Over five years, former broker James Scott McKee defrauded the customers of the brokerage firms where he worked out of nearly $1 million, using lies and omissions to induce them to invest in various real estate ventures in which he had a direct or indirect financial interest, according to a complaint filed by the Financial Industry Regulatory Authority (FINRA).

Filed by FINRA’s Department of Enforcement on Feb. 14, the complaint alleges that McKee engaged in fraud, improper use of funds and conversion, recommendation of unsuitable investments, false statements, selling away, failure to cooperate and lying on the record.

James Scott McKee Willfully Violated Securities Laws

The complaint requests a factual finding that McKee willfully violated securities laws and FINRA rules. It also seeks monetary sanctions, including full disgorgement of ill-gotten gains, full and complete restitution plus interest, and an order that McKee bear the costs of the disciplinary action.

Beginning in early February 2006, McKee defrauded various customers, including an 81-year old retiree, a local church, an owner of a small office supply company and other unsophisticated investors, the complaint says.

All these customers were seeking conservative investments and McKee fraudulently represented to them that his real estate deals fit this description. The fraud continued until September 2011.

Customers were promised unrealistically high returns, and McKee lied about the nature and terms of the investments, the precarious financial condition of some of the businesses, and how the funds would be used. He also failed to disclose his financial interest in the businesses, and the high level of risk, the complaint says.

McKee also converted one customer’s funds to pay off another customer who threatened him with legal action for misappropriating the money from an earlier transaction, the complaint says.

During FINRA’s investigation of all this misconduct, McKee failed repeatedly to cooperate with FINRA and then lied to FINRA during his sworn testimony.

His conduct violated myriad federal securities laws and FINRA rules, including Section 10(b) of the Securities Exchange Act of 1934, the complaint says.

The Firms Where McKee Worked

During the time McKee was defrauding customers, he worked for three brokerage firms. From 2002 to 2008, he was a registered representative and principal with LPL Financial Corp. From 2008 to November 2010, he was a registered representative and principal with Berthel Fisher & Co. Financial Services Inc., who allowed him to resign when they discovery his fraudulent activities, the complaint says.

McKee then joined Morgan Stanley Smith Barney in December 2010 as a registered representative and principal. In September 2011, Morgan Stanley fired McKee for persuading a customer to invest in one of his outside business ventures without notifying or obtaining prior approval from the firm, the complaint says.

In fact, McKee failed to notify or obtain prior approval from any of his employing firms for any of the investments he solicited.

The Real Estate Investments

The earliest misconduct involved rental properties. In early 2006, McKee persuaded a customer identified in the complaint as SS to invest $45,000 in a local residential property. McKee falsely told SS her principal would be returned in 90 days, plus $5,000, and that the money was to remodel the house so that could be flipped for a profit.

SS, who was new to investing, received no documentation. The house was not sold within 90 days and McKee never returned any of the principal, let alone gave her $5,000 in profit, the complaint says. In March 2006, McKee convinced SS to invest $29,000 in another residential property, using the same false promises. He failed to pay SS the promised fee or return any of the principal.

A number of McKee’s fraudulent transactions involved Uptown Development No. 1 LLC, a real estate venture in Eugene, Oregon co-owned by McKee. His job in Uptown was to raise private investments for two shopping centers, the complaint says. He solicited investments from customers of LPL and then Berthel Fisher, without notifying the firms or obtaining prior approval. He never disclosed to these investors that he was an owner of Uptown.

McKee persuaded an LPL customer identified in the complaint as KK to invest $400,000 in Uptown in April 2007. He promised interest at an annual rate of 12.5 percent, paid monthly.

In December 2007, KK had a heart attack. She needed money for medical expenses, so she sought to liquidate her Uptown investment. McKee told her it would take some time before the investment could be liquidated, the complaint says.

KK never got the money. In February 2008, McKee had Uptown write him two checks for $200,000 apiece. He deposited this money in a personal bank account and converted the funds to his own use. McKee knew that KK needed money for medical bills, but he met her repeated requests with delay upon delay. As of the date of the complaint, KK’s investment had not been returned.

The next hapless investor in Uptown was TM, a customer of Berthel Fisher and the owner of a small office supply company. In August 2008, McKee had TM make out a check for $202,632 payable to Uptown, the complaint says.

Uptown transferred $100,000 to McKee. While McKee used about $30,000 to pay an insurance premium for TM, he kept the rest until April 2011, when TM threatened him with legal action.

Through counsel, TM sent McKee a letter accusing him of failing to disclose to the terms of Uptown investment or that McKee had a stake in the venture. After this threatened legal action, McKee repaid TM about $68,000 using funds he misappropriated from another customer, the complaint says.

The Start-up Companies

McKee also solicited investments in two businesses of which he was part owner and which were tenants of Uptown: Sam’s Uptown LLC, a sports bar, and Bedrocks Coffee LLC, a coffee shop. In 2009, they were both in financial difficulty and required additional financing.

Without notice or prior approval, McKee solicited customers of Berthel Fisher to invest directly in these companies, luring them with misrepresentations about promised of rates of return ranging from 8 to 12 percent, the complaint says. McKee also failed to disclose that he had a financial interest in these small companies, that they were in financial trouble, or that they were start-ups without an established customer base.

In October 2009, McKee got a local church to invest $100,000 in Bedrocks. The church – which had no investing experience — informed McKee it was seeking conservative investments with limited risk to generate income for operational expenses.

To persuade the church to put up the money, McKee lied, stating that Bedrocks was part of a larger venture with other locations in its future, the complaint says. McKee failed to tell the church that he had stake in the coffee shop, or that it was a financially uncertain start-up.

To hide this unsuitable investment from Berthel Fisher, McKee falsified the church’s account forms, changing its assets, risk tolerance, investment objective and investment experience. For example, he estimated its net worth at $250 million, when in fact it was far less.

The church never realized any gain from Bedrocks, and lost its entire $100,000 investment when Bedrocks filed for bankruptcy in November 2011.

Also in October 2009, McKee persuaded a customer, identified as AS in the complaint, to invest $48,000 in Bedrocks, falsely describing the coffee shop as a real estate investment trust. AS lost all of her money when Bedrocks filed for bankruptcy.

KK was also persuaded to invest in Bedrocks about one month after the church and AS. She invested $100,000 in the coffee shop based on McKee’s promises that she would earn 12 percent interest. McKee told KK that she would receive an interest payment every month, but she received only one payment, and never got back any more of her $100,000 investment.

McKee also solicited a bogus investment in Sam’s. In April 2010, he induced 81-year-old customer FL to invest almost $60,000 in the sports bar. McKee promised 10 percent interest. He falsely told FL that the investment was secured by the bar’s equipment, and that he could recover the investment at any time, when in fact FL had to wait five years, the complaint says.

Throughout 2010, McKee faced mounting personal debts. In October of that year, he duped customer LK into investing $50,000 in Bedrocks by promising 8 percent interest, the complaint says. McKee then made the owner of Bedrocks kick $10,000 of the $50,000 investment back to him, without informing LK, of course. He also failed to tell LK that he had a stake Bedrocks or that the company was in financial trouble. LK never saw any interest or any of her money again.

McKee lied to Berthel Fisher about all of these outside business activities. As a registered representative, McKee was required disclosed all of his outside business activities and state whether he had obtained written approval from the firm. In 2009 and 2010 McKee said he had obtained approval when he had not. He also never disclosed his interests in Uptown, Sam’s and Bedrocks or his solicitation of investment from firm customers. In November 2010, Berthel Fisher “permitted McKee to resign,” as the complaint put it.

Ventis Investment Properties LLC

About one month later McKee joined Morgan Stanley where he continued his fraud spree, according to the complaint. For example, in April 2011, he solicited LK, at the time a Morgan Stanley customer, to invest $100,000 in Ventis Investment Properties LLC, a company that invested in local residential properties and was 100 percent owned by McKee. He did not notify or obtain prior approval from Morgan Stanley.

True to his pattern, McKee told LK that Ventis invested in assisted living facilities when the company actually owned only a small office building and a small parcel of undeveloped land. He also told LK that Ventis had already developed a senior housing project with 100 percent occupancy when no such housing project existed, the complaint says.

LK was told by McKee that her investment would pay a return of up to 20 percent per year from rental revenues, but Ventis had no renters.

When LK gave McKee the $100,000, he endorsed the check and put it in his own account. He did not provide LK with any documentation despite her repeated requests. She eventually demanded he return the investment, which he refused to do, the complaint says.

McKee then used most of LK’s $100,000 to pay off TM, the Uptown investor who was threatening McKee with legal action for converting TM’s money to his own use. McKee kept the balance of LK’s money, the complaint says.

James Scott McKee Discharged From Morgan Stanley

Morgan Stanley learned of McKee’s Ventis activity and fired him in September 2011. FINRA public disclosure records show that McKee has not been registered with any firm since his discharge from Morgan Stanley.

During FINRA’s investigation into McKee’s activity, he failed to cooperate on numerous occasions – beginning in April 2011 — and then lied during testimony under oath, the complaint says.

Guiliano Law Group

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