Ambassador Advisors and three of its executives, including its chief compliance officer, must pay a total of more than $2 million for failing to disclose conflicts of interest related to fees received from mutual fund share classes selected for clients.
The U.S. District Court for the Eastern District of Pennsylvania on Sept. 7 entered final judgment against the investment adviser and its principals. Bernard Bostwick, Robert Kauffman, and Adrian Young—all part owners, executives, and investment adviser representatives of the firm—selected mutual funds for their clients that delivered fees for their benefit rather than choosing identical share-fund classes that had no or lower fees, the court found.
Between August 2014 and December 2018, the three advisers received more than $1 million in 12b-1 fees, the SEC alleged.
Young is chief compliance officer at Ambassador, which is based in Pennsylvania and describes itself as guided by Christian principles.
The court ruling follows an eight-day jury trial and verdict in March, which concluded Ambassador and the three executives had breached their fiduciary duty and violated the Investment Advisers Act. The SEC lodged its original complaint in May 2020.
The SEC claimed the advisers failed to act in their clients’ best interest and hadn’t adequately disclosed their conflicts of interest to clients. The Ambassador executives said they disclosed the fees and their clients agreed to pay them, the court said.
Judge John Gallagher noted in his opinion the defendants knew of their fiduciary duties because they received “at least three notices from their compliance consultant indicating that the SEC was enforcing [the Advisers Act] against advisers whose investing practices were very similar to defendants’ practices.”
The defendants also reviewed a written, detailed policy of procedures for best practices involving mutual fund transactions that charged 12b-1 fees, but they failed to adopt any written policies for themselves, the court said.
The court noted after the jury’s verdict, Ambassador released a video and statement in which it acknowledged the jury found the firm liable. But in the same statement, the defendants “deflected blame” and “contradicted the jury’s verdict” by claiming they had followed the SEC’s rules and never overcharged clients in any way.
In its opinion, the court denied the SEC’s request for a permanent injunction, but it agreed with the agency’s request Ambassador remove certain misleading statements from its website and Forms ADV; send corrective notices to clients; and pay restitution, penalties, and interest.
Ambassador must pay a $622,642 civil penalty, the court ordered. Bostwick must pay $136,620 in disgorgement, $35,273 in prejudgment interest, and a $136,620 civil penalty; Kauffman $349,395 in disgorgement, $95,972 in prejudgment interest, and a $349,395 civil penalty; and Young $136,627 in disgorgement, $35,275 in prejudgment interest, and a $136,627 civil penalty.
“Although we are extremely disappointed with the judge’s ruling and still vehemently disagree with the decision, we trust God’s continued provision and His eternal plan,” Ambassador said in an emailed statement. “We seek to glorify Him alone through our integrity. A multitude of points from this case could—and probably should—be appealed, but this lengthy ordeal has been tough on our team and our clients.”