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June 30, 2015 at 04:24 AM
The Securities and Exchange Commission announced Monday its first enforcement action as a result of the agency’s data-driven initiative to detect advisors’ fraudulent trade allocations known as cherry picking.
The agency brought fraud charges Monday against a Wisconsin-based investment advisory firm and its owner accused of improperly allocating to his personal and business accounts certain options trades that appreciated in value during the course of a trading day while allocating to his clients other trades that depreciated in value.
Under the data-driven initiative, economists in the agency’s Division of Economic and Risk Analysis along with enforcement investigators analyze large volumes of investment advisors’ trade allocation data to detect whether the advisor is disproportionately allocating profitable trades to favored accounts. The cherry picking initiative is being led by the Asset Management Unit and the regional offices in Boston and Los Angeles.
In the Monday action, the SEC Enforcement Division alleges that Mark P. Welhouse purchased options in an omnibus or master account for Welhouse & Associates Inc. and delayed allocation of the purchases to either his or his clients’ accounts until later in the day after he saw whether or not the securities appreciated in value.
Welhouse allegedly reaped $442,319 in ill-gotten gains by “unfairly allocating options trades in an S&P 500 exchange-traded fund named SPY,” the SEC states. His personal trades in these options had an average first-day positive return of 6.28%, while his clients’ trades in these options had an average first-day loss of 5.05%.
