U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22573 / December 14, 2012
Securities and Exchange Commission v. Aletheia Research and Management, Inc. and Peter J. Eichler, Jr., United States District Court for the Central District of California, Civil Action No. 12-cv-10692-JFW-(RZx)
SEC CHARGES SANTA MONICA-BASED HEDGE FUND MANAGER IN CHERRY-PICKING SCHEME
The Securities and Exchange Commission today charged a Santa Monica-based hedge fund manager and his investment advisory firm with conducting a "cherry-picking" scheme by steering winning trades to their own trading accounts and favored clients to the detriment of certain hedge fund investors. They are also charged with failing to disclose the firm's precarious financial condition to clients in a timely manner.
The Commission alleges that Peter J. Eichler, Jr., and his firm Aletheia Research and Management, Inc., disproportionately allocated losing trades to the accounts of two hedge funds managed by the firm, resulting in monetary losses for those funds' investors. Meanwhile, they allocated winning trades to accounts owned by Eichler and Aletheia employees as well as accounts belonging to select clients.
According to the Commission's complaint filed in federal court in Los Angeles, Aletheia had more than $1.4 billion in assets under management and managed two hedge funds. By engaging in a cherry-picking scheme, Aletheia and Eichler violated the fiduciary duties they owed to their advisory clients. Aletheia failed to implement policies, procedures, or a code of ethics that could have prevented a cherry-picking scheme from occurring.
The Commission further alleges that Aletheia also breached its fiduciary duties and federal law when it did not disclose its financial troubles to clients until immediately before a bankruptcy filing. The federal securities laws require an investment adviser to fully and promptly disclose any financial condition that is reasonably likely to impair the investment adviser's ability to meet contractual commitments to its advisory clients. Aletheia was in a precarious financial condition in July 2012 after the state of California had filed a tax lien for more than $2 million against the firm for unpaid taxes and penalties. On Oct. 1, 2012, California suspended Aletheia's corporate status for non-payment. Once suspended, Aletheia had no right to lawfully engage in any business, nor could it legally exercise any of its corporate powers, rights, and privileges. But Aletheia failed to disclose its precarious financial condition to clients until November 9. The firm filed for Chapter 11 bankruptcy on November 11.
The Commission's complaint charges Aletheia with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder and Sections 204, 204A, 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rules 204-1(a)(2), 204A-1(a), 206(4)-7(a), and 206(4)-8(a) thereunder. Eichler is charged with violations of Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder and Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8(a) thereunder. The Commission's complaint seeks permanent injunctions, disgorgement of the defendants' ill-gotten gains plus pre-judgment interest, and penalties.