William D. Carlton and Hans K. Hernandez
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 26135 / September 27, 2024
Securities and Exchange Commission v. William D. Carlton, No. 2:24-cv-01542 (W.D. Wash. filed Sept. 27, 2024)
Securities and Exchange Commission v. Hans K. Hernandez, No. 3:24-cv-09487 (D.N.J. filed Sept. 27, 2024)
SEC Charges Investment Advisers for Conducting Fraudulent Cherry-Picking Schemes
The Securities and Exchange Commission today announced charges against William D. Carlton, a former investment adviser representative in Kirkland, Washington, and Hans K. Hernandez, a former investment adviser representative in Hillsborough, New Jersey, for each conducting separate multi-year cherry-picking schemes that defrauded their clients.
According to the SEC's complaints against Carlton and Hernandez, each profited at his clients' expense by cherry picking trades using personal trading accounts and observing the daily price movements of the securities. The complaints allege that each delayed allocating the securities until after he had observed the securities' price movement over the course of the trading day. By watching the price movements in their personal accounts before deciding whether to keep trades for themselves or allocate the trades to their clients, Carlton and Hernandez each allegedly disproportionately allocated profitable trades to their personal accounts and unprofitable trades to their clients' accounts. Between at least January 2015 and August 2022, Carlton allegedly generated approximately $5.3 million in illicit first-day profits through the scheme. Between at least July 2020 and February 2022, Hernandez allegedly generated more than $1 million in illicit first-day profits through the scheme.
The SEC's complaints against Carlton and Hernandez, filed in federal court in Washington and New Jersey respectively, charge each with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder, Sections 17(a)(1) and (3) of the Securities Act of 1933, and Sections 206(1) and (2) of the Investment Advisers Act of 1940. In both actions, the SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties. In a related action, the SEC entered settled administrative and cease-and-desist orders for compliance failures against Cetera Investment Advisers LLC, a registered investment adviser based in Illinois, and First Allied Advisory Services, Inc., formerly a registered investment adviser based in California, with which Carlton and Hernandez were associated as investment adviser representatives.
The case originated from the Market Abuse Unit's (MAU) Analysis and Detection Center, which uses data analysis tools to detect suspicious trading patterns. The SEC's investigation was conducted by David Scheffler, Andrew Palid, and Michele T. Perillo of the MAU in the Boston Regional Office (BRO), with assistance from John Rymas of the MAU and Stuart Jackson and Stephen Graham of the Division of Economic and Risk Analysis. The litigations will be led by Susan Cooke and David D'Addio of the BRO.