SEC Chief Administrative law judge Brenda Murray has fined J.S. Oliver Capital Management $15 million for securities violations and breach of fiduciary duty related to an alleged cherry-picking scam that bilked clients of approximately $10.9 million. The registered investment adviser must also pay $1.4 million in disgorgement.
According to the regulator, the RIA awarded profitable trades to hedge funds associated with the firm, while other clients, including a charitable foundation and a widow, were given the less profitable trades that resulted in major losses. These hedge funds that benefited were those in which J.S. Oliver founder Ian Oliver Mausner was an investor. Mausner is also accused of using soft-dollar commissions inappropriately.
Mausner continues to deny the SEC charges. He claims that the profitable trades were disproportionately allocated because of market volatility and that clients’ investment goals played a part.
Murray, however, found that the firm made over 4,000 potential cherry-picking transactions between ’08 and ’09. During that time, several favored accounts made substantial gains while three that were “disfavored” suffered a 99.7% loss. The Commission put out its cease-and desist order against J.S. Oliver last year.
During the purported scheme, the firm would wait until after trading closed for the day or the following day to allocate the trades. This let Mausner determine which securities had declined or appreciated in their value. He is said to have made over $200,000 in fees from just one of the hedge funds that benefited from winning trades. Mausner is also accused of marketing that very hedge fund to investors by bragging about its positive returns when really those results were because of his scam.
J.S. Oliver Capital is accused of misappropriating $1.1 million of client funds via the inappropriate use of soft-dollar funds. Soft dollars are rebates that brokerages pay investment advisers and customers for commission because the broker-dealers’ accounts were involved in transactions. Advisers are allowed to keep the money but they must disclose this and only use the funds in ways that could enhance clients’ investments.
The SEC claims that from ’09 through most of ’11, J.S. Oliver and Mausner did not tell clients that soft dollars were used to pay his ex-wife money he owed from their divorce, cover J.S. Oliver’s “rent” at Mausner’s home, pay portfolio manager Douglas Drennan, and take care of maintenance and other expenses at Mausner’s New York timeshare.
The SEC claims Drennan turned in false data to support the inappropriate use of the soft dollar credits and approved some of the payments to his company.
In addition to the $15 million fine against the firm, Mausner must pay a $3 million penalty and he is permanently barred from the industry. Drennan is also barred and must pay a $410,000 fine.
RIA slapped with $15 million fine; founder barred, Investment News, August 7, 2014
Read the SEC Order (PDF) (PDF)
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Alleged Cherry-Picking Scam Leads to SEC Charges Against California Hedge Fund Manager, Stockbroker Fraud Blog, December 18, 2012
Securities Headlines: UBS to Pay $4.5M Over Unregistered Assistants, $6M Ponzi Scam Allegedly Funded Reality Show, & Cherry Picking Allegations Lead to SEC Charges, Stockbroker Fraud Blog, August 30, 2013