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State-Registered Adviser Barred and Fined for Cherry-Picking

The SEC fined and barred the principal of a state registered adviser for cherry-picking trades to favor his personal accounts over client accounts.  The adviser used an omnibus account at two different brokerage firms over a 3-year period to engage in day trading.  The SEC asserts that the adviser allocated trades after the relevant security’s intraday price changed.  The SEC maintains that the trading outcomes indicate a statistically significant allocation to personal accounts.  Over the period, the respondent’s first day allocations resulted in 81.9% profitable trades to his personal account but only 16% to client accounts.  The brokerage firms closed his omnibus accounts because they suspected cherry-picking, although they did not inform the respondent why they terminated.  A third brokerage firm did not allow omnibus accounts.

OUR TAKE: State-registered advisers are not subject to SEC exam or the compliance rule (206(4)-7), which requires a compliance program that includes annual testing and reporting.  As a consequence, an adviser that is not SEC registered can go several years engaging in clearly illegal conduct without detection.

 

https://www.sec.gov/litigation/admin/2018/34-82816.pdf