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SEC charges advisor for failing to monitor crypto assets

by Janine Lindsey

Florida advisory firm Lufkin Advisors and its founder and CEO, Chauncey Forbush Lufkin III, are facing a lawsuit from the Securities and Exchange Commission (SEC) for failing to notify investors about the loss of a cryptocurrency wallet containing at least $10 million. According to the SEC, Lufkin took nearly a year to inform investors about the loss of access to the wallet. The firm’s accountant, rather than Lufkin Advisors, alerted at least one client to the situation.

In addition to not disclosing the loss, the SEC alleges that Lufkin and his firm placed investors’ money in private funds managed by Hutt Capital Funds, a separate company that employed Lufkin’s wife, Sandra Familet, who eventually became the chief operating officer of Hutt Capital. This conflict of interest was not disclosed to investors. Furthermore, the SEC claims that Lufkin and his firm failed to properly report withdrawals from the funds and did not monitor the value of those investments.

Cryptocurrencies such as bitcoin and ethereum have yet to be widely adopted by financial planners. A survey conducted by the Journal of Financial Planning and the Financial Planning Association found that only 2.6% of advisors recommended cryptocurrencies to clients in 2023, up from 0.3% in 2019. Another survey by the Financial Industry Regulatory Authority and NORC found that only 9% of respondents who invested in crypto for the first time last year cited financial planners as their primary source of information.

Lufkin testified before the SEC officials that he had been unable to find a password or key for an account held at the crypto exchange KuCoin for over a year but less than two years. He estimated that the wallet contained around $10 million. Lufkin claimed that he had elevated the issue to KuCoin’s chief information officer and expected to regain access soon. However, the situation remains unresolved, and an email to KuCoin’s media team received no response.

In response to the case, Matt Edman, a partner and founder at NAXO, a firm specializing in retrieving crypto assets, stated that exchanges like KuCoin are usually willing to assist clients in recovering lost passwords. Retrieving passwords for assets that have been moved off an exchange and onto a privately controlled software wallet can be more challenging but not impossible.

Lufkin Advisors had $115 million in assets under management, according to the firm’s latest Form ADV filed with the SEC. However, the SEC alleges that this amount was incorrect and outdated by at least two years. The firm’s main investing funds were LA Capital Management, LA Floating Rate, and Latitude CLO II.

The SEC is seeking to freeze Lufkin Advisors’ assets and is requesting civil penalties, interest, and disgorgement of any ill-gotten gains. In addition to the SEC case, Lufkin has a previous conviction for cocaine possession in 2015.

This case highlights the need for increased transparency and accountability in the cryptocurrency industry, as well as the importance of properly managing and securing digital assets. As cryptocurrencies gain more attention in the mainstream financial sector, it is crucial for financial planners and advisory firms to stay informed and knowledgeable about this emerging asset class to better serve their clients and protect their investments.

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