SEC Charges California Investment Adviser and Principal in Cherry-Picking Scheme
Aug. 20, 2019
File No. 3-19363
August 20, 2019 - The Securities and Exchange Commission today announced a settled administrative proceeding against a California-registered investment adviser and its principal for defrauding advisory clients through a cherry-picking scheme.
According to the SEC's order, from October 2017 through April 2018, James L. Beyersdorf, the principal of Financial Sherpa, Inc., a state-registered investment adviser that managed $6.7 million in assets for 13 individual investors, engaged in an undisclosed cherry-picking scheme. Beyersdorf, through Financial Sherpa, disproportionately allocated profitable option trades to himself and his wife, while allocating unprofitable trades to his and Financial Sherpa's clients. Beyersdorf bought options in Financial Sherpa's omnibus trading account in the morning and allocated trades later in the day, enabling him to control the accounts into which profits and losses were allocated. As a result of this illegal trading, during the six-month period of October 2017 through April 2018, Beyersdorf and his wife had a net positive one-day return of over 45% on all option trades allocated to their accounts; in contrast, Financial Sherpa's individual clients had a net negative one-day return of 45% on all options trades allocated to their accounts. According to the SEC's order, there is less than a one-in-a-million probability that this disparate performance was due to chance. The SEC's order further finds that Respondents made false and misleading statements in Financial Sherpa's Form ADV filings regarding the manner in which they traded.
The SEC's order finds that Respondents violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Without admitting or denying the SEC's findings, Respondents consented to a cease-and-desist order and agreed to pay disgorgement of $232,166, prejudgment interest of $15,268, and a civil penalty of $188,427. Beyersdorf also consented to a permanent collateral associational bar and investment company bar.
The SEC's investigation was conducted by Division of Enforcement staff in the Los Angeles Regional Office, supervised by Robert H. Conrrad, with assistance from Carina Chambarry and Tong Yao in the Division of Economic and Risk Analysis.