Enforcement News: Cherry-Picking Revisited
Print Article- Posted on: Sep 18 2023
By: Jeffrey M. Haber
“Cherry-picking” is a practice of fraudulently allocating profitable trades to favored accounts at the expense of other advisory clients.
[Eds. Note: we previously examined the illegal practice of cherry-picking here.]
On September 14, 2023, the Securities and Exchange Commission (“SEC”) announced (here) that it settled fraud charges against GlennCap LLC (“GlennCap”), a Connecticut-based investment advisory firm, and its owner, Jonathan Vincent Glenn (“Glenn”), for engaging in a cherry-picking scheme whereby they allocated profitable securities trades to favored accounts, including GlennCap’s own accounts and client accounts that paid GlennCap a higher percentage of positive returns in fees, while allocating a disproportionate amount of unprofitable trades to disfavored clients. Under the settlement, respondents agreed to disgorge $2,743,616, plus prejudgment interest of $251,357. Glenn agreed to pay a civil money penalty of $500,000.
According to the SEC, between at least January 2020 and March 2022, Glenn, who was also an investment adviser of GlennCap, engaged in block trading, which allowed him to pool funds from multiple clients’ accounts into trades, and then, after seeing whether a position increased or decreased in value, he allocated the more profitable trades to accounts that he favored. The SEC noted that the probability that the favored accounts received the more profitable trades by chance was statistically nearly zero. The SEC found that respondents received at least $2.7 million in profits from the cherry-picking scheme.
The SEC found that the scheme, which was perpetrated in two phases, came to a stop in March 2022, when the broker-dealer that was executing respondents’ trades notified respondents that, due to concerns about respondents’ trading, the broker-dealer was terminating GlennCap’s access to the omnibus account that respondents were using and ending its relationship with GlennCap altogether in 90 days. Thereafter, said the SEC, Glenn asked GlennCap’s clients to move their accounts to another broker-dealer. That brokerage firm, noted the SEC, prohibited investment advisers from using omnibus trading accounts. As a result, said the SEC, respondents could no longer cherry-pick profitable trades.
Further, the SEC found that Glenn made false and misleading statements regarding GlennCap’s trading practices in documents it provided to clients and prospective clients.
Commenting on the settlement, Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, said: “Glenn allocated millions of dollars from profitable trades to accounts benefitting himself while unloading unprofitable trades on GlennCap’s clients.” In an effort to warn other brokers and investment advisors about the SEC’s ability to detect cherry-picking schemes, Dean stated: “The SEC has the means to identify investment advisers that abuse their position through cherry-picking, as Glenn and GlennCap did. We use these methods to ensure investor trust in our markets.”In the cease and desist order (here), the SEC found that Glenn and GlennCap violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, Section 17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Respondents consented to the entry of the cease-and-desist order, without admitting or denying the SEC’s findings, and, as noted, the payment of more than $3 million in civil penalties, disgorgement, and prejudgment interest. Glenn also consented to an industry and officer bar, which prohibits him from associating with any investment advisor, broker-dealer, transfer agent, municipal securities dealer, municipal advisor, or nationally recognized statistical rating organization, as well as from acting as an officer, director, manager, advisor, underwriter or depositor of any such entity.
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
