An investment adviser who recently moved his offices to Beverly has been hit with a complaint by state regulators, charging he hid his own interest and failed to disclose other relevant information to investors in proposed cannabis startups.
Frederick "Rick" McDonald Jr. of Manchester, the chief executive of US Advisory Group Inc., was named in an administrative complaint brought by the Massachusetts Secretary of State's Securities Division.
The complaint alleges that McDonald raised more than $10 million from various investors on a number of proposed dispensary projects, without a single license ever being granted.
"McDonald's entire relationship with the emerging cannabis industry has been an improvised effort to learn as he goes, utilizing client funds and firm resources to experiment," the secretary of state's complaint said. "He utterly failed to uphold the fiduciary duty he owed to (the investor) and took advantage of his advisory relationship to pursue these projects."
McDonald, according to the complaint, "further failed to educate himself regarding the unique and complex licensing process in Massachusetts, which resulted in the distribution of offering documents that failed to adequately disclose to investors the risks or difficulties the investment could face," the complaint said.
The investor, identified in court papers as a 78-year-old California man, lost nearly $3 million, and nearly 100 other investors lost a total of $8 million.
A message left with McDonald's office on Wednesday was not returned; a second call then went to a general mailbox for the firm.
Among those projects was one in Revere that has been the subject of a civil lawsuit brought on behalf of approximately 30 investors in Suffolk Superior Court.
"I think it's fair to say the secretary's complaint confirms many of the central allegations of our complaint, that there were material misrepresentations and omissions in the material distributed to our clients," said attorney David Evans of the firm Murphy and King, which is pursuing its own case against McDonald and several others on behalf of some of the investors.
The process established for licensing medical marijuana dispensaries in Massachusetts in 2012 included multiple hurdles, including background checks on individuals.
During the proposed Revere project, relationships among the various parties eventually soured over disagreements. Regulators allege that McDonald and his partners hid the identity of a person who was taking an active role in the project in order to prevent the discovery of his criminal record -- which would likely have precluded the issuance of a license.
But that was just one of the instances in which McDonald hid important information, regulators allege.
The California investor was convinced over the course of a decade to invest funds in various enterprises in which McDonald allegedly failed to disclose his role in those businesses or withheld the nature of his investment.
One of those, in 2011, was called "Dixie Highway Partners LLP" in Connecticut. McDonald gave the investor documents claiming that he was going to be involved in taking the company public, and indicated that it would be managed by an entity called "St. John's Holdings LLC."
St. John's Holdings, according to regulators, was owned by McDonald. Dixie was also under an agreement with McDonald's U.S. Advisory Group to pay the firm fees of $30,000 up front and $10,000 a year after that.
Another entity, Kettle Black I GP, LLC, was partnered with Dixie Highway. McDonald also owned Kettle Black.
McDonald allegedly directed some of the investor's funds toward two of the entities without telling the investor.
"McDonald failed to disclose the relationship between Dixie Highway, (Kettle Black) and (US Advisory) to Investor A," the complaint alleges. "McDonald served as the manager for all these entities."
McDonald also convinced the investor to liquidate a $1 million annuity to invest in a business called Prime Wellness of Massachusetts, but did not tell him that he would actually be becoming a partner in a Kettle Black-related entity controlled by McDonald.
Then, in 2014, McDonald attempted to get into the retail marijuana dispensary game with several partners.
Again, information provided to potential investors failed to disclose important details.
"McDonald's free-wheeling practices included cutting corners at every opportunity and lying to his own business partners and investors to cover his own mistakes," the complaint alleges.
McDonald's various companies and corporations, including US Advisory Group, Commonwealth Pain Management Connections, LLC, and Kettle Black of MA, LLC.
Regulators are asking that McDonald and his firm be barred from doing business in the state, disgorgement of profits, and payment of restitution and a fine.
The firm, which moved last year to 152 Conant St. in Beverly, holds more than $33 million in assets on behalf of 57 clients. Nearly half of that money comes from four "high net worth" investors, according to the secretary of state's office.
Courts reporter Julie Manganis can be reached at 978-338-2521, by email at [email protected] or on Twitter at @SNJulieManganis.
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