SEC Charges Adviser Over Cherry-Picking Trades
By Carmen Germaine of Law360.com
The U.S. Securities and Exchange Commission on Tuesday filed an in-house suit alleging a Hawaii-based investment adviser cherry-picked profitable trades for himself instead of clients’ accounts and falsely claimed he wouldn’t “double dip” on management and advisory fees.
The SEC’s suit, filed in its administrative forum, alleges Laurence I. Balter and his Kihei, Hawaii-based firm Oracle Investment Research violated securities laws by making trades for both Balter and Oracle clients in one omnibus account, cherry-picking profitable trades for Balter’s account and assigning unprofitable transactions to clients.
Jina L. Choi, the director of the SEC’s San Francisco regional office, announced the charges on Tuesday, saying that investment advisers like Balter breach their fiduciary duties by favoring their own interests and forcing clients to take less profitable trades.
“We allege that Balter reaped more than a half-million dollars in ill-gotten gains by siphoning winning trades from his clients and withdrawing more than his fair share of management fees,” Choi said in a statement.
According to the SEC’s order instituting proceedings, Balter advised individual investors, many of whom were retired or nearing retirement, who owned separately managed accounts with Oracle Investment Research, and also served as an investment adviser to the Oracle Mutual Fund.
Balter said in forms filed with the SEC that client trades would be placed prior to any adviser personal transactions, and the Oracle compliance manual required Balter to give priority on all purchases and sales to clients before executing transactions for his proprietary accounts, and mandated him to conduct personal trading without conflicting with clients’ interests, the SEC said.
However, according to the agency, in early 2012, Balter began to regularly execute trades for himself and one Oracle client, and occasionally other clients, through one omnibus account without preallocating the trades. In fact, the SEC said, in almost every instance, Balter didn’t allocate the trades until he knew the profitability of each trade, and then disproportionately allocated profitable trades to himself and unprofitable trades to clients.
From April 2012 to May 2013, while Balter’s accounts were at one brokerage, he earned $220,000 in first-day returns in the omnibus account, while the one client, referred to as “Client A,” suffered first-day losses of $1.3 million and other Oracle clients lost $34,000 total, the order said. After Balter switched to another brokerage, according to the SEC, from July 2013 to December 2013 he earned net profits of $118,000 while Client A lost more than $700,000.
“Ultimately, Balter reaped approximately $490,000 in ill-gotten gains from his cherry-picking scheme,” the SEC said.
Meanwhile, the SEC said, none of Balter’s clients were aware that he was cherry-picking profitable trades, and in daily emails to Client A, he underreported the losses that the client had sustained from the scheme.
The SEC also alleged that Balter had committed several violations related to the mutual fund. In offering and selling the fund to his Oracle clients, the agency said, Balter had assured clients that he wouldn’t “double dip” by charging them both advisory fees, based on a percentage of the assets in clients’ accounts, and fund management fees, based on a percentage of the fund’s assets. Filings with the SEC also said that clients’ accounts would be credited a prorated portion of the fund management fee, the order said.
Despite those assurances, according to the SEC, Balter didn’t apply any credit for the fund management fees when he manually deducted advisory fees from his clients’ accounts.
Although the mutual fund was subject to fundamental investment limitations classifying the fund as “diversified” and prohibiting investing more than a quarter of the fund’s assets in one industry, Balter made investments for the fund that changed it to a nondiversified company and caused it to deviate from its concentration policy, the SEC said.
The agency alleged that Balter made material misstatements by misrepresenting the fund’s subclassification as a diversified company and its concentration policy, and misled the fund’s board of trustees about its compliance with the investment limitations. As a result of Balter’s violations, the SEC said, the fund’s investors suffered significant losses.
A representative for Balter declined to comment.
The SEC is represented by Jason Habermeyer and Robert Tashjian.
Balter is represented by Stanley Morris of Corrigan & Morris LLP.
The case is In the Matter of Laurence I. Balter d/b/a Oracle Investment Research, case number 3-17614, before the Securities and Exchange Commission.
The team of investment fraud lawyers at Starr Austen & Miller LLP represents whistleblowers and fights for the protection of investors, handling cases involving securities arbitration misrepresentation, overconcentra