U.S. Securities and Exchange Commission
Litigation Release No. 18386 / October 2, 2003
Securities and Exchange Commission v. Paul Joseph Sheehan dba Paul J. Sheehan & Associates, Civil Action No. LACV 03-7012 MMM (PJWx) (C.D. Cal.)]
The United States Securities and Exchange Commission ("Commission") filed a civil complaint this morning in United States District Court in Los Angeles charging Paul Joseph Sheehan ("Sheehan") with securities fraud and investment adviser fraud. Sheehan allegedly carried out a fraudulent "trade allocation" scheme known as "cherry-picking." Separately from the Commission's action, Sheehan was arrested this morning by FBI agents on a charge of investment advisory fraud.
The Commission's action and the criminal case allege that Sheehan fraudulently allocated profitable securities trades to his own personal accounts at the expense of his clients' accounts. From at least April 1999 until September 2000, Sheehan "cherry-picked" at least $7.4 million in profitable day trades for himself and thereby stole economic opportunities that rightfully belonged to his clients.
Sheehan, 64, of West Hollywood, an investment adviser formerly registered with the Commission, operated Paul J. Sheehan & Associates in West Hollywood until early 2003. Sheehan provided investment management services to individuals, pension and profit-sharing plans, trusts, estates, charitable organizations, and corporations.
In the criminal complaint that was filed late yesterday, also in United States District Court in Los Angeles, Sheehan was charged with one count of fraud by an investment adviser. These charges carry a maximum penalty of 5 years imprisonment and a fine of $250,000. Sheehan is expected to make his initial court appearance this afternoon in federal court in Los Angeles.
The Commission's civil complaint and the criminal complaint filed by the United States Attorney's Office allege that Sheehan implemented the fraudulent scheme by calling in trades to executing brokers without designating whether the trades were for his own personal accounts or the accounts of his clients. After the trades were executed, the shares or trade proceeds were allocated to an account at Salomon Smith Barney. Sheehan did not instruct Salomon Smith Barney to which particular client account or personal account the shares were to be allocated until the end of the trading day, by which time Sheehan knew whether or not a day trade had been profitable.
According to an affidavit in support of the criminal complaint, Sheehan's scheme was detected by a Commission accountant during an examination of Sheehan's business. The accountant found, among other things, a large disparity in profitability between Sheehan's personal accounts and his clients' accounts. Subsequent statistical analysis by a Commission economist revealed that the chance the disparity was the result of random chance was less than one in ten quadrillion.
Through this scheme, Sheehan knowingly and fraudulently allocated to his own personal accounts thousands of profitable day trades that that brought him profits of approximately $7.4 million. In a required filing with the Commission, Sheehan falsely represented that he would "give absolute priority to client accounts over any [Sheehan] account when there is accumulation or disposition of a security involving a client account and the [Sheehan] account."
The Commission's complaint alleges that Sheehan violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940. The complaint seeks a permanent injunction prohibiting Sheehan from committing future violations of these laws and an order directing Sheehan to disgorge his ill-gotten gains and to pay a civil monetary penalty.
Sheehan, without admitting or denying the allegations of the Commission's complaint, consented to the entry of a judgment that permanently enjoins him from violating the above provisions. The appropriateness and amounts of disgorgement and civil penalty are to be determined by the court at a later date. Sheehan also agreed to consent to the entry of a Commission administrative order revoking his registration with the Commission as an investment adviser and barring him from associating with any investment adviser.
A criminal complaint contains allegations that a defendant has committed a crime. Every defendant is presumed innocent until and unless proven guilty beyond a reasonable doubt.
This case is the product of an investigation by the Securities and Exchange Commission, the Federal Bureau of Investigation, and the United States Attorney's Office for the Central District of California.