The FINRA has permanently barred James Blake Daughtry from broker activities after he was found to have committed multiple securities law violations. Daughtry was first sanctioned by the INRA in 2016 when he was suspended from acting as a broker for a period of six months.
Dotham, Alabama based financial advisor (FA) James Blake Daughtry, 50 years of age, has been charged by the Securities Exchange Commission (SEC) for breach of fiduciary duty to his clients. Daughtry has, since, been barred.
The SEC action is a fallout of Daughtry selling his advisory business to 31-year-old Jared D. Eakes, who is named as a defendant in the same case for using Graysail Advisors, his now-defunct registered investment advisory firm (RIA) based in Jacksonville, Florida, for the theft of $2.6 million in client money.
The Daughtry business sale
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When Daughtry put up his advisory business for sale in late 2018, he was managing $45 million in assets for about 140 households. He listed it on a platform meant for the buying, selling and integration/merger of businesses between financial services professionals.
When the sale to Eakes was finalized in March 2019, he had agreed to continue advising clients who agreed to move to Graysail, for a minimum period of 3 years. In return, Daughtry would receive:
- $1 million over 3 years as compensation
- $100,000 for purchasing two cars
- $4,333.33-a-month as stipend for life
- and future options
The sale of the advisory business, which is believed to have been for a ‘substantial’ sum, was termed as an unusual and portentous step by lawyers involved in the case. Even the SEC, while bringing civil charges against Daughtry, highlighted the transaction as an example of the perilous nature of succession planning done by self.
Daughtry’s fault
Though Daughtry is not charged with committing the crime, his fault lies in not having performed adequate due diligence on Eakes and his business, while finalizing the sale. Thereafter, when presented with client complaints and other signs of Eakes’ misconduct, he apparently failed to act in a manner that would protect the interest of the clients, according to the SEC complaint filed in a Florida federal court.
“People are always looking for shortcuts and doing the ‘simple’ transaction, and this complaint has all the reasons that is not a good idea. The first step in any business transaction is always due diligence, and that’s especially true when you’re dealing with a buyer who doesn’t have a history.” Brian Hamburger, a New Jersey-based lawyer who is not involved in the case but works with investment advisors said, commenting on the case.
In addition, Daughtry not only failed to continue to monitor their accounts and review investments that were proposed as per conditions of the sale, but was also remiss in not communicating the stoppage of his promised services to clients.
The SEC lawyers noted that “Daughtry failed to abide by these promises, even when several clients raised questions about certain investments that had been made in their accounts with GraySail. Daughtry’s failure to exercise the requisite care for his clients, once their accounts were at GraySail, enabled Eakes to defraud these clients.”
Daughtry’s record
Daughtry, spent the last five years of his twenty-year career in brokerage Kestra Investment Services, an Austin, Texas based independent broker-dealer.
On account of his refusal to testify into “potentially fraudulent and unauthorized transactions in customers’ accounts,” in a FINRA investigation, he was barred by FINRA in 2020 March, and also fired by Kestra, according to his BrokerCheck report.
Kestra only learned of the transaction once an investigation had been initiated into it by the Financial Industry Regulatory Authority (FINRA). Daughtry did not bother to inform them.
Eakes’ history and role
Reading the SEC complaint together with his BrokerCheck profile reveals that Eakes was a registered broker with Merrill Lynch between 2016 and 2018 February. Towards the end of 2018, he set up Graysail with the objective of purchasing the practice of Daughtry and the additional acquisition of clients from a broker-dealer in Arkansas. His investment advisor license was dropped in 2019 September.
$8.6 million in assets under management across 47 clients is what Eakes gained from the acquisitions.
The fraud charges against Eakes mostly pertain to selling fake promissory notes to his clients, issued by Small World Capital, LLC, through which he was able to raise $2.6 million. The collected funds went towards paying off student and business loans, settling $116K at a casino in Las Vegas, and ‘unprofitable’ trades in his personal brokerage account.
Concluding remarks
It is not clear from the complaint filed by the SEC how client accounts were transferred and the terms that were included. According to Hamburger, if the transaction had been executed professionally, which, in hindsight, seems unlikely in this case, it is unlikely that any liability would have been attached to the seller.
While the SEC’s naming of the seller was a “rather unusual” step, Hamburger opined that given the pace at which deals were being cut recent years, it could become much more common. “It’s another indication of what we can expect to see as all these deals continue to happen. It shouldn’t surprise anyone that the SEC is going to follow the documents and follow the money.”
As per the court docket, the defendants’ lawyers were yet to make an appearance. The Alabama-based lawyer who had represented Daughtry in the earlier litigation in the same case, did not respond when reached for a comment.
