The SEC banned the managing member and chief compliance officer of a registered investment adviser from the securities industry for illegal "cherry-picking" investments among the adviser's managed accounts. The SEC staff uncovered the trades through data analysis used to detect suspicious trading patterns.
The SEC filed a complaint in federal district court in the District of Massachusetts alleging that, over the course of more than six years, the principal of a registered investment adviser, who also acted as a trader, placed block trade orders for securities of certain public companies on days that those companies were scheduled to make earnings announcements. The principal did not allocate the trades among his personal accounts and accounts managed on a discretionary basis for the adviser's clients until after the earnings announcements were made. As a result, the SEC alleges, trades were disproportionately allocated to the principal's personal account if earnings reports were positive (expecting the stock price to increase) or to client accounts if earnings reports were negative (expecting the stock price to decrease).
The SEC alleges that the principal made more than $1.3 million in profits from cherry-picking stocks to be allocated to his account versus client accounts.
The adviser and its principal are charged with violating their fiduciary duty of loyalty, fairness and good faith owed to advisory clients. In addition, the SEC alleges that the adviser knowingly made false and misleading statements and failed to disclose material facts to the adviser's clients and to the SEC itself. The complaint alleges violations of anti-fraud provisions of the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934.
According to the accompanying press release, the principal consented to an SEC order barring him from the securities industry.
Advisers should be aware that the SEC's staff continues to actively monitor and analyze market data, as well as data provided in filings with the SEC, to identify trends and patterns. Advisers should consider looking at similar data in their own compliance programs in order to ensure that such patterns do not appear in their trading or, if they do, that there is a valid explanation for the trading trends.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved
