SEC v. Slocum, Gordon & Co., et al., (United States District Court for the District of Rhode Island, Civil Action No. 02-367L, Filed August 20, 2002)
The Commission today filed a civil fraud case against Rhode Island residents John J. Slocum, Jr. and Jeffrey L. Gordon, and their Newport, Rhode Island-based registered investment advisory firm, Slocum, Gordon & Co. (SGC). The Commission's complaint, filed in Rhode Island federal district court, alleges that, beginning as early as 1988 and continuing through mid-2000, the defendants illegally diverted more than $1 million in short-term trading profits from SGC's advisory clients to SGC's own account for the benefit of SGC, Slocum and Gordon.
The Commission's complaint alleges that Slocum and Gordon used accounts that improperly mixed their clients' assets with SGC's assets. According to the Commission's complaint, the improper mixing of assets enabled Slocum and Gordon to engage in a practice known as "cherry-picking," where they allocated profitable trades to themselves and non-profitable trades to clients. Specifically, Slocum and Gordon would often purchase stocks without identifying whether the stocks were bought for the firm or for clients. They then waited to assign trades until just before the settlement date (usually three business days after purchase) so they could first determine whether the firm could make money for itself. The Commission's complaint alleges that, in many cases when the stock price went up on or before the settlement date, Slocum and Gordon sold profitable stocks that had been intended for clients and credited the profits to SGC. In other instances when the stock price had fallen before the settlement date, they assigned stocks originally intended for SGC to clients instead. According to the Commission's complaint, as a result of these practices, Slocum and Gordon enjoyed extraordinary success in their trading for SGC. For example, Slocum and Gordon realized a profit on nearly all of their trades for SGC from 1996 until 2000, generating more than $1 million in profits. As principals of SGC, Slocum and Gordon personally benefited from the scheme. The Commission's complaint alleges that defendants' practice of appropriating short-term trading profits for SGC instead of clients and assigning non-profitable trades to clients instead of SGC constituted a breach of their fiduciary duty to the clients.
The Commission alleged in its complaint that SGC, Slocum and Gordon violated the antifraud provisions of the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act") [Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder]. The Commission's complaint also charges SGC with violating the antifraud and record-keeping provisions of the Investment Advisers Act of 1940 ("Advisers Act") [Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(3) and 206(4)-2(a)(2) thereunder] and SGC and Gordon with violating the reporting requirements of the Advisers Act [Section 207 of the Advisers Act]. According to the Commission's complaint, Slocum and Gordon also aided and abetted SGC's violations of the Advisers Act. The Commission's complaint seeks permanent injunctions against SGC, Slocum and Gordon, monetary penalties, and disgorgement of ill-gotten gains and losses avoided, plus prejudgment interest.
