Adviser Fraud in Our Backyard
Adviser Fraud in Our Backyard
Dennis Gibb, a Redmond, Washington based investment adviser, stole over $3 million dollars from clients of the investment advisory firms he owned, Sweetwater Investments, Inc. On March 28th, 2019, he pleaded guilty to two felony charges, one for wire fraud and the other for falsification of records with intent to obstruct a matter within the jurisdiction of the Securities and Exchange Commission (SEC).
So who is Dennis Gibb? Mr. Gibb is a charismatic, extroverted crook who was the sole owner of Sweetwater Investments, Inc., a Redmond, WA registered investment advisory firm which, according to SEC filings submitted by Gibb, managed roughly $500 million for mostly high net worth individuals. Only it didn’t. Mr. Gibb had for years grossly overstated (lied about) his firm’s asset under management. In fact, Gibb only managed $73 million of clients assets. While Gibb overstated the amount of assets he managed for clients by about $430 million to the SEC, publically, he claimed to manage almost $2 billion, or about $500 million for high net worth investors and another $1.4 billion in assets for various Native American tribes. Dennis Gibb appeared to be a well-established, upstanding member of his community. (Remember, Bernie Madoff – who stole $20 billion from his clients – was a philanthropist, former chairman of NASDAQ, and a respected member of the New York and Florida Jewish communities.) Gibb chaired the prestigious Scotch Committee at The Rainier Club, a downtown Seattle private club, plus he was an active Rainier Club member who would work the crowd at a Rainier Club social event like a politician working a 4th of July picnic!
For years, Gibb hosted economic outlook forums at The Rainier Club for alumni of Harvard Business School, Stanford Business School, the University of Chicago’s Booth School of Business, and the Wharton School at the University of Pennsylvania. Gibb claimed to have been a student at Wharton before his pursuit of a Masters in Business Administration was allegedly interrupted by service in Vietnam. Gibb was an economic outlook forum co-panelist along with other high profile speakers like Booth School alumnus and former Treasury Bond Portfolio Manager at Microsoft, Apurv Jain, and Harvard Business School alumnus and Goldman Sachs employee in Seattle, Larry Estrada. So Gibb’s lies and public persona painted him as a knowledgeable and accomplished member of his community. It was all a ruse! Not only did Gibb overstate the amount of assets he managed for clients by 26 times the actual amount, he STOLE over $3 million from his clients and used the money for his personal use. So in reality, Gibb was an accomplished liar and thief until he got caught.
So how did Gibb manage to steal over $3 million from his clients? The same way Madoff and many others have. Gibb formed a private fund, the Sweetwater Income Flood, LP, where he both managed the fund and served as the custodian for the fund assets. Because there was no independent, qualified custodian (like Schwab) serving as a watchdog over Gibb’s private fund assets, Gibb cooked the books and sent his fund investors false reports showing returns and fund balances that were false. We have seen this movie more than once before! Gibb funneled his private fund dollars to accounts where he could withdraw money for his own use. What’s more, Gibb reported to the SEC that the Sweetwater Income Flood, LP fund was annually audited by an independent, outside accounting firm. Of course, that never happened.
So we know Gibb lied and stole for many years, but more importantly, what’s the lesson here? If you had been one of Gibb’s clients, how could you have detected the fraud and avoided being a victim of it? Let’s examine some fairly easy ways you could’ve likely discovered something or some things were not exactly kosher.
Fortunately, all registered investment advisory firms (Sweetwater Investments, Inc. was a registered investment advisory firm, also known as an RIA) must file a form ADV annually with the Financial Industry Regulatory Authority, or FINRA. Part 2 B of an RIA’s form ADV must contain information that you can use to vet any advisory firm. Yes, Gibb falsified the amount of client investment assets he managed, but he – like all other advisory firms – is required to include biographical information on other key personnel at the firm. At Sweetwater, Gibb included this required biographical information, and it was from a quick review of the Sweetwater Investments, Inc. team that we concluded something was not right. Upon entering the names of Gibb’s Sweetwater Investments, Inc. colleagues in http://www.adviserinfo.sec.gov (the SEC’s website where consumers can check on the status and disciplinary history of advisers), we found several who were not registered as Sweetwater Investments, Inc. advisers or employees and others who were not registered at all! In fact, we only found one employee of Sweetwater Investments, Inc. who appeared to be legitimate. Not only did information on http://www.adviserinfo.sec.gov reveal peculiarities, when we looked up some Sweetwater professionals on Linkedin, multiple did not even include Sweetwater Investments, Inc. on their Linkedin profiles! This conspicuous omission included a Sweetwater employee, Jeffrey Alton, who holds the very prestigious Chartered Financial Analyst, or CFA, credential. One can look up a CFA charterholder on the CFA Institute website at https://www.cfainstitute.org, thus we did. Not unexpectedly, we found Jeffrey Alton, CFA, but his place of employment was NOT Sweetwater Investments, Inc. Nor did Mr. Alton’s Linkedin profile make any mention of Sweetwater. Although I should never expect to understand how pathological liars think, it appears quite sloppy that Gibb would include a CFA charterholder, Alton, as a staff member in his regulatory filing knowing full well how easy it is to vet Alton’s career history. Furthermore, we find it more than odd that Gibb listed Samantha Yewman as Sweetwater’s coordinator of social media and communications. Why? Because Gibb’s purported coordinator of social media is not on Facebook, Twitter, or YouTube! I did not check Instagram or other social media platforms because I don’t use them, but Samantha Yewman’s absence from Facebook, Twitter, or YouTube speaks volumes! It’s yet another red flag surrounding the Sweetwater team. Furthermore, three Sweetwater team members appear to work in metro New York City instead of Seattle. Matters not if these other pseudo Sweetwater employees were complicit in the charade. Our quick due diligence on the Sweetwater Investments, Inc. team raised enough concern that we surmised there was a huge problem with the Sweetwater shop.
Let’s suppose Gibb had done a better job of falsely assembling a team which appeared to work at this nearly $2 billion (actual amount was $73 million) investment advisory firm. How could you have avoided being fleeced by shyster Gibb? Well, the first potential problem is the private fund. Why would Gibb need to create a private income fund? I’m quite certain the slick talking Gibb has plenty of reasons, but from a macro perspective, an investor should have a compelling reason to invest in a private fund, and she should be acutely aware of the additional risk introduced by doing so. Not all private funds or pooled investment vehicles are evil. But when one leaves the safety of a Vanguard, Schwab, Fidelity, Blackrock, insert-the-name-of-any-high-profile-fund-family security, she should do it with eyes wide open and with a healthy dose of skepticism and caution. The reason Gibb told the SEC that his Sweetwater Income Flood, LP had been annually audited is because an annual audit is required! Investors in Gibb’s Sweetwater Income Flood, LP should have insisted on receiving an audit report including prior audit reports if applicable. Yes, Gibb could have provided a fictitious audit report, but he would’ve had to use the name of a Certified Public Accounting firm. Absent Gibb recruiting the CPA firm to participate in the fraud, a highly unlikely proposition, Gibb would’ve increased his chances of getting caught in the fraud by a mutual client mentioning their common business relationship with Sweetwater Investments, Inc. Furthermore, a Sweetwater Income Flood, LP investor could have contacted the audit firm to affirm they had actually completed the audit! Although it’s unlikely an investor or potential investor would indeed contact the CPA firm to inquire about whether or not an audit had been done, when it comes to investing one’s money in a private fund, proper due diligence is critical. The more thorough, the better! And by all means, don’t outsource the due diligence by substituting another investor’s due diligence for your own. Just because someone you respect has invested in a private fund like Sweetwater Income Flood, LP, don’t think you’re safe. I don’t care if the other investor is a bright guy who you think could not get duped. Conduct your own due diligence!
In conclusion, shysters who seek to separate you from your money by committing fraud will be part of the financial services industry landscape forever. Be aware that private funds differ enormously from mutual funds and Exchange Traded Funds (ETFs) offered by Vanguard, Schwab, Fidelity, etc. Private funds are not even cousins to the aforementioned fund companies/operators. Private funds introduce a new dimension of risk that you should be prepared to analyze and accept. Therefore if you absolutely insist on investing in the opportunity offered by a private fund, take no shortcuts in your due diligence to make sure your investment is and remains legitimate!
For more information or to discuss the fraud committed by Dennis Gibb, please contact Stuart McGehee at 206-259-0575 or firstname.lastname@example.org. Invest in Wealth. On Twitter: @investinwealth
Pacific Northwest Asset Management, LLC is an independent, fee-only registered investment advisory firm. We serve our clients as full-time, not part-time, fiduciaries. Our qualified custodian is Charles Schwab & Co., Inc.,
DISCLOSURE: Pacific Northwest Asset Management, LLC (hereinafter “PNW Asset Management”) is an investment adviser registered with Washington State. PNW Asset Management may not transact business in states where it is not appropriately registered, excluded or exempt from registration. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.