A New Jersey-based asset management firm and its president and chief compliance officer are facing Securities and Exchange Commission (SEC) charges for “cherry-picking” profitable stocks for new and favored accounts that diminished returns for other clients.
RRBB Asset Management and co-owner and CCO Carl Schwartz were charged Thursday with three counts of fraud in connection with the alleged scheme. The SEC’s complaint was filed in the U.S. District Court for the District of New Jersey.
Schwartz and RRBB are accused of steering profitable trades to a wealthy couple who had indicated they may invest a significant amount of money with RRBB. Schwartz and the firm defrauded six long-term clients by directing unprofitable trades to them, the SEC said. Those defrauded clients included two elderly widows and a charitable fund for which Schwartz is a trustee. The scheme lasted from April 2016 to August 2017, the SEC alleged.
SEC securities rules prohibit knowingly favoring one group of investors at the expense of another group. The SEC alleged RRBB and Schwartz “misrepresented to clients that all trades would be allocated in a fair and equitable manner,” according to a press release.
The SEC took the position that Schwartz and RRBB either knowingly committed fraud by developing the cherry-picking scheme, or that Schwartz “aided and abetted RRBB’s violations.”
The SEC did not specify how much the alleged scheme cost the defrauded investors.
According to the complaint, “The likelihood that this disproportionate allocation of profitable trades to the Favored Accounts resulted from random chance – as opposed to knowing and intentional conduct – is, at best, less than one in a million.” The complaint made a similar statement about the likelihood that unprofitable trades would be consistently allocated to unfavored accounts.
From a compliance perspective, the SEC said RRBB “failed to adopt and implement written policies and procedures reasonable designed to prevent violations of the Advisers Act, including policies and procedures concerning portfolio management process, allocation of investment opportunities, the use of omnibus or block accounts, and the prevention and detection of cherry-picking.”
As a result of their conduct, Schwartz and RRBB may be required to disgorge “all funds received from their illegal conduct,” pay civil fines, and be subject to other penalties.
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