Investment Officer Charged with Cherry Picking

The SEC sued a former co-chief investment officer of a large investment advisory firm for allegedly orchestrating a "cherry picking scheme" in which he disproportionately allocated better performing trades to certain favored portfolios, and worse performing trades to other portfolios.

According to the Complaint, filed in the US District Court for the Southern District of New York, during the relevant period, the defendant used omnibus brokerage accounts to execute trades for multiple client portfolios. The SEC alleged that the defendant delayed allocating these trades until he could observe their intraday performance, disproportionately allocating better performing trades to certain favored portfolios, and worse performing trades to other portfolios. The SEC said that the defendant allocated over $600 million in net first-day gains to favored portfolios, while more than $600 million in net first-day losses were assigned to other, disfavored portfolios. The SEC asserted that the statistical likelihood of this pattern occurring randomly is less than one in a trillion.

The SEC charged the individual with violating SEA Section 10(b) ("Position limits and position accountability for security-based swaps and large trader reporting"), and Rule 10b-5 ("Employment of manipulative and deceptive devices") thereunder; SA Section 17(a) ("Fraudulent Interstate Transactions"); IAA Sections 206(1) and 206(2) ("Prohibited transactions by investment advisers"); and ICA Sections 36 ("Larceny and embezzlement") and 37 ("Rules, regulations, and orders").

The SEC is seeking (i) injunctive relief to bar him from further violations and participation in the securities industry, (ii) disgorgement of ill-gotten gains with prejudgment interest, (iii) civil monetary penalties and (iv) a permanent prohibition against the defendant serving as an officer or director of a public company.