U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 24017 / December 20, 2017
Securities and Exchange Commission v. Ronald A. Fossum, Jr. and Alonzo R. Cahoon, No. 2:17-cv-01894 (W.D. Wash. filed Dec. 19, 2017)
Washington-based Investment Adviser and His Business Partner Charged in Multi-Million Dollar Scheme
The Securities and Exchange Commission charged a Snohomish, Washington-based investment adviser with fraud based on his misappropriation of fund assets and misrepresentations to retail investors about the financial condition of the funds and his compensation. The SEC also charged another Morgan, Utah-based investment adviser with fraud relating to his concealment of additional compensation that he received in connection with sales of interests in one of the funds.
According to the SEC’s complaint, filed yesterday in the U.S. District Court for the Western District of Washington, from approximately March 2011 to June 2016, Ronald A. Fossum, Jr. raised more than $20 million from over one hundred investors through unregistered securities offerings of three investment funds he owned and controlled: Accelerated Asset Group, LLC; Smart Money Secured Income Fund, LLC; and Turnkey Investment Fund, LLC (collectively, the “SMFG Funds”). The SEC alleges that Fossum misappropriated hundreds of thousands of dollars of SMFG Fund assets by, among other things, living rent free in a home owned by an SMFG Fund and causing the SMFG Funds to pay other personal expenses, including for his extensive international travel and federal taxes. According to the SEC’s complaint, Fossum also induced new investments in the Smart Money Secured Income Fund without disclosing its poor financial condition and repeatedly breached his fiduciary duties to the SMFG Funds by indiscriminately commingling fund assets to satisfy the funds’ liquidity needs.
The complaint also alleges Fossum and a partner, Alonzo R. Cahoon, who both acted as investment advisers to the Turnkey Investment Fund, breached their fiduciary duties to the fund and misled investors by misrepresenting that they would receive only a one-time management fee of $2,990 per investment unit sold as compensation. Instead, Fossum and Cahoon secretly pocketed $20,000 or more in compensation from each investment. The SEC also alleges that both Fossum and Cahoon sold unregistered securities without a valid exemption from registration and acted as unregistered brokers in the Turnkey Investment Fund securities by soliciting prospective investors in the fund and earning transaction-based compensation as a result of sales made to investors.
According to the SEC’s complaint, in June 2016, the SMFG Funds filed for bankruptcy and are currently being liquidated by a trustee.
The SEC’s complaint alleges that Fossum violated Sections 5(a) and (c) and 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”), along with additional alternative charges. The complaint further alleges that Cahoon violated Sections 5(a) and (c) and 17(a)(2) of the Securities Act, Section 15(a) of the Exchange Act, Sections 206(1) and (2) of the Advisers Act, aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, along with additional alternative charges. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties from both defendants. The SEC also seeks a conduct-based injunction against Fossum.
The SEC’s investigation was conducted by David A. DeMarco and supervised by Kurt L. Gottschall and Jason J. Burt of the Denver Regional Office. Bankruptcy counsel David W. Baddley represents the SEC in bankruptcy litigation related to the funds. The SEC’s litigation against Fossum and Cahoon will be led by Gregory A. Kasper and Terry R. Miller.