SEC Sues Adviser for Violating Cross-Trading Rules

The SEC
has sued an adviser, its affiliated broker-dealer, and its principal for
fraudulently inducing clients through a scheme that involved inflating values
through undisclosed cross-trades.  The
adviser advertised a cash management strategy that depended on a liquid market
for preferred utility stocks.  When the
market became illiquid, the SEC alleges that the Adviser maintained inflated
values through cross-trades made using the affiliated broker-dealer.  The SEC noted its long-standing position that
cross-trades require prior client notice and consent before each transaction.

OUR TAKE:
We don’t often see cases alleging violation of the cross-trading rules.  This is a reminder that cross-trades require
client consent before each transaction. 

 http://www.sec.gov/litigation/complaints/2011/comp21812.pdf