Prominent investors sue OKC financial planner over luxury vacation homes, gemstones
Local investment adviser Steve Shafer says he has built a career out of responsibly stewarding his clients' wealth, but now he faces a lawsuit accusing him of a range of misconduct, including using luxury beachfront homes owned by investors for personal vacations and making a number of risky and self-dealing investments.
“All you have in this business is your name,” said Shafer, who said he was shocked to discover after returning from a recent business trip that investors in several limited partnerships he manages had filed a lawsuit against him for breach of fiduciary duty.
Investors in Covenant Financial Services LLC and several limited partnership funds are asking a judge to wrest control of the funds from Shafer and turn them over to a receiver to begin liquidating millions of dollars' worth of real estate and other assets.
Shafer says he can still sell all of the funds' assets, although he believes there has been a breakdown in communication between him and his investors.
“I understand some of our investors' frustrations,” Shafer said. “There's a lot of complexity in some of our assets, like rare gemstones or intellectual property or even some real estate.”
Several prominent local investors, including former Coca-Cola bottler Robert F. Browne, are plaintiffs in the lawsuit, filed Sept. 27 in Oklahoma County District Court.
The investors claim in their lawsuit that Shafer is taking too long to sell assets from the funds and return investors' money. The funds' assets include sprawling vacation homes in Florida, stock in a Texas-based tech startup that is suing Twitter over intellectual property claims and a portfolio of precious gemstones valued at $25 million.
“Some plaintiffs have tied up their retirement money,” the investors said in their lawsuit. “Others invested money that they earned and had hoped to pass on to their children and grandchildren.”
In February 2015, the Texas-based Covenant Multifamily Offices LLC purchased Oklahoma City-based Covenant Financial LLC's wealth-management business. Although the two companies shared the same name, they had no affiliation before the merger.
As part of the sale, Scott Duncan, founder of Covenant Financial Services, joined Covenant Multifamily as its senior wealth adviser. Duncan did not respond to requests for comment.
After the sale, Shafer started a new financial adviser business called Cartographer, based in Covenant's old offices in the Oklahoma Tower in downtown Oklahoma City.
The Covenant limited partnership investment vehicles that Shafer managed were then closed after the sale and Shafer began liquidating the funds to return money to investors.
Investors say the liquidation process has stalled and they want their money back.
The investors accuse Shafer in their lawsuit of making deals to benefit Shafer's new company, Cartographer, at the expense of the Covenant limited partnership investors.
While Shafer initially promised to have all of the assets in the Covenant funds sold by the end of the 2015, it has taken longer than originally planned, he admits.
All of the stocks and bonds the investment funds held have been sold, but it's been more difficult to sell “illiquid” assets the funds hold, Shafer said.
By 2016, many of Shafer's investors had grown impatient with the liquidation process. The investors claim Shafer has failed to produce books and records detailing Covenant's financial dealings, something Shafer says isn't true.
Shafer said the disgruntled investors hired a forensic accountant in Oklahoma City to examine Covenant's books and all of the financial data was made available.
“We complied with everything they asked for, and then they fired the accountant because they didn't want to pay his rate,” Shafer said. “For them to say we haven't complied with their data request is an absolute fallacy. We downloaded a massive amount of documents for them.”
Browne is one of the largest investors in the Covenant funds, and is the lead plaintiff in the lawsuit against Shafer.
He led a leveraged buyout of the Great Plains Coca-Cola Bottling Company in 1980 and remains a prominent member of Oklahoma City's business community.
The Browne family had controlled Coca-Cola bottling rights in Oklahoma City since 1922, when pharmacist Virgil Browne purchased the franchise for $130,000, according to the company's official history. Great Plains bought the syrup from Coca-Cola, then mixed and bottled it before shipping.
In 2011, Coca-Cola struck a deal with the Browne family to purchase Great Plains for $360 million.
Other plaintiffs in the lawsuit include Oklahoma City personal injury attorney Edwin D. Abel and Edmond architect David Hornbeek.
The suing investors claim in their lawsuit they represent the majority of Covenant funds' investors.
Gary Svirsky, an attorney with the international law firm O'Meveny & Myers LLP, is representing the investors in their lawsuit against Shafer. Svirsky declined to comment on the matter on behalf of his clients. Other plaintiffs in the case also either declined to talk about the matter or did not respond to attempts to contact them.
Browne said he did not want to speak publicly about his investment in Covenant funds and the lawsuit.
“The petition speaks for itself — there's quite a bit in there,” Browne said.
The investors claim Shafer used luxury vacation properties the funds own for his own benefit, taking his friends and family to stay at Florida beachfront homes, according to the lawsuit.
Among the funds' holdings is a vacation home on a coastal dune surrounded by white sand in Rosemary Beach, Fla. The home is listed for sale for $4.9 million.
There's also a gulf-front vacation home called Sea Sabella in Seaside, Fla., with panoramic ocean views. The home is listed for sale at $6.75 million.
The homes are rented out to wealthy vacationers, but investors claim in the lawsuit that Shafer is the most frequent guest.
“Defendant Shafer has misused Covenant Funds' assets by vacationing with his family at the Covenant funds' luxury homes and allowing friends and employees to use the luxury homes without consent and without compensating the Covenant Funds,” the lawsuit states.
Shafer said he does stay in the vacation homes from time to time. He visits Covenant's vacation properties one or two times a month to make sure the homes are being properly maintained, he said, as well as to oversee the property management company that oversees the homes.
“In the high season, if our homes are booked, then I stay in a hotel, which costs something,” Shafer said. “If our homes are not booked, then I stay there because it's not going to cost anybody anything.”
The investors also claim Shafer's new firm, Cartographer, purchased the property management company Covenant founded to maintain the luxury vacation homes at an “arbitrary price,” financing the sale by lending Covenant fund assets to Cartographer.
Shafer maintains he obtained two independent appraisals of the property management business and that Cartographer paid above fair market value, although he would not disclose the price.
“It's hard to explain how these investors can be saying, ‘I want my money now' but also ‘no, no no, don't sell that,'” Shafer said.
As part of their lawsuit, Covenant investors are asking a judge to reverse the sale of the property management company.
Covenant funds also invested in a Texas-based startup company called YouToo Technologies LLC. The Las Colinas-based company claims technology it developed will merge social media with broadcast television by making it easy for people to record and broadcast video for social media.
Mark Burnett, executive producer of the hit television shows “Survivor” and “The Voice,” also is an investor in the company.
While Covenant investors claim they were made repeated promises that Covenant was selling its stake in YouToo, Shafer has yet to sell any of the funds' equity in the company.
On April 30, Shafer closed a deal that more than doubled its equity stake in YouToo at the expense of $8 million to Covenant funds investors, the lawsuit claims.
In March, YouToo moved to file a federal patent infringement lawsuit against Twitter Inc. In its lawsuit, YouToo claims Twitter stole YouToo's patented video technology to launch the video-sharing service Vine in 2013. Twitter acquired Vine in 2013 for a reported $30 million.
The investors also claim that Shafer allocated about $3 million of Covenant's funds to finance its intellectual property lawsuit against Twitter. The investors' petition characterizes YouToo's lawsuit against Twitter as “aspirational.”
“YouToo was an investment we made in 2011 at a time when we were looking to allocate capital into companies that were leveraging the power of social media,” Shafer said. “What we liked about the company was its intellectual property and how the company had gone about patenting the power of their idea and concept.”
Shafer said financing the company's lawsuit against Twitter is part of his responsibility to investors to protect the value of their assets.
“As a fiduciary I would be going against my fiduciary responsibility not to protect the value of what the investors invested in originally,” Shafer said.
Chris Wyatt, CEO of YouToo Technologies, said he believes the company's claims against Twitter are valid. YouToo already has deals with several television networks to license its technology worldwide, he said.
Wyatt went on to describe Browne as a “senior with too much time on his hands.”
“Sometimes investors, especially individuals of the wealthy 1 percent, think they can throw their weight around if they don't get their way,” Wyatt said of Browne's lawsuit.
One of the largest illiquid assets of the Covenant funds is a portfolio of six rare gemstones.
The jewels have colorful names, including the Yellow Rose, a 77.12-carat yellow diamond, and the Burma Blue, a 74.41-carat blue sapphire. There's also a 22.72-carat white diamond called Golconda. Covenant investor publications describe Golconda as a “flawless” diamond that originated from India's world-famous Golconda diamond mines, where the Hope Diamond also was excavated.
The gems are estimated to be worth about $25 million.
Shafer said he saw the stones as a solid investment, as the price of gemstones fluctuates less than precious metals. Covenant had a chance to purchase the gems at distressed prices in the aftermath of the 2008 financial crisis and the plan has always been to hold onto them for several years before selling them in order to get the best price, he said.
Covenant investors claim in the lawsuit that Shafer has stalled on selling the gems, even though there was strong market demand for rare gemstones in 2015.
“This lack of effort to sell the rare gemstones flies in the face of the Covenant Defendants' statements that liquidation would be complete or nearly complete by the end of 2015,” the investors claim in their lawsuit.
Some of gemstones are scheduled to be sold at auction at Christie's on Dec. 7 in New York City, Shafer said. The remainder of the gems are in the process of being listed for sale through Christie's private sales division.
Shafer said Covenant was at the mercy of the auction houses when it came time to sell the gemstones.
William Noble, a rare gemstone specialist in Dallas who helped Shafer assemble Covenant's portfolio of rare jewels, backed up Shafer's claim.
“When Steve was building the collection, the original objective was to have a hedge against the market and keep them for 10 or more years, because they are such unusual pieces,” Noble said. “He is a great businessman and if he is allowed to do what he wants to do, the investors will all be happy.”