Adviser and Principal Sanctioned for Violations Associated With Representative’s Cherry Picking Scheme

In the eyes of the SEC, the failure to adhere to compliance policies and procedures is just as – if not more – problematic than not having policies and procedures at all. For several years, an investment adviser representative (IAR) allegedly ran a cherry picking scheme and made unsuitable investments for his clients while employed by an investment adviser. In a recently settled enforcement proceeding, the SEC charged the IAR with fraud in connection with the cherry picking scheme. It also claimed that the adviser and its CEO failed to enforce the firm’s policies and procedures regarding allocation of block trades and supervision. Although the enforcement action does not involve private funds, it provides valuable compliance lessons for all advisers regarding enforcement of policies and procedures and supervision of personnel. The proceeding is also notable because it originated from the Analysis and Detection Center of the SEC Division of Enforcement’s Market Abuse Unit. This article details the cherry picking scheme; the alleged compliance and supervisory violations; and the terms of the settlement order against the adviser and its CEO and the final judgment against the IAR. See “Advisers Must Adopt and Implement Appropriate Trade Allocation Policies and Monitor Employee Trading” (Oct. 6, 2022); as well as our three-part series on the duty to supervise: “Recent SEC Enforcement Actions Claim Violations by Broker-Dealers and Investment Advisers” (Sep. 6, 2018); “Conduct Proper Trade and Electronic Communications Surveillance” (Sep. 13, 2018); and “Respond to Red Flags; Implement Reasonable Policies and Procedures; and Conduct Adequate Training” (Sep. 20, 2018).

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