SEC Sues Adviser for Operating a Cherry-Picking Scheme

The SEC sued an investment advisory firm and its principal for operating a multi-year cherry-picking scheme.

According to the SEC Complaint, filed in U.S. District Court, Eastern District of Pennsylvania, from January 1, 2011, through December 31, 2015, the principal of the firm traded securities through the firm’s master trading account and observed the performance throughout the day. The SEC alleges that the principal then disproportionately allocated securities that performed profitably to herself as securities decreased in value to clients. The securities allocated from the firm’s master trading account to the principal’s and her family’s accounts increased in value by more than 2%, or over $1 million, while the securities that were allocated from the firm’s master trading account to the principal’s clients decreased by over $1 million, or over 1.3%.

The Complaint charged the firm and its principal for violations of the antifraud provisions of the 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"). It also charged the firm for violation of IAA Section 206(4), and Rule 206(4)-7 ("Compliance procedures and practices"), thereunder, and charged the principal for aiding and abetting those violations under IAA Section 209(f)(Aiding and abetting").

The SEC seeks (i) injunctive relief, (ii) disgorgement of all funds the principal received from her illegal conduct with prejudgment interest, and (iii) payment of civil penalties by the firm and its principal.