SEC Charges NJ Adviser with Fraud, Breach of Fiduciary Duty

The Securities and Exchange Commission (SEC) announced that it has filed charges against David Yow Shang Chiueh and his New Jersey-based investment advisory firm, Upright Financial Corp. (UFC) (“Defendants”), for fraud and breach of fiduciary duty, among other securities law violations.  In November 2021, the firm settled charges that they had breached the fiduciary duties outlined in the Concentration Policy of its mutual fund, known as Upright Growth Fund, by investing more than 25% of its assets in a single company between July 2017 and June 2020 and operating the fund as non-diversified.  However, despite Defendants’ agreement to comply with orders to stop this conduct, the SEC alleges that Chiueh’s advisory firm engaged in three sets of misconduct during the relevant period.

First, that UFC not only continued to violate the 25% industry concentration limit and misrepresent their investments between November 2021 and June 2024 but also waited two and a half years to reduce the fund’s holdings, a decision which ultimately caused losses of over $1.6 million to the fund and its investors.  Second, the SEC claimed in their complaint that the mutual fund’s board had not been operating with the required number of independent trustees and that Chiueh had misrepresented the independence of one of its members in the company’s filings, both of which constitute breaches of fiduciary duty.  Finally, UFC allegedly withheld critical information about their advisory contract from the board and hired an accountant to audit the fund without the required vote from the board and collected fees of over $100,000 on the assets that exceeded the 25% limit.

“As alleged, the defendants not only ran the fund contrary to its fundamental investment policies, but they actively misled investors and the fund’s board about their conduct,” said Corey Schuster, Chief of the Division of Enforcement’s Asset Management Unit. “Undeterred by their prior SEC settlement involving these very same issues, we allege that the defendants repeatedly violated fundamental rules designed to protect investors in mutual funds.”

The SEC’s complaint, filed in the U.S. District Court for the District of New Jersey, charges Defendants with violating antifraud and other provisions of the federal securities laws, including the Securities Act of 1933, Exchange Act of 1934, Investment Advisers Act of 1940, and the Investment Company Act of 1940.  The complaint seeks permanent injunctive relief, return of allegedly ill-gotten gains, and civil penalties.

What obligations do fiduciaries have to their investors under securities law?

Under the Investment Advisors Act of 1940, an investment advisor owes its client two fiduciary duties: the duty of care and the duty of loyalty.

According to the SEC, “[t]he duty of care includes, among other things: (i) the duty to provide advice that is in the best interest of the client, (ii) the duty to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and (iii) the duty to provide advice and monitoring over the course of the relationship.”  Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 84 Fed. Reg. 33669, 33672 (Jul. 12, 2019) (to be codified at 17 C.F.R. pt. 276).  This means that the fiduciary must make a reasonable inquiry into the client’s objectives and ensure that there is reasonable belief that the advice is in the best interest of the client.

The duty of loyalty requires that an investment advisor not place its own interests over its client’s interests.  To meet its duty of loyalty, the SEC states that “an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship.”  Commission Interpretation, 84 Fed. Reg. at 33675.  An adviser must also eliminate or disclose any conflicts of interest which might hinder their unbiased and disinterested decision-making.  Most critically, the disclosure must be clear and detailed enough for the client to make an informed decision to consent to the conflict of interest or reject it.