, and we're very close to — we got frozen because of, I don't know, a trading password, I forgot the trading password," Lufkin said in his testimony.
Matt Edman, a partner and founder at NAXO, a New York-based firm that specializes in the retrieval of crypto assets, said exchanges like KuCoin are usually fairly willing to help clients' recover lost passwords. He said passwords can be harder to obtain for digital assets that have been moved off an exchange and onto a privately controlled software "wallet." But even then, there are plenty of techniques that can aid with retrieval, he said.
"It should be a fairly straightforward recovery process," he said.
Lufkin Advisors' latest Form ADV, filed with the SEC on Dec. 20, said the firm had $115 million in assets under management. The SEC alleged that amount was incorrect and out of date by at least two years.
According to the SEC, Lufkin Advisors had three main investing funds: LA Capital Management, LA Floating Rate and Latitude CLO II. Its handful of investors included The Chauncey F. Lufkin III Foundation, set up ostensibly to fight poverty and medical diseases; and two former employees, Marianne Chrencik and Kirk Wallace. Attempts to reach Chrencik and Wallace, both former senior vice presidents, were unsuccessful.
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Beyond cryptocurrency, the bulk of Lufkin Advisors' holdings were in private equity. In a declaration submitted to court on Sept. 19, Wallace said he first learned in March that Lufkin Advisors had lost access to its crypto holdings. He said he was looking for information needed for his taxes and that he eventually, after seeing several of his emails go unanswered for weeks, reached out to the firm's accountant, New York-based CWS.
Wallace also said he had never been told some of the firm's money had been invested with a firm that employed Lufkin's wife.
"My wife and I withdrew some of the money we had invested with Lufkin Advisors," Wallace said. "We would like to withdraw the rest, though we have not submitted a formal request to do so."
The SEC accused Lufkin of falsely claiming that technology-related expenses charged to its LA Floating Rate Fund were from the firm when in fact they were from the foundation. It also said Lufkin agreed to compensate a friend $50,000 a year for consulting and research and has already paid him with at least $25,000 from the LA Floating Rate Fund.
"To date, the subject of this research has not been defined and the friend has not performed consulting services," according to the SEC's complaint.
The SEC is seeking to freeze Lufkin Advisors' assets and is asking for civil penalties plus interest and the disgorgement of any ill-gotten gains. Lufkin pleaded guilty in Blaine County, Idaho, in early 2015 to charges of cocaine possession.
