Securities and Exchange Commission v. Buttonwood Financial Group, LLC et al

Case Summary

On September 23, 2021, the Securities and Exchange Commission (“SEC” or “Commission”), represented by Charles Canter attorney at SEC’s LA regional office, filed a civil enforcement action against Buttonwood Financial Group, LLC (“Buttonwood”) and Michael McGraw (“McGraw”) (collectively, “Defendants”), seeking injunctive relief and disgorgement of all ill-gotten gains along with prejudgment interest for the alleged breach of their fiduciary duties by Defendants to their advisory clients. This case was filed in the U.S. District Court in the Western District of Missouri with Judge Howard F. Sachs presiding.

In the complaint Plaintiff alleged that, “From at least 2014, Buttonwood and McGraw repeatedly breached their fiduciary duty to their advisory clients by failing to disclose certain conflicts of interest and selecting investments that were not in their clients’ best interest. In violation of their fiduciary duty to their clients, Buttonwood and McGraw did not disclose that they had an incentive to select investments for which Buttonwood would not pay any transaction costs, including more expensive mutual fund share classes. In addition, during the relevant period, Buttonwood avoided paying millions of dollars in transaction fees.”

Plaintiff further alleged that, “In violation of their fiduciary duty to their clients, Buttonwood and McGraw did not disclose that they had an incentive to select investments for which Buttonwood would not pay any transaction costs. In addition, during the relevant period, Buttonwood avoided paying millions of dollars in transaction fees. Buttonwood’s agreement with its third-party broker (the “Broker”) provided that Buttonwood would pay a $25 transaction fee when wrap account clients purchased or sold certain share classes of mutual funds, but did not charge Buttonwood a transaction fee when the adviser selected other share classes of mutual funds with higher internal expenses. Buttonwood and McGraw therefore had a financial conflict of interest with their clients.”

Plaintiff also alleged that, “In 2016, Buttonwood and McGraw took further steps to gain a financial advantage for themselves by investing clients in more expensive mutual funds share classes. Upon Defendants’ request, Buttonwood’s Broker agreed that in exchange for Buttonwood investing no less than 60% of all client assets in share classes of mutual funds for which the Broker did not charge Buttonwood a transaction fee (i.e., generally more expensive mutual funds), the Broker would waive all transaction fees on any other mutual fund or equity stock trades making up the remaining 40% of Buttonwood client assets. This “60/40” arrangement exacerbated Defendants’ existing conflict of interest.  Buttonwood, however, still did not disclose to clients its conflict of interest or the “60/40” arrangement until 2020, during the SEC’s investigation.”

There are three claims for relief laid down by Plaintiff. The first claim is for the alleged violations of Section 206(1) of the Advisers Act. The second claim is for the alleged violations of Section 206(2) of the Advisers Act. The third claim is for the alleged violations of Section 206(4) of the Advisers Act and Rule 206(4)-7, thereunder.

In its prayer for relief Plaintiff has requested the court permanently enjoin Defendants and those persons in active concert or participation with any of them,  order Defendants to disgorge all ill-gotten gains and/or unjust enrichment received directly or indirectly, with pre-judgment interest thereon and order Defendants to pay civil penalties under Section 209(e) of the Advisers Act, 15 U.S.C. § 80b-6(9)(e).

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