As ARK ETFs become increasingly popular among investors, fraudsters are taking advantage.
A June 17 emergency cease and desist order alleges an unregistered advisor working for a firm named Keye Midas pretended to sell clients shares in ARK ETFs but instead was actually selling fraudulent securities and promoting a cryptocurrency scheme.
“This type of fraud is very troubling. Investors believe they are working with legitimate advisors, and investing in legitimate products,” says Christine Lazaro, director of the Securities Arbitration Clinic at St. John's University.
The order, filed by Securities Commissioner Travis J. Iles, stopped an unregistered advisor from impersonating ARK Invest. It accuses Nick Cuban of leveraging the popularity of ARK Invest and the ARK ETF to bait-and-switch investors with fraudulent securities. ARK ETFs have gained a reputation as high-performing, earning a notable 175% return over the past twelve months.
“ARK Innovation investment funds have garnered widespread publicity,” says Texas State Securities Board Enforcement Director Joe Rotunda. “We saw someone attempt to leverage that popularity to defraud the public." All parties named in the order have 30 days to challenge it.
The phone number listed under Keye Midas’s Contact Us page belongs to a man in Los Angeles, California, who says he “handled some stuff for them” but does not work for them. “My number somehow got confused in their system,” says the man, who declined to give his name. The firm did not respond to an email request for comment.
ARK Invest is an investment advisor for ETFs and is registered with the SEC. The ARK Innovation ETF, with shares listed on the NASDAQ, has gained popularity with retail investors throughout the pandemic. Its securities rose in value from about $52 in February 2020 to nearly $160 in February 2021.
Five of the ETFs managed by ARK have a return average of more than 150%, generating widespread enthusiasm among investors. Some strategists on Wall Street are concerned, however, seeing parallels to the late 1990s amidst the dot-com bubble.
Cuban allegedly advertised investments to residents of San Antonio, Texas, which he pretended were put out by ARK Invest to promote a cryptocurrency product, saying it would generate profits of 40% each month. The scheme urged investors to act swiftly when presented with the opportunity, citing COVID-19, stimulus payments and an impending economic collapse, according to the order.
“There are several different types of harm suffered by investors when that turns out not to be true,” Lazaro says. “Even when the bad actors are located, the money has often already been spent.”
After Brooklynn Chandler Willy recommended that the clients invest $100,000 into an LLC, its principals were arrested on federal fraud charges, the filing says.
Rotunda says that the Texas State Securities Board does not know of any investors who fell victim to this fraud. “We hope we were able to stop the scheme before it was able to reach the public, and we hope we were proactive,” Rotunda says.
Rather than having any affiliation with ARK Invest, Cuban is a sales agent for Keye Midas Wealth Management Worldwide. The firm purports to be a domestic firm with a specialization in real estate, bonds, forex, stocks and cryptocurrency mining. However, according to the order, Keye Midas is an unincorporated business attempting to hide its physical location.
Keye Midas allegedly tells investors it is a Rhode Island company with offices in Utah, California and Pennsylvania, but the Rhode Island Department of State does not have any record of its incorporation in the state. Additionally, Keye Midas is not organized with Secretaries of State in Utah, California and Pennsylvania. The physical addresses that Keye Midas has provided are a performing arts center and two residences, according to the order.
“Impersonation schemes are on the rise and something that state regulators have identified as a top threat to the investing public,” Rotunda says. “If anyone sees anything suspicious, we strongly encourage them to contact us, and we will be happy to assist them.”
