Press Release SEC Uncovers Cherry-Picking Scheme, Charges Investment Adviser Behind It FOR IMMEDIATE RELEASE 2017-32 Washington D.C., Jan. 25, 2017 — The Securities and Exchange Commission today announced that a Massachusetts-based investment adviser agreed to be banned from the securities industry after the agency uncovered an illegal cherry-picking scheme through its data analysis used to detect suspicious trading patterns. The SEC filed fraud charges in federal district court against Michael J. Breton and his firm Strategic Capital Management, alleging they defrauded clients out of approximately $1.3 million. Breton allegedly placed trades through a master brokerage account and then allocated profitable trades to himself while placing unprofitable trades into the client accounts. Breton and his firm agreed to a partial settlement subject to court approval. Monetary sanctions would be determined at a later date. In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts today announced criminal charges against Breton. “As alleged in our complaint, Breton assured clients that he would put their interests first but did just the opposite, taking the firm’s most profitable trades for himself and dumping the losing trades on his clients,” said Joseph G. Sansone, Co-Chief of the SEC Enforcement Division’s Market Abuse Unit. “Our probing analytical work will continue to root out investment advisers who subject their clients to cherry-picking.” The Market Abuse Unit’s analysis of Breton’s trading showed that he defrauded at least 30 clients during a six-year period as outlined in the SEC’s complaint. Breton allegedly purchased securities for his own accounts and the client accounts through a block trading or master account on days when public companies scheduled earnings announcements. He typically delayed allocation of those trades until later in the day after learning the substance of the announcement. According to the SEC’s complaint, when companies announced positive earnings that would presumably increase the stock value, Breton disproportionately allocated those trades to his accounts. And when a company announced negative earnings that would presumably decrease the stock value, Breton disproportionately allocated those trades to client accounts. The SEC’s complaint charges Breton and Strategic Capital Management with violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 as well as Sections 206(1) and 206(2) of the Investment Advisers Act. Breton and his firm agreed to be permanently enjoined from future misconduct, and Breton consented to the issuance of an SEC order barring him from the securities industry. The SEC’s investigation was conducted by Caitlyn M. Campbell, Eric Forni, David Makol, and Michele T. Perillo of the Market Abuse Unit in the Boston Regional Office with assistance from John Rymas of the Market Abuse Unit and Stuart Jackson and Raymond Wolff in the Division of Economic and Risk Analysis. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Massachusetts and the Boston field office of the Federal Bureau of Investigation.
How does this type of scam get detected? It seems non-trivial to discover this unless there was an insider tip.
Shades of Larry Williams! The NFA: "There is no question that Mr. Williams's personal trading accounts had a material effect upon his composite trading performance. The record reflects that for the first quarter of 1987, Mr. Williams's composite performance showed a loss of $6,122,281, while at the same time Mr. Williams's personal accounts experienced a gain of $902,599. The Panel finds that the fact Mr. Williams was making significant gains while managed customer accounts were suffering considerable losses would be a material fact which a potential customer would need to know in order to make a fully reasoned decision." What's old is new again.
The brokers should require pre-trade allocation. Allowing post-trade allocations from master accounts enables these schemes. 22. For example, on or about March 10, 2016, Breton purchased 500 shares of Ulta Salon Cosmetics & Fragrance (“Ulta”) and he purchased 3,000 shares of El Pollo Loco Holdings (“El Pollo”) before Market Close. Breton placed each of these trades using the Master Account. Between approximately 4:03 p.m. and 4:06 p.m. ET, Ulta and El Pollo reported their earnings to the public. After the news was released, the price per share of Ulta increased and the price per share of El Pollo decreased during After Hours Trading. By approximately 4:21 p.m. ET, Breton allocated all 500 shares of Ulta to a Breton Account and all 3,000 shares of El Pollo to six of the Client Accounts. In doing so, Breton allocated to himself the profitable trade and allocated the unprofitable trade to the Client Accounts. https://www.sec.gov/litigation/complaints/2017/comp-pr2017-32.pdf
The regulations have formulas and procedures for allocating post-trade. The broker or B/D can even include his own accounts but it has to be done without preference to any involved.
I agree, in fact I'm really surprised that you can still do this post-trade allocation thing. Not only is it susceptible to this type of manipulation, it's a great way to launder or transfer money i.e. the alleged Clinton hog belly futures incident. I thought they got rid of this long ago, but apparently it's still legit as long as they don't catch you breaking some other law.
http://www.investmentnews.com/artic...brokercheckmate-finra-marks-wave-big-red-flag meyers associates just kept on going to bigger and more profitable mis-adventures,