“Cherry-Picking” Allocation Scheme Results in Permanent Bar and $800,000 in Penalties
A registered investment adviser agreed to pay nearly $800,000 in disgorgement and fines, and its principal was barred from the industry, for engaging in a “cherry-picking” scheme when allocating trades. According to the SEC, the respondent allocated profitable day trades to his personal accounts and allocated the losers to client accounts. The SEC states that the personal accounts earned 6.28% average first-day returns, but clients suffered -5.05% first day returns over a 2-year period. The principal, who also served as the firm’s CCO, ignored multiple warnings from the broker, which ultimately terminated the relationship, about commingling personal and client assets. The SEC also charges the firm for failing to tell clients about the securities it would purchase and that the principal would purchase the same securities.
OUR TAKE: Perhaps the firm should have hired a competent CCO who would have responded to the broker’s warnings to halt the allocation scheme.