Investment advisory firm Aletheia Research and Management, Inc. and its owner hedge fund manager Peter J. Eichler, Jr. are facing Securities and Exchange Commission charges over their alleged involvement in a cherry-picking scam. They are accused of directing winning trades to their trading acocunts, giving preferences to some clients at cost to certain investors, and not revealing in a timely fashion that the firm was in a precarious financial state.
Per the SEC charges, Aletheia and Eichler did a disproportionate job of allocating losing trades to accounts in two of the hedge funds that they managed. This led to investors losing money. Meantime, winning trades were allegedly sent to accounts belonging to company employees, Eichler, and preferred clients.
It was Eichler that allegedly used Aletheia’s discretionary authority over Trading Options accounts to make about “4,891 options trades for an aggregate investment of $238.9M” for these accounts between at least the middle of August 2009 through November 2011. Because most of these trades didn’t happen until over one hour after a trade was made or after the closing of the options positions, Eichler could cherry-pick the losers and winners. Favored accounts then got a disproportionate amount of profitable trades that had been allocated while the disfavored clients received a disproportionate amount of the unprofitable trades.
By participating in this alleged securities scam, contends the Commission, Eichler and his investment advisory firm did not fulfill their fiduciary obligations to certain advisory clients. Aletheia also allegedly failed to put in place procedures, policies or an ethics code that could have stopped the cherry-picking scam from happening and breached federal law and its fiduciary duties when it waited until right before filing for bankruptcy to let its clients know that it was in financial trouble.
Even though Aletheia already was allegedly in financial trouble as early as July of this year, when the state of California filed an over $2M tax lien against it for taxes it hadn’t paid and then on October 1 suspended the company’s corporate status for failing to pay (at this point the investment advisory firm was not legally allowed to be in business), it wasn’t until two days before seeking Chapter 11 protection on November 9that clients were notifies about the firm’s financial woes.
The SEC is accusing Aletheia of violating the Securities Exchange Act of 1934, Section 10(b) and Rules 10b-5(a) and (c) thereunder, as well as numerous sections of the Investment Advisers Act of 1940 and numerous rules thereunder. The regulator wants disgorgement of ill-gotten gains, permanent injunctions, penalties, and prejudgment interest.
Under federal securities laws, an investment advisor has to immediately and completely reveal any financial conditions that might reasonably likely hurt its ability to fulfill its contractual obligations to clients. Unfortunately, this is not always what happens.
S.E.C. Says Asset Firm Manipulated Trades to Enrich Some Clients, NY Times, December 16, 2012
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K.W. Brown & Company, K.W. Brown Investments, & 21st Century Advisors Are Held Liable in $4.5 Million Cherry-Picking Scam, Stockbroker Fraud Blog, January 21, 2008
Contact our securities lawyers today if you suspect that you were the victim of financial fraud.