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Advisor's pot scheme costs 78-year-old $3M, regulator says

An advisor accused of mishandling millions of dollars in client assets to fund a medicinal marijuana distributor never obtained a license to sell marijuana or opened a dispensary, according to a state regulator.

The Massachusetts securities regulator accused Frederick McDonald Jr. of failing to disclose key risk factors from more than 100 investors regarding the often complex world of the cannabis manufacturing industry and of hiding other crucial information as he and a handful of partners raised money for a dispensary.

The scheme centered around one 78-year-old, high-net-worth investor who lost $3 million, according to the administrative complaint filed by the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth.

The relationships between McDonald and his partners and investors eventually collapsed, according to regulators. “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,” according to the complaint.

McDonald, as CEO of US Advisory Group, used his influence as a financial advisor and his relationship with customers to raise the funds, according to the complaint. The firm listed $33 million in assets under management and 53 total clients on its latest Form ADV filed in January.

Marijuana stocks have tumbled over the last six weeks, as legalization in Canada failed to offset growing concerns about high valuations.
Marijuana plants grow in the Mother Room at the Canopy Growth Corp. facility in Smith Falls, Ontario, Canada. Photographer: Chris Roussakis/Bloomberg

McDonald did not return a request for comment left on his voicemail or at the offices of US Advisory Group.

The complaint alleges that McDonald pursued side marijuana projects, while hiding important information from investors like the identity of a fundraiser for the dispensary, who had a criminal record that could have led to the denial of a dispensary license. No license was ever acquired.

“McDonald 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,” according to the complaint.

According to FINRA BrokerCheck records, McDonald had logged more than 30 years of experience in financial services, beginning with Commonwealth Equity Securities in 1981 before moving toTransamerica Financial Advisors, among other firms.

In 2014, a customer alleged McDonald provided unsuitable advice regarding the refinancing of two homes and of using a portion of the proceeds to purchase a variable annuity. The dispute was settled for $60,000, according to BrokerCheck. A pending customer dispute from December 2017 alleges misrepresentation and omission of facts.

US Advisory Group listed six employees and two investment advisors on its Form ADV.

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