The Securities and Exchange Commission charged a New Jersey asset management firm and its top executive with defrauding clients in a “cherry-picking scheme” that the regulator claimed involved trades made on the Charles Schwab online trading platform.
In a complaint filed Thursday in the U.S. District Court for the District of New Jersey, the SEC claimed Maplewood, New Jersey-based RRBB Asset Management and Carl S. Schwartz, its president, co-owner and chief compliance officer, traded securities in RRBB’s omnibus account and delayed allocating the securities to specific client accounts until he had observed the securities’ performance over the course of the day.
Schwartz allegedly then allocated profitable trades to favored accounts and allocated less profitable trades and losing trades to RRBB’s other clients. The complaint claimed Schwartz disproportionally allocated unprofitable trades to six client accounts associated with two elderly widows, including a charitable foundation of which Schwartz serves as a trustee.
Schwab declined to comment Monday. Schwartz did not immediately respond to a request for comment.
“Schwartz generally executed and allocated trades through an online platform provided by Charles Schwab,” according to the complaint. However, “in 2017, Schwab terminated RRBB from its platform due to concerns about Schwartz’s use of RRBB’s omnibus trading account,” the SEC said.
On March 17, 2017, Schwab representatives “told Schwartz in a phone call that they had concerns about the way RRBB was block trading,” the complaint said, adding: “Specifically, a Schwab representative told Schwartz that it appeared Schwartz was allocating profitable day trades to the Favored Accounts and allocating unfavorable trades to RRBB’s remaining clients.”
In a letter dated April 14, 2017, Schwab notified Schwartz it was terminating RRBB from the Schwab platform, according to the complaint.
The complaint further alleged that RRBB and Schwartz misrepresented to clients that all trades would be allocated in a fair and equitable manner.
RRBB and Schwartz were charged with violating the antifraud provisions of the Securities Exchange Act of 1934, the Securities Act of 1933 and the Investment Advisers Act of 1940. The SEC also claimed Schwartz aided and abetted RRBB’s violations of the Advisers Act, while RRBB and Schwartz violated the Advisers Act, and Schwartz aided and abetted RRBB’s violation of the Advisers Act.