Posted by & filed under Financial Fraud Watch.


Alex Brokaw contributes the Financial Fraud Watch on a weekly basis.

This week, the SEC announced charges against Mill Valley, California-resident Scott M. Landress and his registered investment adviser SLRA Inc. for the improper disbursement of $26.68 million in undisclosed fees. 

Through SLRA, Landress managed the accounts of two private equity fund advisory clients, Liquid Reality III, L.P. and Liquid Realty Partners III-A, L.P. — limited partnerships which included over $500 million from university endowments and pension funds. The limited partnerships were formed in 2006 to invest in real estate trusts with underlying investments in properties throughout the United Kingdom — a portfolio known as Project Ursula. SLRA earned fees for managing the accounts, which were based on the net underlying value of real estate holdings.

When the financial crisis hit in 2008, the real estate holdings in these managed accounts tanked. The fees that SLRA and Landress normally charged the accounts’ limited partners bottomed out. Meanwhile, the cost of managing Project Ursula’s properties jumped. Beginning in 2009, Landress began requesting additional compensation from the accounts’ limited partners to cover shortfalls from the financial fallout. By January 2014, Landress claimed multiple request for payment had been denied, and he directed his finance director to withdraw $26.68 million from the funds. Despite objecting, Landress’s finance director proceeded with the withdrawal.

When the limited partners were notified of the charges the following month, they claimed this was the first they’d heard of these fees. This was just one indication that Landress’ story didn’t check out, the SEC would come to discover. Their investigation found that it wasn’t until the fall of 2013, when Landress had begun preparing to withdraw the $26.68 million from his clients, that SLRA’s finance director and the fund’s auditors first learned these requested fees even existed. And despite Landress’s assertions that he’d made multiple requests of the limited partners, no documentary evidence exists to support the claim.

Landress sealed his fate on March 4, 2014. The limited partners, aware of the withdrawal, had objected and demanded the $26.68 million be returned. SRLA had declined, and so Landress transferred the sum to a personal account.

Landress’s misappropriation did not last long, though. During negotiations with the limited partners, Landress froze the withdrawn service fees. Shortly after, negotiations turned into a lawsuit, SLRA filing against certain limited partners, seeking a declaratory judgement and other relief regarding SLRA’s entitlement to fees. But SLRA’s cased turned against itself and Landress. After the commencement of the SEC’s investigation, the SLRA and the limited partners reached a final settlement in February 2016. SLRA was ordered to return $24,422,852.43 to the defendants.

Now, a year after the settlement was reached, the SEC has permanently barred Landress from the securities industry and has ordered him to pay a $1.25 million penalty for withdrawing improper fees from SLRA’s managed funds. Landress, the SEC said, breached his fiduciary duty by withdrawing the funds without disclosure and not properly alerting his clients to fees accruing in their accounts. This puts Landress in willful violation of Sections 206(1), 206(2), and 206(4) of the Advisor Act.

Landress and the SLRA agreed to the SEC’s barment order without admitting or denying the findings.



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