SEC CHARGES HEDGE FUND MANAGER WITH CHERRY-PICKING TRADES
The SEC filed a lawsuit against a hedge fund manager for cherry-picking trades by waiting until the close of trading to allocate trades between the hedge fund account and his personal account. The manager used a suspense account at a prime broker to conduct all trading and then provided instructions to the prime broker after the close of trading as to how to allocate trades. The SEC described two and half years of trading during which 98.3% of the manager’s personal trades were profitable and only 52.6% of the hedge fund trades were profitable. The SEC argued that there were no significant differences in the manager’s trading strategy “either in the type of security or in the size of the trades.” The SEC charged that the manager failed to properly disclose his trade allocation policy that resulted in personal benefit.
OUR TAKE: This case raises some interesting questions: If the manager could demonstrate a qualitative difference in the trading strategy, would that have avoided the lawsuit even if the manager did better than the fund? What if the manager had disclosed the trade allocation practices? What if the trade allocation benefited certain clients rather than the manager? Is this a cherry-picking case or a disclosure case? Why didn’t the prime broker object?