SEC Bars and Fines State-Registered Adviser for Options Cherry-Picking Scheme
The SEC barred a state-registered adviser from the industry and assessed over $400,000 in fines, disgorgement and interest for allocating options trades that benefited himself and his wife to the detriment of clients. The adviser utilized an omnibus trading account at a third party broker-dealer to allocate profitable trades to his personal accounts and unprofitable trades to clients. According to the SEC, during the relevant 7-month period, the personal accounts had a net positive 45.2% one-day return, but the client accounts had a net negative 45.0% one-day return, a statistically significant difference that could not be explained by random chance. The SEC accused the adviser of securities fraud under the Securities Act (Rule 10b-5) and the Advisers Act (Section 206).
OUR TAKE: If you operate a state-registered (or unregistered) adviser, don’t assume the SEC doesn’t have the regulatory means to uncover and prosecute wrongdoing. The feds still have jurisdiction over the securities markets and any person providing investment advice.