SEC Sues Investment Adviser for "Cherry Picking"
The SEC sued a former investment adviser representative for allegedly breaching his fiduciary duty to clients by orchestrating a "cherry picking scheme" in which he allocated better performing trades to his own account. His former firm settled charges with the SEC in connection with the scheme.
According to the Complaint, filed in the US District Court for the Southern District of New York, the defendant engaged in "block trading" to execute trades between his clients and accounts held by him and his wife. The SEC alleged that the defendant delayed allocating these trades until he could observe their performance, disproportionately allocating better performing trades to his accounts. The misallocated trades involved highly-leveraged ETFs. The SEC said that the defendant allocated over $170,00 in net first-day gains to favored portfolios, while causing aggregate losses of $188,000 to his clients.
The SEC charged the defendant 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"); and IAA Sections 206(1) and 206(2) ("Prohibited transactions by investment advisers").
The SEC is seeking (i) injunctive relief to bar him from further violations, (ii) disgorgement of ill-gotten gains and (iii) civil monetary penalties.
In a related administrative action, the defendant's firm settled SEC charges for failing to (i) implement procedures reasonably designed to prevent securities laws violations and (ii) supervise the defendant. The SEC also found that firm's Form ADV brochures negligently included statements about its procedures that were false in light of the firm's failures. The SEC found that the firm violated SA Section 17(a); IAA Sections 203 ("Registration of investment advisers"), 206(1) and 206(2) and Rule 206(4)-7 ("Compliance procedures and practices.") To settle the charges, the firm agreed to (i) cease and desist from causing further violations; (ii) a censure; and (iii) pay a $375,000 fine.