SEC Brings Settled Actions Charging Cherry Picking and Compliance Failures
Aug. 26, 2019
File No. 3-19378
August 26, 2019 - The Commission today announced that Laurel Wealth Advisors, Inc., a registered investment adviser based in La Jolla, California, and its former investment adviser representative, Joseph C. Buchanan, agreed to settle charges relating to Buchanan's multi-year cherry-picking scheme. Cherry-picking is the fraudulent practice of preferentially allocating profitable trades or failing to allocate unprofitable trades to an adviser's personal accounts at the expense of the adviser's client accounts.
The SEC's orders found that from at least March 2013 to June 2015, Buchanan disproportionately allocated profitable trades to his personal accounts, and disproportionately allocated unprofitable trades to his clients' accounts. The orders found that Buchanan's allocation scheme resulted in $56,075 in net same-day profits to Buchanan and $60,821 in net same-day losses to his clients. According to the SEC's order against Buchanan, the likelihood of these profitable trades being randomly allocated to his personal accounts are less than one in one billion.
According to a separate order against Laurel Wealth, Laurel Wealth failed reasonably to supervise Buchanan, despite receiving written and telephonic warnings from its brokerage provider regarding Buchanan's late allocations, and despite the brokerage provider imposing a one-month suspension on Buchanan's omnibus account. The order also found that during the relevant period, Laurel Wealth failed to implement its own internal procedures that required Buchanan and others to pre-clear and obtain written pre-approval before transacting securities for their personal accounts. The order found that Laurel Wealth's Form ADV contained misleading statements that it employed a pre-clearance procedure to prevent conflicts of interest and to ensure that its employees' personal transactions were carried out in a way that did not endanger client interests.
The SEC's order against Buchanan found that Buchanan violated the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and 10b-5(c) thereunder. Without admitting or denying these findings, Buchanan consented to the entry of a cease-and-desist order, and an order to pay disgorgement of $56,227 and prejudgment interest of $15,284. Payment of the disgorgement and interest amounts, except for $40,000, was waived and no penalty was imposed based on Buchanan's financial condition. Buchanan also consented to a permanent associational bar and investment company bar.
The SEC's order against Laurel Wealth found that Laurel Wealth made misleading statements in violation of Section 206(2) of the Investment Advisers Act of 1940, failed to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act in violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and failed reasonably to supervise Buchanan within the meaning of Section 203(e)(6) of the Advisers Act. Without admitting or denying these findings, Laurel Wealth consented to the entry of a cease-and-desist order, which includes a censure, payment of a $100,000 penalty, and a voluntary undertaking to provide a copy of the order to each of Buchanan's former Laurel Wealth clients.
The SEC's investigation was conducted by Nicholas Chung and Diana Tani of the Market Abuse Unit in the Los Angeles Regional Office, with assistance from Hugh Beck in the Market Abuse Unit's Analysis and Detection Center. The case was supervised by Joseph Sansone, Chief of the Market Abuse Unit. Data analysis was performed by Jonathan Hershaff in the SEC's Division of Economic and Risk Analysis.