Investment Adviser and CCO Settle SEC Charges for Cherry-Picking Scheme

An investment adviser and its Chief Compliance Officer ("CCO") settled SEC charges for disproportionately allocating profitable trades to the officer's personal account while allocating unprofitable trades to client accounts.

According to the cease-and-desist Order, the respondents breached their fiduciary duty by "execut[ing] trades through block trading omnibus accounts" and delaying allocating the trades until the end of the day. The SEC found that the CCO engaged in a "cherry-picking" scheme where he allocated a disproportionate share of profitable "day trades" to himself. The SEC also found that the CCO allocated a disproportionate share of unprofitable "multi-day trades" to client accounts.

The SEC stated that this practice resulted in the CCO receiving over $78,000 in excess first-day gains while clients suffered losses. In addition, the SEC found that the respondents materially misled clients in the firm's Form ADV brochures with claims that the firm reviewed employee trading to prevent conflicts of interest. The SEC found the firm conducted no such review of the CCO's trading.

As a result, the SEC charged the respondents with violating IAA Section 206(2) ("Prohibited transactions by investment advisers").

To settle the charges, the firm agreed to a censure. The CCO agreed to a six-month suspension and agreed to pay disgorgement of $78,490, prejudgment interest of over $31,000, and a civil penalty of $40,000.