The Securities and Exchange Commission announced fraud charges Thursday against Navellier & Associates, a Reno, Nev., investment adviser, as well as Louis Navellier, its founder and chief investment officer.
The SEC alleges that Mr. Navellier and his company defrauded clients and prospects about the performance track record of the Vireo AlphaSector investment strategies that the firm offered under the Vireo brand name. The SEC says Mr. Navellier and the company ignored red flags that the investment strategies hadn't worked as advertised, and distributed false information about those strategies. The SEC also says that Mr. Navellier and his firm sold the Vireo line of business in August 2013 for $14 million, rather than correcting their prior misrepresentations to their clients or informing their clients about their conflicts of interest in selling the Vireo business.
Mr. Navellier began publishing analysis of growth stocks in 1980 and began managing accounts for institutional and individual clients in 1987. His Emerging Growth newsletter had top rankings from the Hulbert Financial Digest from 1985 though 2005. The $1 billion company manages several portfolios for clients and is the adviser for one mutual fund, the Cavalier Fundamental Growth Fund.
In 2009, Mr. Navellier, a growth investor, began to explore doing business with F-Squared, an investment adviser founded in 2006. The company claimed that its AlphaSector trading signals allowed investors to avoid downturns while still reaping the benefits of a bull market.
Things went wrong from the beginning, according to the SEC complaint. The SEC alleges that Mr. Navellier and his firm failed to perform due diligence on the Vireo AlphaSector's track record. Things got worse as Navellier Associates used F-Squared marketing material that promoted an inaccurate track record.
"Navellier ignored and concealed several red flags that the performance track record of Vireo AlphaSector was not based on live trading since 2001 — as F-Squared had represented — and that the track record was substantially inflated," according to the complaint. "Despite these red flags, Navellier recommended Vireo AlphaSector to clients and prospective clients, using performance track record statements it knew it could not verify and which it understood were probably false."
The SEC also says Navellier sold the Vireo business instead of disclosing that its marketing materials were misleading.
The SEC says that Navellier & Associates asked for proof that the F-Squared strategies had a live record, but F-Squared refused on grounds of client confidentiality. The SEC complaint alleges other due diligence efforts were also inadequate, and that the company persisted with its plans to market the AlphaSector strategy. "Navellier's Vireo AlphaSector advertisements included explicit (and entirely false) representations that the historical performance of AlphaSector was not back-tested," the complaint said. The complaint alleges that Mr. Navellier knew about his firm's misrepresentations, yet continued to make them.
Navellier & Associates did not return calls for comment.
"SEC charges Navellier & Associates with fraud" originally appeared on Investment News, a sister publication of Pensions & Investments.