A state-registered adviser faces civil and criminal charges for cherry-picking trades in a manner that benefitted him over clients. The SEC asserts that the respondent, the adviser’s Managing Partner and Chief Compliance Officer, placed omnibus trades before earnings announcements and then allocated the trades after the announcement such that profitable trades were allocated to his personal account and unprofitable trades were allocated to clients. The SEC alleges that the respondent unlawfully made $1.3 Million in profits on more than 200 trades. In addition to violations of the Advisers Act’s fiduciary provisions, the SEC also alleges violations of Section 10 and Rule 10b-5 for fraud in the sales of securities. The respondent has been barred from the industry and faces monetary penalties as well as criminal prosecution.
OUR TAKE: The SEC has brought many cherry-picking cases with similar facts (See e.g. In re Hartshorn). However, the SEC, by alleging violations of Section 10 and Rule 10b-5, opened the door for criminal prosecution. This legal theory could potentially transform any alleged breach of fiduciary duty into a criminal case.