SEC Charges Orange County Investment Adviser and Senior Officers in Fraudulent "Cherry-Picking" Scheme
Litigation Release No. 24054 /February 21, 2018
Securities and Exchange Commission v. Strong Investment Management, et al., Civil Action No. 8:18-cv-00293 (C.D. Cal. filed Feb. 20, 2018)
The Securities and Exchange Commission filed a complaint in U.S. District Court for the Central District of California against Orange County-based Strong Investment Management and its president and sole owner, Joseph B. Bronson, for operating a "cherry picking" scheme that defrauded Strong's clients. The complaint also alleges that John B. Engebretson, Bronson's brother and the former chief compliance officer of Strong, abdicated his compliance responsibilities and ignored numerous "red flags" raised during the course of the fraudulent scheme.
The complaint alleges that for more than four years, Bronson traded securities in Strong's omnibus account but delayed allocating the securities to specific client accounts until he had observed the securities' performance over the course of the day. Bronson reaped substantial profits at his clients' expense by "cherry picking" the trades, allocating the profitable trades to himself and the unprofitable trades to Strong's clients. The complaint also alleges that Strong and Bronson misrepresented their trading and allocation practices in the firm's Forms ADV, including by falsely stating that all trades would be allocated in accordance with pre-trade allocation statements and that the firm did not favor any account, including those of the firm's personnel.
The SEC also alleges that Engebretson failed in his role as chief compliance officer to ensure that Strong's policies and procedures regarding trade allocations were implemented and repeatedly disregarded "red flags" relating to Strong's allocation practices.
The SEC's complaint charges Bronson and Strong Investment Management with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Sections 17(a)(1) and 17(a)(2) of the Securities Act of 1933, and Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940. It also alleges that Strong Investment Management violated Section 206(4) of the Investment Advisers Act and Rule 206(4)-7 thereunder and that Bronson and Engebretson aided and abetted those violations.
This is the third action arising out of an enforcement initiative to combat cherry-picking led by the SEC's Los Angeles Regional Office and supported by the agency's Division of Economic and Risk Analysis (DERA). The previous actions were announced on September 12, 2017. The SEC's investigation was conducted by Colleen Keating and supervised by Robert Conrrad, with assistance from Scott Walster and Raymond Wolff in the Division of Economic and Risk Analysis. The litigation will be led by Douglas Miller.