SEC Charges Head Of Defunct Whiskey ETF With Fraud

The Securities and Exchange Commission charged the creator of the defunct Whiskey ETF yesterday with defrauding investors.

David Bolton was charged with defrauding investors in a venture to organize and operate exchange-traded funds in violation of the antifraud provisions of the federal securities laws.

According to the SEC’s complaint, Bolton formed Millennia Shares to launch and maintain exchange-traded funds. The complaint alleges that Bolton solicited ten investors, who invested approximately $800,000 in Millennia Shares between August 2018 and May 2019. The complaint alleged Bolton misappropriated at least $215,000, or more than a quarter of the investor-contributed funds, for his personal use.

Two years prior to the alleged SEC violation, Bolton launched the Spirited Funds/ETFMG Whiskey and Spirits ETF. He was chief executive officer of Spirited Funds, which created the underlying index. It was best known for its ticker symbol WSKY. The fund was operated by the ETF Managers Group, a white label firm in New Jersey. The SEC complaint had nothing to do with the ETF or ETFMG.

The SEC seeks against Bolton permanent injunctions, disgorgement of ill-gotten gains plus interest, civil penalties, and an officer-and-director bar.

According to the complaint, the alleged fraud started just two months after the Whiskey ETF shut down in June 2018 due to lack of demand. Launched in October 2016, WSKY was a narrowly-constructed thematic ETF, which held the publicly-traded stocks of some of the largest producers of alcohol, such as Diageo (DEO), Remy Cointreau (REMYY), and Pernod Richard (PRNDY).

Over its 21-month lifetime it posted a return of 32% vs. the S&P 500’s 34% over the same period, according to Eric Balchunas, senior ETF analyst at Bloomberg Intelligence,

“I would put this in the top ten wackiest ETFs that ever launched,” said Balchunas. “If you’re a theme ETF you have to be up a lot more than the market to get attention You have to be double the S&P 500 to have a shiny object moment.”

“Many of us were calling this the poster child of what was wrong with thematic ETF investing, little did we know how big an outlier this truly was,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research. “The appeal of thematic ETFs was that they provided diversified exposure to a long-term investment trend without having to try to pick winners. It was then and remains hard to see the long-term investment case for an alcohol-focused ETF and the universe of companies tied to the theme is likely pretty narrow.”

Rosenbluth added that the ETF never saw much demand, raising only $15 million in assets, and was more known for its niche focus and eye-catching ticker.

He said before investors buy they have to believe the theme has long-term staying power as an investment, and that the companies inside the ETF are appropriate investments and capture the theme as intended.

“A catchy ticker will not help your portfolio over time,” said Rosenbluth.

Bolton also ran afoul of regulators just before the ETF launched. In August 2018, right before the time of the SEC complaint, the Financial Industry Regulatory Authority (FINRA) found him in violation of its rules.

In April 2016, just two months before the ETF launched, a complaint was filed against Bolton for unsuitable trading and for stealing the files related to the trading, causing a member firm to maintain inaccurate books and records between October 2011 and February 2016. He was also charged with failing to preserve books and records, because he later destroyed the files. Bolton was fined $20,000 and suspended from associating with any FINRA-member firm in any capacity for one year. During that year, the SEC complaint allegedly occurred.

Bolton could not be reached for comment.